Nortel's Funeral -- Who Dances, Who Cries?

It was on Friday that Nokia Siemens Networks (NSN) announced that it was buying the LTE and CDMA assets from Nortelat a price that more than one industry analyst is calling the beginning of the fire sale. It's clear that the Nortel ship is going down for the last time, not to emerge whole from bankruptcy. But the question for us is, who are the industry winners and losers?

The first big point is that there are some losers and winners. Clearly the first category includes many Nortel employees, shareholders, business partners, and customers. As two different telecom analysts pointed out, the price of $650 million was not even one year revenue for the wireless division. The irony is that much of the problem Nortel has been facing stems from the last telecom recession in the early 2000s, according to Dana Cooperson, vice president of network infrastructure at technology consultancy Ovum. "It hadn't recovered and ran out of runway," she said.

According to a note from Frost & Sullivan principal consultant Ron Gruia, NSN got itself quite a deal, as Nortel claimed to be the second largest CDMA supplier in the world:

Nortel's CDMA customer pedigree includes operators such as Bell Mobility, Telus, Verizon Wireless, Sprint, KDDI and China Telecom, among others. On the LTE side, Nortel has established some traction with KDDI and T-Mobile International AG (where it was trialing the technology). From an LTE IP perspective, NSN will be able to leverage Nortel's SON (Self-Organizing Networks) solution.
What the acquisition really does is provide NSN with a strong foothold in the North American market, which NSN CEO Simon Beresford-Wylie openly admits represented its weakest single market share. (And is it just me, or does Beresford-Wylie's picture look vaguely like a shark that just spied dinner? Ah, but then, NSN just did.)

As PA Consulting Group member Peter Sigginsnotes, the price was a matter of bad economic timing: "Nortel's business assets aren't worth their fair market value in a normal sense." Gruia suggests that the low valuation of the one part could well help bring similarly low prices for the company's other divisions, including Metro Ethernet Networks, enterprise, global services, and carrier infrastructure:

The Enterprise Division is widely expected to be sold within the next week or so, and potential suitors include Siemens Enterprise Communications (a [joint venture] between Gores Group LLC and Siemens) and Avaya (owned by private equity firms Silver Lake Partners and TPG). The odds are slightly higher for the former to win the bidding, but given the price of the wireless sale to NSN, the valuation of the enterprise business unit is not expected to reach $500 million, which represents a drop of over 50% of the valuation that it would have gotten last year before the downturn that precipitated the downfall of Nortel.
The breakup of Nortel is likely to relieve some pressure on its major competitors, though carrier customers will be eyeing all suppliers warily for the least sign of financial instability.

Another loser in the industry shake-up will be Canadian R&D, as Nortel was the country's top tech spender in that area, outpacing RIMby more than four to one and giving life to hundreds of spin-offs. The other big loser is the group of small niche telecom equipment vendors. "It was always hard for a big carrier to choose them" because of concerns of stability and financial strength, says Cooperson. Now it's just gotten tougher.