In the end the question was not if, but when. On January 14th Nortel, a troubled Canadian maker of telecoms equipment, filed for bankruptcy protection, making it the first big technology firm to succumb to the recession. “Nortel must be put on a sound financial footing once and for all,” explained Mike Zafirovsky, its chief executive.
It marks the end of a breathtaking fall. Nortel, a high-flyer during the internet boom, was once Canada’s largest company, employing 95,000 people worldwide and boasting a stockmarket value, at its peak, of C$366 billion ($251 billion), accounting for more than one-third of the value of the entire Toronto Stock Exchange. Just before the filing this week, its workforce had shrunk to 26,000 and its stockmarket capitalisation to a mere C$191m ($156m).
The immediate cause of Nortel’s demise is the recession, which hit it particularly hard. In November Nortel posted a third-quarter loss of $3.4 billion. Revenue in its core business, which sells switching gear to telephone companies, fell by 24 percent. But the roots of Nortel’s troubles go deeper. It never really recovered from the bursting of the internet bubble in 2000-2001, followed by an accounting scandal in 2004.
Will other big technology firms follow it into bankruptcy? Not necessarily. Although its rivals are not doing too well, they are stronger. In December Alcatel-Lucent said demand for its products would fall by 8-12 percent next year, and it would not make much of an operating profit before 2010. Even Motorola and Sun Microsystems, embattled makers of telecoms equipment and high-end computers respectively, should be able to make it through the recession, provided they are not taken over or broken up by their own management. Both firms have plenty of cash in the bank.
Still, Nortel could become a model. Its filing was a “strategic move”, says Richard Windsor, an analyst at Nomura Securities. With $2.4 billion in the bank, Nortel could have limped along for a while. But it went for bankruptcy protection now, he says, so it would not have to do it in total desperation when the money had run out. Will it emerge in one piece? Probably not, says Mr. Windsor. Its parts are likely to be sold, perhaps to Huawei Technologies, a Chinese rival which has been looking to boost its presence in North America for some time. It is a sorry end for a once-proud Canadian technology icon, but this way investors will at least get some of their money back.