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Vendors See Hope in Nortel's Bankruptcy

Chapter 11 bankruptcy might be just what the networking giant Nortel needs to finally get years of financial struggles behind it.

That's the consensus among user groups and government officials who spoke to InternetNews.com after Nortel Networks filed for bankruptcy protection yesterday.

"We think this was the right move for them at the right time and completely support Nortel's decision," Steve Ford, president of the International Nortel Networks Users Association (INNUA), wrote to InternetNews.com in an e-mail. "The timing was critical to ensure Nortel maintained resources to continue operation through the restructuring."

INNUA is an international non-profit association representing over 4,000 Nortel customers and claims to receive no direct funding from Nortel. Ford does not expect the current Nortel situation to affect the technology deployments of his membership. He added that INNUA is staying in contact with the Nortel leadership during the transition.

"We have also seen a membership increase over the past few months, bucking many of the economic trends. The message we are getting is that the connection we provide to Nortel is vital -- the decision yesterday only increases the importance of what we do."

IDC analyst Eve Griliches called the filing the best move for Nortel's situation. "They need to get rid of the debt first and then sell off pieces of the biz. Sad to see. I used to work there as did lots of good people."

Yankee Group analyst Zeus Kerravala agreed. "When you're hamstrung by too much debt it paralyzes what you want to do," Kerravala told InternetNews.com. "Nortel was spending all its energy servicing debt and didn't have any energy to do R&D or customer activities. It really acted as an achor that was weighing them down."

Forrester analyst Henry Dewing echoed the sentiments, while noting it was the only alternative facing the company.

"Nortel has been burning cash faster than they've been earning it and they've had financial problems on and off for coming up on ten years," Dewing told InternetNews.com. "They've got great technology and customers but they're not great at marketing and sales."

Dewing noted that Nortel has listed $2.4 billion in cash among its assets, which should help carry the company through its restructuring.

"At the end of the day this is what Nortel needs to do to have enough runway to take off," Dewing commented. "Were it not for the economic situation they might have been able to get off the ground."

Dewing also noted that the Canadian Government is helping to provide some financial grease for Nortel as well. Tony Clement, Minister of Industry has pledged to extend up to to $30 million in short-term financing to Nortel.

"Nortel Networks is known as a leader in the field of information and communications technologies and for its research and development in Canada," Clement said in a statement. "The decision to file for creditor protection was made by its Board of Directors in an effort to turn the company around. The Government of Canada appreciates the importance of the telecommunications industry to our economy and will continue to work with Nortel during its restructuring through Export Development Canada (EDC)."

Clement added that in Canada Nortel is filing for court-supervised restructuring under the Companies' Creditors Arrangement Act (CCAA) and not bankruptcy.

"The CCAA allows for a court-administered process that gives corporations the opportunity to restructure their business so that they can continue to be a viable and sustainable entity contributing to Canada's economy," Clement stated.

What Should Nortel do now ?

"From a short term initiative they need to reach out to their customers and ensure to them that things are ok," Yankee Group analyst Kerravala said. "

So far that's an action that Nortel has taken, at least according to INNUA's Ford. He added that it's important that Nortel help customers understand the positive impact of the direction they have taken, and the potential outcomes will be critical to avoid any misunderstanding by their customers.

"I believe Nortel should- and will- take this opportunity to focus on getting the company back on solid ground," Ford said. "Once that happens, I believe they have the product portfolio and solid customer following to come out of this a stronger company."

Part of the issue for Yankee Group's Kerravala will for Nortel to figure out which products they want to move forward with and which ones they want to either sell of or retire.

"Clearly this company will look different post bankruptcy," Kerravala said.

Kerravala suggests that Nortel should focus on their telecom base since the the enterprise landscape is so competitive.

"When you look at their installed base they have equipment at nearly every telco in the world and they are thought of as though leaders there.," Kerravala said. "I would focus energy on telcom and bolsters that."

For Forrester's Dewing, the key to Nortel's success will be execution, and specifically with sales and marketing. Dewing argued that sales and marketing has been an area where Nortel has lagged. He also noted that in the enterprise space they will need to get their channel resellers on board with whatever initiatives they go forward on.

"It's an execution question and marketing,sales and channel management will be critical to them actually demonstrating that they are doing something different on the other side of this protection," Dewing said. "At the end of the day I'm still fairly bullish on Nortel because of their strong customer base and their technology. They need to put some effort into marketing and sales to make those assets pay off."