The local Nortel branch, which employs 20 people, says it will be business as usual, despite the Canadian telco giant filing for bankruptcy protection.
It has filed under the Companies' Creditors Arrangement Act, in Canada, and under the US Bankruptcy Code's Chapter 11, to weather the global economic storm.
The move came a day before Nortel, North America's largest telephone equipment maker, was due to make a $107 million interest payment.
“If one has to look at it in the context of the current global economy, the organisation is looking at the situation proactively,” says Magda Engelbrecht, South African country manager for Nortel.
“It's important to note the difference between Chapter Seven, which is filing for bankruptcy, and Chapter 11, which is filing for creditors' protection from bankruptcy, which Nortel is doing.
“Nortel is not bankrupt, but is rather restructuring its financial strategy. We are now giving our clients the assurance that it's business as usual for Nortel SA.”
Engelbrecht says SA will not be significantly affected and its two main businesses, namely its carrier business and, particularly, its enterprise business, are in good shape.
Nortel internationally is transferring 1 000 jobs to lower-cost countries, following deep financial losses. Engelbrecht says this is not new and has been happening for two years.
“Nortel has consolidated its centres of excellence, such as Nortel in Turkey. We have a lot of support from the Middle East and we've had people coming from Nortel in Europe and the US to work in SA and coming to the Nortel training centre in SA.”
Canadian-sourced bailout
Nortel timeline:
* 1882: Founded as the mechanical department of Bell Telephone Canada.
* 1885: Became known as Northern Electric and Manufacturing.
* 1995: Changed brand to Nortel Networks and moved from a telephony manufacturing company to a multi-service network provider.
* 2001: Cut its year earnings in half, blaming the US economic slowdown. This resulted in a 33% drop in its stock. Within the same year, Nortel faced class-action lawsuits.
* 2002: 3 500 jobs were cut as shares fell to an all-time low in a decade.
* 2004: Underwent a formal investigation by the US Securities and Exchange Commission, due to accounting irregularities. CEO Frank Dunn was fired following the investigation. Later that year, Nortel moved away from its manufacturing services and sold some of its business to Flextronics International. Nortel later cut 10% of its staff, equating to 3 250 job losses.
* 2006: Appointed Mike Zafirovski as its new CEO. Nortel paid $2.47 billion to settle its two class-action lawsuits coming from its accounting scandal.
* 2007: A further 3 900 jobs shed and 1 000 employees transferred to lower-cost locations such as China and India. The same year, Nortel paid $35 million to settle civil charges again relating to its accounting scandal.
* 2008: Another 2 100 jobs cut as demand for its products comes to a halt. It sold its Metro Ethernet Networks Business and announced a further 1 300 layoffs, which equated to a loss of 5% of its workforce.
Valery Yiptong, public officer for the Canadian Embassy, says Nortel will receive a $30 million bailout from the Canadian government.
Canadian minister of industry Tony Clement says in a statement: “The Export Development Canada has agreed to provide up to $30 million in short-term financing through its existing bonding facility. It is important to note that Nortel is filing for court-supervised restructuring under the Companies Creditors Arrangement Act (CCAA), not bankruptcy. Nortel has stated it has every intention of emerging from this restructuring under the CCAA as a viable business. We will monitor its progress closely.”
Nortel says the global financial crisis and recession have compounded its financial challenges and directly impacted its ability to complete its transformation.
The company says in a statement that it has $2.4 billion in cash that it will use to preserve its liquidity and fund operations during its restructuring process. Nortel adds it's dealing decisively with its cost and debt burden, to effectively restructure its operations and narrow its strategic focus.
Mike Zafirovski, Nortel president and CEO, said: “Nortel must be put on a sound footing once and for all. I am confident that the actions we're announcing will be the fastest, most effective means to translate our improved operational efficiency, double-digit productivity, focused research and development and technology leadership into long-term success.”
Surviving the storm
A changing telecommunications industry, falling sales and poor management have been cited as reasons for Nortel's troubles. It is experiencing a decade-long financial slump, owing about $107 million in debt. The company lost $3.4 billion in the third quarter of last year, with its shares plummeting by 14%. Overall, its stock has fallen by 97% of its value in the last year.
According to Reuters, shares in Infosys Technologies and Wipro plummeted by 5%, after Nortel, one of its clients, filed for bankruptcy protection. Reuters reports: “Nortel's shares have tumbled along with the company's fortunes, sinking into penny-stock territory in recent months. In mid-2000, at the zenith of the company's success, they were worth more than C$1 100 each, adjusted for a stock consolidation that took place in late 2006.”
According to an April 2007 report published in Brainstorm magazine: “The company has been through a series of upheavals over the past five years, including repeated restatements of financial results, regulatory investigations and a class-action lawsuit that was settled in [2006].”
Mass job cuts
Nortel's head office is based in Ottawa, the technical hub of Canada. It does business in 150 countries around the world. Nortel started its South African branch around the late 1990s and early 2000.
Last year, Nortel said it would slash 2 100 jobs worldwide. This, however, will mostly affect North America. South African jobs in Nortel are safe. In 2000, Nortel had 90 000 employees and now has approximately 30 000.
Arthur Goldstuck, MD of World Wide Worx, says this does not mean it is the end of Nortel. “What it does mean, is that it weakens confidence in the company from its customers and suppliers, which are the worst affected. SA does not have the same dynamics at play as North America and it will not have the same impact on the local branch and on the South African telecommunications market.
“A company of their significance, filing for bankruptcy protection, is a reflection on how weak the market is. Nortel's competitors, such as Cisco, 3Com, Alcatel and Lucent, will not be cheering about it, but - at the same time - they will be the beneficiaries. SA and Africa in general have a strong market in the telecommunications space and it's in Nortel's best interest to look after this region.”
Goldstuck notes Nortel is one of the sponsors of the 2012 Olympics and has shown confidence in its market by announcing it has no interest in pulling out from the £40 million sponsorship.
Don't panic
Lindsey McDonald, Frost & Sullivan analyst, agreed with Goldstuck, predicting Nortel SA will limit its spending on research and development, as well as marketing and advertising.
“The advancement in R&D that we might have expected will take a backseat. Its channel partners such as Dimension Data and systems integrators might find that the degree of marketing and sales support might certainly be impacted. Yesterday, Datatec's share price fell 10% and it recovered. I don't anticipate that it will be seriously impacted. I think they want to give themselves some time to be able to restructure their debt.”
Steve Blood, VP of Gartner Research, says: “The most important point is that Nortel has filed for bankruptcy protection, not bankruptcy itself as had been reported. This is probably the best action to take in order for Nortel to resolve its challenges and existing customers have no need to panic.”
* Unless otherwise indicated, all figures are quoted in US dollars.
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