Nortel Networks, once a high-flying telecommunications equipment maker, filed for Chapter 11 bankruptcy protection Wednesday.
Nortel has been struggling to regain its footing since the last economic downturn in 2001 and 2002, which hit the telecommunications industry particularly hard. But the recent credit crunch may end up as the death knell for the company, making it difficult for Nortel to fund its operations. At the same time, customers have also pulled back drastically on spending for the company's voice-only equipment.
For the past several months, Nortel's management team has been trying to cut spending. The company has also put some of its assets up for sale in an attempt to survive. But mounting debt payments and a steep drop in revenue appear to have caught up with the company.
The most pressing issue for the Toronto, Ontario-based company is paying the interest on its $3.8 billion in bond debt. Nortel faced a $107 million bond interest payment this week, The Wall Street Journal reported.
While bankruptcy protection doesn't always signal the end of a company, in today's economic climate, it could prove disastrous as the already-struggling company may find it even more difficult to convince customers to buy its gear. Carmakers used this argument recently when seeking a bailout from Congress. They said that customers would be unwilling to buy cars from companies that they feared wouldn't be around to service them.
Nortel has about $2.6 billion in cash, which some analysts have said could help it stay afloat until at least 2010. But as the company sinks deeper into trouble, many industry watchers believe that Nortel will likely be broken apart during Chapter 11 restructuring, with individual businesses sold off one by one.
In December, the New York Stock Exchange warned it would delist Nortel's stock if the company couldn't get shares to trade above $1 minimum. Nortel is currently trading at 32 cents.
Nortel's fall from grace was a result of a series of strategic missteps over the years that chipped away at the company's value.
In 2000, Nortel was worth about $250 billion. The company now has a market value of about $275 million.
Mike Zafirovski came on board as chief executive three years ago to help turn around the company. Initially, he had some success building profits from selling wireless gear to U.S. operators. Under his leadership, Nortel invested in new technology, and the company was preparing for the next wave of wireless networks. But then the economy tanked, and phone companies started to pull back on spending, which resulted in a sharp revenue drop for Nortel.
In September, Nortel announced more cost-cutting and said it would sell some of its business units. But the company was unable to find a buyer.
Nortel isn't the only big telecommunications equipment maker to struggle. Alcatel Lucent, which has also been trying to get back on track after the telecommunications boom, announced a restructuring late last year.
Nortel is also expected to seek bankruptcy protection against creditors in its home country of Canada.