Credit crunch and deepening global recession have led to a wave of bankruptcies across countries and sectors. Ailing telecom equipment maker Nortel Networks Corp, once North America’s 2nd largest telecom equipment maker, was one such group.
Liquidity woes lead to bankruptcy filing
Inability to pay $107M interest payment due on January 14, 2009 and expiration of a 30-day waiver granted by Export Development Canada on a (US) $750 million line of credit were the immediate reasons for Nortel Networks Corporation and certain of its Canadian subsidiaries seeking protection from creditors under the bankruptcy laws. In addition, Nortel Networks Inc. (NT) and fourteen (14) of its subsidiaries filed petitions in the United States Bankruptcy Court for the District of Delaware seeking relief under chapter 11 of the United States Bankruptcy Code. Nortel Networks UK Limited and certain subsidiaries of the Nortel group incorporated in the EMEA region have each obtained an administration order from the English High Court of Justice under the Insolvency Act 1986.
Inability to operate in a volatile environment spurred the liquidity problems
The company operates in a highly volatile telecommunications industry that is characterized by vigorous competition for market share and rapid technological development. In recent years, Nortel’s operating costs have generally exceeded its revenues, resulting in negative cash flow. A number of factors have contributed to these results, including competitive pressures in the telecommunications industry, an inability to sufficiently reduce operating expenses, costs related to ongoing restructuring efforts described below, significant customer and competitor consolidation, customers cutting back on capital expenditures and deferring new investments, and the poor state of the global economy.
Turnaround efforts since 2005 come to a naught
In recent years, Nortel has taken a wide range of steps to attempt to address these issues, including a series of restructurings that have reduced the number of worldwide employees from more than 90,000 in 2000 to approximately 30,000 (including employees in joint ventures) as of December 31, 2008. In particular, in 2005, under the direction of new management, the group began to develop a Business Transformation Plan with the goal of addressing its most significant operational challenges, simplifying organizational structure, and maintaining a strong focus on revenue generation and improved operating margins including quality improvements and cost reductions. These actions have included: (i) the outsourcing of nearly all manufacturing and production to a number of key suppliers, including, in particular, Flextronics Telecom Systems, Ltd.
