Is there a way out for Nortel?
This autumn has not been kind to name-brand companies like AIG, General Motors, Lehman Brothers, and Merrill Lynch. But the tech industry seemed to be cruising along without any major disasters--until Monday that is.
Venerable networking giant Nortel Networks announced a third-quarter loss of $3.4 billion, or $6.85 per share. As of this writing, the company's stock is trading around 80 cents with a market cap just over $400 million. Yikes!
Why is a company that did over $10 billion last year worth so little? The primary reason is liquidity. Financial analysts estimate that the company is burning through $700 million in cash each year. At this rate, the company will be low on cash in a few years just when it has $1 billion in debt due in 2011. Unless the Canadian government gets involved, the Toronto-based company probably won't be able to find any financial lifesaver in this economy.
Adding to Nortel's woes, I don't see any white knights coming along anytime soon. Huawei has been mentioned as a possible suitor, and I'm sure the company would love Nortel's channel, but it has too many overlapping products and there's no way it wants to jump into this financial mess. Fujitsu? Siemens? I just can't see it.
During the boom years, Nortel was known for its multiple layers of middle management and bureaucracy. This stigma led Massachusetts technology veterans to refer to Nortel as "the Digital of the networking business"--a not-so-kind comparison to organizationally challenged Digital Equipment Corp. Unfortunately for Nortel, this comparison still holds. Nortel's only option is to follow the Digital example, sell off valuable non-core divisions ASAP, and kill other nonessential units entirely. Here are a few ideas for CEO Mike Zafirovski to ponder:
Sell the metro optical equipment and services groups to IBM. IBM builds lots of private networks for distributed mainframe clusters and storage replication. IBM could also add bodies and expertise to its global services division. EMC may also be interested at the right price as well.
Lean on Microsoft to broker a deal for Unified Communications. Microsoft has years of software development and marketing programs invested in Nortel Unified Communications. Microsoft also has lots of cash and industry connections. Perhaps Microsoft can use its money and influence to drag in a third party like Juniper or Lucent to make sure that this effort continues with a stronger player.
Sell core Ethernet switching and routing products to HP. HP is on a roll with ProCurve networking but it lacks enterprise-class products. This one probably makes the most sense.
Get out of the network security business. Actually, Nortel has already abandoned most security products but it should kill the remaining offerings including Network Access Control and VPN (virtual private network) products. There may be some small asset value here for someone like Extreme, Force10, or Foundry.
If priced right, these painful moves could be attractive to other vendors and keep Nortel afloat in the service provider market. Unfortunately, without intervention or divestment, the most likely scenario is continual cuts and eventual bankruptcy. At that point, a "Chainsaw Al" type can come in and rip the company apart. I, for one, would be very sad if this happens.
Jon Oltsik is a senior analyst at the Enterprise Strategy Group. He is not an employee of CNET. 
