As the poor economic climate of 2008 spills over into 2009, things aren’t getting better for most technology companies. In fact, for many technology firms, things are getting worse. One of the latest companies to be placed under extreme financial stress in the current global economy is Nortel.
Reuters reports that Nortel has filed for Chapter 11 bankruptcy protection in the U.S. to give it time to reorganize in an attempt to save itself from extinction. Nortel has also filed for protection in Canada and its European subsidiaries are also expected to make similar filings.
Nortel is one of the largest employers in Canada and was once of the most traded and secure stocks on the Canadian stock market during its heyday in the late '90's. The massive firm has been struggling in the face of increased competition from companies in the U.S. and abroad. The firm had warned last month, according to Reuters, that it was under increasing pressure and that its cash position and liquidity were deteriorating.
Reuters quotes Gavin Graham from BMO Asset Management in Toronto saying, "It's obviously a remarkable transformation from where it was as the largest company in Canada worth about 35 percent of the (Toronto Stock Exchange) in 2000. But this is a reflection of the way that the telecommunications industry has changed."
The poor economy has seen many large corporations slash the budget allotted for the equipment that Nortel manufacturers. The sharp slowdown in key areas like U.S. sales has pushed Nortel to bankruptcy filing.
In its heyday, Nortel stock traded for over C$1,100 in late 2006. Wednesday the firm's stock plummeted over 60% to close at only C$0.15 per share on the Toronto Stock Exchange. According to the exchange, it is looking at the stock for delisting at this time.
Nortel hopes that the bankruptcy filing will give it time to reorganize and shed assets in an attempt to remain solvent. UBS analyst Nikos Theodosopoulos said, "They're avoiding a slow death by doing this. The company is going to have to sell assets and change its focus. It's not going to be the same company."
Nortel filed for bankruptcy protection the day before an interest payment of $107 million was due. DSAM analyst Duncan Stewart said, "Based on this filing, the board of directors must believe that not only is the fourth quarter bad, but that the first quarter is going to be just as bad or worse."
Stewart says that Nortel may have enough cash on hand for short term, but the medium and long term operations aren’t viable. Canada's government has said it will help Nortel, which is a huge part of the Canadian business world with 32,000 employees. The government will offer Nortel C$30 million in short-term financing.
According to the filings, Nortel's biggest debtor is the Bank of New York Mellon with claims of about $4 billion USD. Another key debtor is one of Nortel's main suppliers, Flextronics. Exactly how much Nortel debt Flextronics holds is unknown. Part of Nortel's restructuring will undoubtedly be more layoffs added to the 1,300 cut jobs it announced in November 2008.