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Nortel Networks

Nortel Networks. Bankruptcy Protection Restructuring Mar 19, 2009. Team Members. Ahmed Akeela Aiman Abou-Shakra Sherif Radwan Yousef Madi Mehemed Younes Nancy (Shuang Qiu) Tracy (Xiaochuan Huang). Agenda. The History of Nortel Landmarks Legal Entities Nortel Bankruptcy Protection

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Nortel Networks

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  1. Nortel Networks Bankruptcy Protection Restructuring Mar 19, 2009

  2. Team Members Ahmed Akeela Aiman Abou-Shakra Sherif Radwan Yousef Madi Mehemed Younes Nancy (Shuang Qiu) Tracy (Xiaochuan Huang)

  3. Agenda The History of Nortel Landmarks Legal Entities Nortel Bankruptcy Protection Process & Impact Company and Market Analysis Financials, Debt structure, Cash position Strategy Formation Process Proposed Strategy Proposal Impacts

  4. The History of Nortel 1874: Scottish-born inventor Alexander Graham Bell invented the telephone at his parent's home in Brantford, ON 1876-1877: Bell patented his invention in US then in Canada 1879: Milville, his father, sold patent shared, 75% of the Canadian telephone patent, to National Bell, the predecessor of AT&T 1880, The Bell Telephone Company of Canada was formed. The Manufacturing Branch flourished 1895: Incorporated as a separate company, called Northern Electric and Manufacturing Company Limited 1899: The Bell Telephone Company of Canada purchased a Montréal wire and cable factory which later would be called the Imperial Wire & Cable Company Limited. 1914: the two companies amalgamated to form The Northern Electric Company Limited. It was owned 44 percent by Western Electric, the manufacturing subsidiary of AT&T Company of the United States, and the remainder by Bell of Canada

  5. The History of Nortel 1956: Consent Decree terminated WE patent and NE started its technical independence – R&D 1957: Bellville research facility 1959: Ottawa research facility 1971: NE and Bell Canada merged their R&D to form BNR 1972: First Electronic switching system (PBX: Private Branch eXchange) 1977: First All-Digital switch for small central offices (DMS-10) 1979: First All-Digital switch for large central offices (DMS-100) 1980’s: Explosive growth due to: DMS-100, break-up from AT&T, formation of US regional Bell holding companies 1995: new organizational structures to respond to globalization, forming NORTEL 2000: BCE Inc spun-off all of its shareholdings in Nortel to become a public company that owns 143 subsidiaries and makes $30B revenues

  6. Nortel’s Landmarks First 50 years, Northern Electric essentially manufactured equipment based on designs and processes licensed from Western Electric. NE made products primarily for the use of the Bell Telephone Company of Canada. Yet, it did make some consumer electronics products, such as radios, television sets, console radio-phonographs, hi-fi amplifiers, movie theatre sound equipment, and fire and police call boxes--even Hammond organs 1932: Trans-Canada telephone goes live 1958: Trans-Canada Skyway, the world's longest microwave system 1979: All-digital large central office telephone switch (DMS-100) 1995: Celebrates its first 100 with Internet and IP-based global communication solutions. Installed 3G (UMTS) wireless network CDMA2000 1xRTT technology 2003: End-to-end VoIP solution certified by the U.S. Defense

  7. Legal Entity Structure Separate legal entity in each of the countries which it operates Revenues are distributed among all entities NNC: Nortel Networks Corporation is the ultimate parent company, based in Toronto No active operations Invests in its direct/indirect subsidiaries NNL: Nortel Networks Limited, Canadian principal operating subsidiary Employees 2,800 in Canada Parent of 100+ subsidiaries: NNTC: NN Technology Corporation, 3,000 R&D Emp. in Ottawa NNIC: NN International Corporation in the US, holds minority equity in some foreign subsidiaries NNUKL: NN UK Limited in the UK NNGC: NN Global Corporation, 22 Emp in China, no operations

  8. Nortel: Bankruptcy Protection Jan 14, 2009 Nortel filed for bankruptcy protection in Canada, US and UK Definition: Reorganization under the bankruptcy code Can be used by individuals and businesses Creditors Secured creditors (Banks) Preferred creditors (preferred shares) Unsecured creditors (common shares, severance packages) Deferred Creditors (Pension Fund) Process Company submit bankruptcy protect request to court, against due payments Court form creditors committee to replace Board of directors Company negotiate liabilities, payment schedules and restructuring plans If failed to reach to agreement court will force bankruptcy Court can provide protection extensions

  9. Bankruptcy Protection Impact Positive Impact Deferred interest payments Improved cash flow Negative Impact Customer trust is shaken (no new contracts/business) Loss of investors trust (worthless shares) Employees quitting, low productivity Might impact existing contracts deliverables

  10. Financial Information - 2008 Total Revenues: $10,421 Cost of Revenues: $6,136 Mgmt Operating Margin: $559 Total Operating Expense: $6,467 Interests/Taxes: $3,617 Net (losses): ($5,799)

  11. Nortel Debt Structure

  12. Nortel Debt Structure EDC: $187 M outstanding bonds Pension Funds: US: $1.8B (as of Sep 30, 2008) UK: £356 M (declared in 2005) Canada: $129 M Total unsecure debt: $4,175 M

  13. Cash Position Total Treasury Cash: $2,442 M Restricted Cash: $32 M Unavailable Cash: $1,179 M Available Cash: $1,231 M

  14. Company & Market Analysis Worsening economic environment Rapidly advancing industry Slow purchase cycle Highly competitive industry High cost structure due to the broad strategic focus High debt levels Cost exceed revenue resulting in cash outflow

  15. Company and Market Analysis Upstream company ? ? ? $ High Wireless – 4G LTE Enterprise Global Services Industry Growth Rate (Cash use) Voice Packet Core Legacy Products CDMA Optical Low LowRelative Market ShareHigh (Cash Generation)

  16. Nortel Life Cycle: Technology Based Legacy Products (Voice, Packet) Enterprise (IP-based Solutions) Global Services 4G LTE Product Differentiation Focus Niche Cost Focus Cost Leadership

  17. Old Structure of BNR One main line of business: Telephone switches (70’s, 80’s) Org Structure is Deep functional structure (about 15 level of management) leadership style rigid and Beurucratic, centralized Incentive Well paid salaries and benefits compared to market decision making Slow to make decisions, complex process, too many stake holders Culture High sense of pride of belonging Value employees input

  18. Mid Structure During 90s: Multiple line of business (Telephony, Optical, Data switching) Complex matrix structure (functional, product and project dimensions) Leadership style Motivational, result oriented Created some competition among line of businesses Incentive Generous salaries and benefits, above market average. Some line of businesses (Optical) used paid large bonuses Decision making Decisions were made quickly derived by market pressure (time-to-market) Culture Higher sense of pride of belonging and achievement Flexible/relaxed working environment

  19. Nortel Existing Structure • Business Units Based • Decentralized Sales/Marketing

  20. Strategy Formulation Process Strategy Choice Evaluating Strategic Alternatives Developing Strategic Alternatives

  21. Strategies Considered Status quo It is not valid, as debt requirement need to be addressed Concentration Existing line of businesses have equal market share making it difficult to concentrate on one. Joint Venture Not attractive to others since Nortel liability is much higher than the value offered by its products Retrenchment Can be chosen as part of the recommended strategy Innovation Being in a surviving mode, cannot based the strategy on far future bidding Restructuring This is the most valid option. But require some other components from above options.

  22. Alternatives: Refinance Loans On Dec 15, 2008, NN rating was downgraded from B3 to Caa2 This prohibited refinancing options

  23. Alternatives: Sale & Divestiture During the last 2 years NN efforts to sell parts of its business failed Capital market conditions NN debt and cost levels Inability to raise funds Now, being under BP the sale might be easier Sale should be based on the exit strategy

  24. Alternatives: Sale & Divestiture Sale Pros Quickly generate some cash Avoid financial burdens for internal restructuring Get rid of debited/loosing divisions Focus on promising divisions Cons Company may not survive Sale value might be very low

  25. Strategic Alternatives Financial Strength • Conservative • Status quo • Unrelated Diversification • Harvesting 6 ---- 5 ---- 4 ---- 3 ---- 2 ---- 1 ---- • Aggressive • Related Diversification • Market Development • Product Development • Vertical Integration Service Category Strength Competitive Advantage -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 -1 ---- -2 ---- -3 ---- -4 ---- -5 ---- -6 ---- • Competitive • Penetration • Enhancement • Product Development • Market Development • Status quo • Defensive • Divestiture • Liquidation • Retrenchment Environmental Stability

  26. Proposed Strategy Restructuring that includes retrenchment, divestiture and liquidation: Reduction of activity or operation Permanent phase-out Removal of entities that do not fit Realign products/market or organization Cost reduction, growth potential Concentrate on products/divisions with high potential

  27. Proposed Strategy Focus on network Core and Gateway products Carreir Networks Short-term (2years): Wireless – CDMA 2.1B, GSM/UMTS 1.5B Wireline – DMS 0.5B Enterprise: 2.4B Optical: Long-Haul 1.1B, Metro 0.3B Services: 2B Long-Term (3-5years): Wireless – CDMA ~1B, LTE potential revenues ~2B Phase-out Wireline Optical Long Haul +1.1B Enterprise: +2.5B Services +2B Exit network access products Optical Data networking & security solutions (2.7% of revenues) Wireless and Voice Access products Legacy Wireline Optical Metro

  28. Financial Restructuring • Negotiate existing debt with creditors to achieve: • Exchange debt with company equity (up to %50) • Payback period extension beyond 2011 • Interest rates reduction

  29. Impact: Leadership • Require Business Experienced and honest Leadership with strong history of successful record in telecomm industry • For example: Carols Ghosn in Auto Industry • Potential Candidate: Mike Lazaridis, founder of RIM • Leader Style: Inspirational & Directive • Based on the life-cycle of line of business and market maturity (LTE is starting up, CDMA is phasing-out) • Inspirational (creativity based) • Decision Style: Directive (high-structure, Task orientation) • Ability to implement the proposed restructuring plan • Influence/impact on other areas: • Inspire/motivate staff • Gain market trust/confidence/valuation (customers, investors, lenders) • Better networking ability, better access to decision makers in the industry and government

  30. Impact: Information and Decision Process • Coordinate and integrate across businesses and between levels with planning, integrating roles, integrating departments • Fast mechanisms to share infomration • Quicker decision process due to reduced layers (vertical) and business of units (horizontals)

  31. Impact: Staffing • Experienced • Specialized • Cross-functional • Risk takers • Result motivated • Change accepting • Team disciplined

  32. Impact: Incentives • Executives: announced reduction of their salaries • Review salary structure (levelling, market update) • Secure exiting jobs (no more layoff once restructured) • Success bonus: based on back to profitability, across the board • Incentives based on a mix of objective and subjective performance measures • Broad requirements for general managers and integrators

  33. Impact: Culture • Less flexible work environment • Result oriented accountability • Business interest centric • Value expertise • Accepts and responds to changes • Nortel employees should base their work on the current situation not on the company’s history

  34. Restructuring as a Project • Creating the Charter • Assign PM, and define high level objectives and alternative selection • Identify limitations, assumptions and boundaries • Create Preliminary Scope • Define high level scope of the project. That is “to identify the best strategy to exit Nortel from chapter 11 within 12-18 months” • Create Project Management Plan • Create management plans for communications, risk, scope, cost, schedule, quality, human resources and procurement • Project Execution • Direct and manage execution, Quality Assurance, acquire and develop team and communicate • Project monitoring and Control • Performance reports ,change control and verify and control • Project Closure • Sign-off acceptance, lessons learned, Archive documents, administrative closure

  35. References • Ernest & Young • http://www.ey.com • Cata Alliance, Dr. Koplyay • http://www.cata.ca/files/PDF/Resource_Centres/hightech/elearning/Part6-Strategy.pdf • Weber State University, Dr. Burton • http://faculty.weber.edu/lburton/MHA%206000/Session%20two%20MHA%206500.ppt • Nortel Networks Web Site • http://www.nortel.com • Bell system Memorial: • http://www.porticus.org/bell/northern_electric_history.html • Purdue University: • http://www.agecon.purdue.edu/extension/sbpcp/resources/strategicchoice.ppt#270,14,Strategic

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