Nortel Networks

Bankruptcy Protection

RestructuringMar 19, 2009

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Team MembersAhmed AkeelaAiman Abou-ShakraSherif RadwanYousef MadiMehemed YounesNancy (Shuang Qiu)Tracy (Xiaochuan Huang)

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AgendaThe History of Nortel

◦ Landmarks◦ Legal Entities

Nortel Bankruptcy Protection◦ Process & Impact

Company and Market Analysis◦ Financials, Debt structure, Cash position

Strategy Formation ProcessProposed StrategyProposal Impacts

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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

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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

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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

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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

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Nortel: Bankruptcy Nortel: Bankruptcy ProtectionProtection 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

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Bankruptcy Protection ImpactPositive 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

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Financial Information - 2008 2008 Revenues By Business Unit

Carrier Networks42%

Enterprise Solutions

23%

Global Services20%

Other2%

Metro Ethernet Networks

13%

2008 Revenues By Region

United States42%

EMEA23%

Canada7%

Asia22%

CALA6%

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

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Nortel Debt Structure

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Nortel Debt StructureEDC: $187 M outstanding bondsPension Funds:

◦US: $1.8B (as of Sep 30, 2008)◦UK: £356 M (declared in 2005)◦Canada: $129 M

Total unsecure debt: $4,175 M

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Cash PositionTotal Treasury Cash: $2,442 MRestricted Cash: $32 MUnavailable Cash: $1,179 MAvailable Cash: $1,231 M

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Company & Market AnalysisWorsening economic

environmentRapidly advancing industrySlow purchase cycleHighly competitive industryHigh cost structure due to the

broad strategic focusHigh debt levels Cost exceed revenue resulting in

cash outflow

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Company and Market AnalysisUpstream company

(Cash Generation)

Ind

ust

ry G

row

th R

ate

(Cas

h u

se)

High

Low Low Relative Market Share High

?? ?

$

CDMAOptical

Voice Packet CoreLegacy Products

Wireless – 4G LTEEnterpriseGlobal Services

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Nortel Life Cycle:Technology

Based

Product Differentiation

Focus Niche Cost Focus Cost Leadership

4G LTE

GlobalServices

Enterprise(IP-based Solutions)

Legacy Products

(Voice, Packet)

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Old Structure of BNROne 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 holdersCulture

◦ High sense of pride of belonging◦ Value employees input

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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

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Nortel Existing StructureNortel Existing Structure

•Business Units Based•Decentralized Sales/Marketing

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Strategy Formulation Process

Developing Strategic Alternatives

Evaluating Strategic Alternatives

Strategy Choice

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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.

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Alternatives: Refinance LoansOn Dec 15, 2008, NN rating was

downgraded from B3 to Caa2This prohibited refinancing

options

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Alternatives: Sale & DivestitureDuring 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

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Alternatives: Sale & DivestitureSale 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

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Strategic Alternatives

CompetitiveAdvantage

Financial Strength

Service CategoryStrength

6 ----5 ----4 ----3 ----2 ----1 ----

-6 -5 -4 -3 -2 -1 1 2 3 4 5 6-1 -----2 -----3 -----4 -----5 -----6 ----

Defensive•Divestiture•Liquidation•Retrenchment

Competitive•Penetration•Enhancement•Product Development•Market Development•Status quo

Aggressive•Related Diversification•Market Development•Product Development•Vertical Integration

Conservative•Status quo•Unrelated Diversification•Harvesting

Environmental Stability

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Proposed StrategyRestructuring 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

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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

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Financial RestructuringNegotiate existing debt with

creditors to achieve:◦Exchange debt with company equity

(up to %50)◦Payback period extension beyond

2011◦Interest rates reduction

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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

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Impact: Information and Decision ProcessCoordinate 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)

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Impact: StaffingExperiencedSpecializedCross-functionalRisk takersResult motivatedChange acceptingTeam disciplined

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Impact: IncentivesExecutives: announced reduction of

their salariesReview salary structure (levelling,

market update)Secure exiting jobs (no more layoff

once restructured)Success bonus: based on back to

profitability, across the boardIncentives based on a mix of objective

and subjective performance measuresBroad requirements for general

managers and integrators

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Impact: CultureLess flexible work environmentResult oriented accountabilityBusiness interest centricValue expertise Accepts and responds to changesNortel employees should base

their work on the current situation not on the company’s history

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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

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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/resource

s/strategicchoice.ppt#270,14,Strategic