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Will Nortel Emerge Stronger After Bankruptcy?

Nortel Networks' bankruptcy protection filing on Wednesday could lead the struggling networking company to a more profitable comeback, partners and industry analysts say.

"It's a very wise decision," said Stuart Chandler, president and CEO of Optivor Technologies, an Ellicott City, Md.-based solution provider and Nortel Elite Advantage Partner. "Nortel will emerge a much more viable, much stronger and more profitable organization. They didn't respond fast enough to market conditions, now they're responding and they need a little time."

On Wednesday, Nortel sought protection from its creditors, filing for Chapter 11 bankruptcy protection in the U.S. and under the Companies' Creditors Arrangement Act (CCAA) in Canada. The move came as Nortel faced paying a $107 million bond interest payment this week on a $3.8 billion bond debt.

The filing comes as Nortel struggles to find its footing in a slumping economy. In November 2008, Nortel posted $3.4 billion in quarterly losses, its biggest dip in seven years. In response to weak sales and mounting debt, Nortel slashed 1,300 jobs and froze salaries and hiring in its bid to restructure and cut costs of roughly $400 million. Nortel has faced a downward spiral since 2005, when president and CEO Mike Zafirovski took the helm. Zafirovski was charged with turning around the struggling company and since taking over as chief executive has cut the work force by roughly 18 percent and faced losses of more than $4.5 billion.

"This process will allow Nortel to deal decisively with its cost and debt burden, to effectively restructure its operations and to narrow its strategic focus in an effective and timely manner," Nortel said in a statement announcing the filings.

Despite the missteps, some Nortel partners are confident that the massive networking and telecom vendor will bounce back. Filing for Chapter 11, Optivor's Chandler said, gives Nortel room to breathe and focus on continuing operations without having to scramble to pay off mounting debt right away.

"Nortel has needed to make dramatic cost cuts for some time and has been slow to do so," Chandler said. "I think they've been far too slow to make those cost cuts. Nortel needs to do this now to allow their cost cutting to reap the rewards and to take effect."

And while filing for Chapter 11 is seen as a stigma, Chandler said he doesn't foresee bankruptcy protection having a long-term impact on his Nortel sales.

"The issues we may come across are customers may get the wrong impression and the wrong idea," he said, adding that oftentimes Chapter 11 is equated with liquidation, which is a false assumption. If anything, Chandler said, a leaner, meaner Nortel will thrive, mainly due to its vast pool of intellectual property, its massive installed base and its stable of partners and resellers.

"This is a short-term hiccup. The impact is, sure, somewhere, somehow there's going to be some customer that overinterprets what this means." Still, he said, customers and partners can take comfort in Nortel's restructuring plans being guided by a federal judge. "They have to have a plan. That's the key. You can't go into Chapter 11 without a plan to get out."

Right now, Nortel's restructuring plans are still a bit fuzzy. Nortel has vowed to continue operations and has $2.4 billion in the bank to do so. Along with the hiring and compensation freezes and layoffs, Nortel has also been shopping around its Metro Ethernet Networks division, which, if sold, could bring in $1 billion. Additionally, a number of Nortel's top executives have left their posts since the start of the new year.

"Nortel must be put on a sound financial footing once and for all," said Zafirovski in a statement Wednesday. "These actions are imperative so that Nortel can build on its core strengths and become the highly focused and financially sound leader in the communications industry that its people, technology and customer relationships show it ought to be. I am confident that the actions we're announcing today will be the fastest, most effective means to translate our improved operational efficiency, double-digit productivity, focused R&D and technology leadership into long-term success."

Yankee Group senior vice president Zeus Kerravala called Nortel's bankruptcy protection a "good news, bad news" situation, but noted "this is the right time for Nortel to do it."

"There's a very negative short-term impact for Nortel to overcome ... and that hurts customer confidence," he said. "Customers will be hesitant to invest in Nortel. It would be very difficult to convince a company to make a long-term investment in Nortel because they're not sure what it will look like post-restructuring."

Nortel's struggles also open the door for other vendors like Cisco Systems, Hewlett-Packard, Juniper Networks and others to take aim at Nortel's customer base and woo them away from the oft-troubled vendor.

"The competitive channels can jump all over the installed base," Kerravala said.

Chandler, however, said while customers may be hesitant to sign on with Nortel, it's as good a time as any to deploy Nortel. While other vendors may use the bankruptcy filing as leverage, Nortel could make itself more competitive pricewise.

"They haven't discontinued any products or any support," he said. "Nothing has changed. This is a self-bailout. They're creating a safety net for the buyers."

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