As Nortel CEO Mike Zafirovski drives to fix Nortel by reducing costs and getting out of unprofitable markets such as the UMTS access business, he is setting up the company to be a leveraged buy-out candidate? According to BusinessWeek, the high-tech sector is ripe for LBOs after several years of stagnating stock prices, increasing regulatory requirements and worthless stock options. Among the companies to go private are SunGard Data Systems ($11.4-billion), Serena Software ($1.3-billion) and Royal Philips Electronics’ chip unit ($9.5-billion). That opened the eyes of many a tech chief to the possibilities of private equity. BusinessWeek suggests future candidates include Nortel, Sun Microsystems, NCR, Symantec, Siemens and Avaya. With a market cap of $9.1-billion, Nortel would be a relatively large LBO but it could make for an interesting play if Mike Z.’s restructuring strategy starts to generate cash flow and profits. The new owners could presumably sell some of Nortel’s assets to generate cash, and operate a leaner, profitable organization that could be sold down the road.
Archive for August, 2006
Despite losing nearly 100s of millions of dollars on a wireless contract with Indian wireless carrier BSNL, Nortel is apparently still digging around for contracts in India. According to CIOL, the company is in discussions with major wireless carriers about helping them reach customers in rural areas. This is a major mandate for the Ministry of Telecommunications, which wants 500 million wireless subscribers by 2010. Sanjay Jotshi, vice president (marketing), Nortel India told CyberMedia News “we are already in talks with the major telecos on the rural connectivity, but we are not in a position to reveal the name of the companies. It is a major market for the operators as it is a unraveled market.” While the Indian market is seeing strong growth, it’s a bit of a minefield for equipment suppliers – as Nortel painfully learned – because margins are razor-thin and costs can be variable. At the same time, there’s plenty of competition, including low-cost suppliers such as Huawei. Given Nortel’s track record in India, it would be wise to proceed with caution.
The consolidation of the global telecom equipment market is even happening in China where Huawei plans to acquire Beijing-based Harbour Networks. Harbour, which specializes in data communications, was started in 2000 by former Huawei employees. According to emsnow, Huawei has a full plate this year as its expands domestically and internationally. The company is beginning to strike partnerships with global equipment suppliers such as Siemens, although a broadband joint venture with Nortel fell apart earlier this year.
Juniper and Nortel have jumped into the wireless LAN market by taking part in a $30-million D round investment in Trapeze Networks. Trapeze said it plans to use money to expand geographically, improve its channel programs and bolster product development. Nortel, which originally invested in Trapeze last year, has been selling Trapeze’s WLAN switch since early last year under the WLAN 2300 series brand. Before Nortel got involved with Trapeze, it used to rebrand and sell equipment from Airespace Networks until the company was purchased by Cisco for $425 million. Trapeze CEO Jim Vogt said the latest round of funding will help the company attract new partners and add channel personnel. "We’re seeing growth, and a key part of that is recruiting and maintaining a channel," he said. The other investors in the round include Oak Investment Partners, Accel Partners, Redpoint Ventures, DAG, and Castille, who added to their previous investments in the company. Trapeze’s technology lets users roam securely anywhere in a network and over any topology, including corporate headquarters, branch offices, campuses or multi-tenant/multi-use facilities.
Update: With the D round, Trapeze has raised $102.5-million of private equity since March 2002. It raised $16-million in March 2002, $34-million in June 2003, and $22.5-million in 2005, including money from Nortel and Motorola Ventures. In terms of the Juniper-Nortel connection, Nortel chief strategy office George Riedl used to head up Juniper’s M&A activity.
Now, this is kind of interesting. An Algerian railway, Societe Nationale des Transports Ferroviaires, has selected Nortel for the first phase of its GSM-R project to provide a new wireless system that will enhance emergency procedures, improve operational efficiency, increase safety and reduce the cost of the railway’s operations. Nortel claims SNTF is the first African railway operator to adopt the new global GSM-R standard. According to the press release, Nortel will provide design and engineering services for SNTF’s GSM-R network while SNEF Algeria will supply construction, installation and commissioning support. While the SNTF deal is not large, it is part of a string of positive press releases issued by Nortel recently. It’s not a bad strategy to talk the happy talk as part of an overall plan to restructure Nortel’s operations and reputation. Now let’s see if all these positive press release can be turned into positive financial results.
A year ago, Nortel made a big deal about winning a $5.6-million contract to provide the city of San Jose with a public-access computer system (crowing about how it won the deal in Cisco’s backyard). Well, it turns out the system hasn’t been working that well, although the city has not been able to figure out the problem. Apparently, it may have to do with network and fire-walls problems associated with equipment supplied by Nortel. According to the San Jose Mercury, a big issue is the city’s voice-recognition system. The newspaper did eight tests recently using different phones and voices but the system failed each time. San Jose, however, is sticking with Nortel, having signed a new $1.1-million operations and maintenance contract.
As Nortel drives to slash operating costs, it is creating a product design, development and testing centure in Bangalore, India that will employ 100 engineers by the end of the year. The team will work on Ethernet switching, security and VoIP. About 70 of these engineeers will come from Tasman Networks, which Nortel acquired for $99-million last year. Nortel already does some product development work in India through Infosys Technologies, Wipro and Tata Consultancy Services. Nortel also has a minority stake in Bangalore-based Sasken Communications, which provides software services to Nortel customers.
Somewhere, ex-Nortel CEO Bill Owens must be smiling after Nortel was among 25 companies selected to be part of a multi-billion dollar contract to provide services to the U.S. Department of Homeland Security, which is launching a seven-year program called the Enterprise Acquisition Gateway and Leading Edge Solutions to enhance the department’s information technology services. Owens, a ex-U.S. Navy Admiral with all kinds of connections in Washington, was the one who pushed Nortel to get into the U.S. government technology services business by acquiring PEC Solutions for $443-million in cash. It was a strange move because PEC was a second-tier systems integrator focused on one vertical, albeit a large one.
One other issue raised by Charter Equity analyst Edward Snyder in today’s Toronto Star is that Nortel’s CDMA business could be its “shining star” even though CDMA appears to be losing the standards battle against GSM. In what appears to be a strange thesis, Snyder said Alcatel-Lucent could lose CDMA market share or abandon the business if their merger goes poorly – even though it will be the dominant market leader when the merger is approved. “If Lucent and Motorola get out of CDMA, who’s going to get that share?,” he said. “Probably Nortel. Nortel could end up the king of the hill for the CDMA infrastructure business that nobody thinks is growing. It could be hugely profitable.”
Now for something completely different: a U.S. analyst believes Nortel’s inability/failure/reluctance to find a major dance partner a la Alcatel-Lucent or Ericsson-Siemens could be a competitive advantage – despite all the hue and cry that Nortel has been left without a dance partner. Confused? Well, Charter Equity Research analyst Edward Snyder said all the M&A action will leave telecom equipment customers confused over the next year, which will let Nortel steal market said. “A review of the Hewlett-Packard and Compaq merger suggests as much,” he said in a research report. “Low morale on layoffs and spending cuts hurt productivity and eased pressure on competitors. “We’re likely to see the same scenario played out in wireless systems, with turnover, both planned and unplanned, sapping productivity as employees worry more about employment than customers.” It’s an interesting thesis that may be valid in the short-term if Nortel’s competitors have to spend a lot of management time and energy working through consolidation efforts. But in the long-term, post-consolidation, it’s hard to see how Nortel can effectively compete unless it becomes a ultra-focused, ultra-lean supplier. This will mean exiting and/or selling business units, slashing R&D and cutting employees – something CEO Mike Zafirovski has yet to do or spell out yet. (Source for post: Toronto Star)
Orion Securities analyst Duncan Stewart has picked up on the news report that Nortel has a new channel program in place to make it easier for existing and potential customers to migrate to VoIP from legacy telephony systems. Stewart is pleased Nortel has recognized a problem that encouraged channel partners to “rip and replace” Nortel gear with Cisco’s, but he said it is a “bit horrifying that this was not fixed sooner”. Here’s an excerpt from his research report:
“You have to understand the telecom history in this space: for 15 years (at least) voice+packets EQUALLED Nortel. It should have been mopping the floor with its competitors in this space, and although Nortel has done OK, everybody has known it has been losing what ought to have been the company’s proper market share. Nobody was sure why – maybe its technology was not good enough?”
Stewart rates Nortel as an “overweight (speculative)” with a 12-month target price of US$3.60.
Dell’Oro Group issued a report recently that the 10 Gigabit Ethernet switch market grew substantially in the second quarter of 2006 to $302-million with the modular segment driving most of the strong results. Cisco is the market leader with Force10, Foundry, Nortel, Extreme and HP rounding out the top-six. “Not only did 10 Gigabit Ethernet port shipments increase dramatically during the quarter, but average selling prices rose resulting in extra strong revenue growth for this segment,” said Seamus Crehan, senior director of Ethernet switch research with Dell’Oro. “Although prices did increase during the quarter, we expect the general trend of steep declines to resume as vendors introduce higher port density line cards and fixed configuration products.” (Source: vnunet.com)
The Ottawa Citizen has a story today – actually a Q&A – looking at Nortel’s class-action lawsuits – two of which were settled earlier this year for $2.4-billion. Investors, however, should also keep in mind there are still RCMP, OSC, FBI and SEC investigations happening that involve the company’s accounting scandal. The Citizen also has a story looking at Nortel’s two-year battle to recover pirated copies of a key piece of software called GenKey.
Nortel has a new program called IPT 1-2-3 to encourage sales of customers looking to migrate to VoIP from legacy systems. An interesting comment was made to CRN by Pat Patterson, Nortel’s director of North American IP telephony marketing, who said: “When we looked at the large installed base that Nortel has in hand, we weren’t gaining our fair share of the IP telephony market”. He went on to tell CRN that in many cases, Nortel’s channel partners found it easier to quote a “rip and replace” solution from Cisco rather than adopt a solution that would use a combination fo old and new Nortel equipment. These are certainly interesting statements, aren’t they? It suggests Nortel’s VoIP equipment isn’t competitive and/or its sales systems/progrmas aren’t working or effective. That’s a troubling admission by Patterson. Update: As a reader was quick to point out, the CRN article also talks about Nortel has also created a new tool so partners can get quotes far quicker to customers. Nortel is also providing financial incentives and financing options. Still, is it just quotes and prices that have been at the root of Nortel’s woes?
Nortel has appointed Jackson Wu as the new president for China. Wu was previously previously head of a former Nortel joint venture, Tong Guang-Nortel in Shenzhen. Before joining Nortel in 1993, Wu was president of Datacraft Ltd. in Taiwan. It looks as though he is replacing Robert Mao, who had been head of Nortel’s Chinese unit since 1997.