January 14, 2009, 5:27 PM — Is Nortel going out of business?
Technically, no. The company is trying to reorganize under court supervision that will give it protection from paying its creditors all that they are owed. (Read a letter from Nortel's CEO.)
Nortel or its subsidiaries have filed under two chapters of the U.S. bankruptcy code, Chapters 11 and 15.
Under Chapter 11, the company tries to sort out its debts, reorganize and continue in business. The company files disclosure and a plan of reorganization that includes details of how much creditors will get back on the dollar. The creditors vote to decide whether to accept less than they are owed in accordance with the plan.
Under Chapter 15, multi-national companies can file for bankruptcy protection, which takes into account that debtors and creditors may operate under separate legal systems yet tries to protect the interests of all of them. The overriding goal is to find a way to keep the business up and running.
If it doesn't go out of business, what might happen?
Depending on what the courts decide, the company may be broken up and parts of it sold off to raise cash to settle debts. The cash left over from that can be used to set the remaining parts of the company on a course toward profitability.
How much does Nortel owe?
Its total liabilities are more than US$11 billion, including a payment on $1 billion in bonds that falls due Jan. 15.
How did this all come about?
Nortel ran into problems around the time the high-tech bubble burst in 2000. The company stock was selling for an all-time high of $900 per share (adjusted for splits), but to make its bottom line more attractive, it was also exaggerating its profits -- a $3.2 billion fraud. (Read a story from 2005 showing Nortel's woes then.)
The CEO at the time, Frank Dunn, was fired and fined as were the CFO and controller.Â
The company acknowledged its problem in 2004, refiled its financial statements for the previous four years, and hired a new CEO. But the scandal lingered until 2007 when Dunn and others were charged with fraud, charges they are still fighting. Meanwhile, Nortel went on a campaign to reorganize and downsize, dropping from 95,000 employees in 2000 to 26,000 today. Current CEO Mike Zafirovski, a turnaround specialist was hired in 2005, and has been unable to stop the company's slide despite repeated layoffs, selloffs and new leadership.
International financial troubles compounded the situation, with plummeting stock performance reducing the company's value and making borrowing more difficult.
Nortel's stock price on the New York Stock Exchange was frozen at 32 cents when trading of the stock was suspended in light of the bankruptcy filings. The stock will be delisted this spring if it doesn't recover to more than $1.
What happens to current Nortel customers?
For now, the company is doing business as usual. If parts of the company are sold off as part of the bankruptcy proceedings, what happens to customers depends on who buys the division they bought Nortel gear from.
Typically when one business buys another, the buyer continues supporting the products of the purchased company at least for awhile and works toward integrating product lines. The buyers can also keep the purchased products as standalone lines or discontinue them altogether, depending on what the purchasing company deems best for itself.
In the case of Nortel, it's too soon to know the specifics.
Isn't there any good news?
Not much. The bright side, if there is one, is that the company's assets are somewhat close to its debt, at least according to the Sept. 30, 2008 numbers cited in the bankruptcy filing - assets of $11.6 billion vs. debt of $11.8 billion.
The company's U.S. branch has cash on hand that will help it through the next months without having to borrow, which will ultimately help the bottom line. (Read a story with Nortel's enterprise chief.)
