Telecom: Mike Z steps down, says Nortel 'stabilizing'

J. Sturgeon | Financial Post | Aug. 11, 2009

In November 2005, he was hired by Nortel Networks Corp. to open a new chapter for the struggling telecommunications firm. Almost four years later, Mike Zafirovski has left Nortel as it moves through what most say is its last.

Monday, Mr. Zafirovski stepped down as chief executive of the bankrupt firm, as did most of Nortel's board of directors.

The decision, which comes as the Toronto-based company is in the process of selling off all of its business operations, was jointly made by Mr. Zafirovski, Nortel's bankruptcy monitor Ernst & Young Inc. and the company's creditor committee.

In an interview, the 55-year-old executive said the decision to go was made because the company, while still losing considerable amounts of money, was "stabilizing" now and that it was in the best interest of all for him and certain board members to step aside.

Nortel's two largest business units have or are on the verge of being acquired by rivals while Nortel is in advanced talks to sell its remaining units. The moves put the company's employees and technological legacy on a secure and "promising path," he said.

The announcement coincided with the release of Nortel's second-quarter results, which showed the company lost US$274-million during Mr. Zafirovski's final three months at the helm, more than double the loss from the same quarter a year ago. Revenue declined 25% to US$1.97-billion.

However, revenue did increase 14% quarter over quarter, indicating some customers are gaining more confidence that the company will honour future contract obligations - or at least whatever company acquires its businesses will.

Mr. Zafirovski said in June that Nortel would sell all its divisions through so-called "stalking horse" auctions as it tries to pay back creditors. The court-supervised sales are designed to set a floor price on the assets and encourage rival bids.

Last month, the company sold its major wireless business, which makes network equipment for mobile-phone carriers, to Sweden's Ericsson for US$1.13-billion. That bid trumped a US$650-million offer from fellow European giant Nokia Siemens Networks. Avaya Inc. has placed an initial US$475-million bid for the Enterprise unit, Nortel's second biggest by revenues, which develops networks for large corporations. An auction is slated for early next month.

"Frankly, we've done a pretty significant job of stabilizing the company, producing good results and increased the interest in our businesses from buyers," Mr. Zafirovski said of Nortel's performance since its bankruptcy filing on Jan. 14.

The 127-year-old company was forced to seek bankruptcy protection after its turnaround plans were sideswiped by the economic downturn last year, Mr. Zafirovski said.

"We were there in the middle of 2008," he said adding that he and other senior managers worked tirelessly to overcome the accounting scandals and related legal woes with investors that had plagued the firm since before his arrival.

He said he expected growth in most of the company's markets last year until the recession hit, leading to double-digit declines in sales across the telecommunications industry.

"We certainly did not have the flexibility to withstand that," he said.

More than a dozen appeals to the federal government made between October and January were rebuffed, Mr. Zafirovski said, as lawmakers were not convinced a bailout would save the firm. "I feel it's something the government should have done," he said. "I understand why it wasn't, but certainly we believe we provided a compelling case."

Alongside Mr. Zafirovski, five directors left the company yesterday. Chairman Harry Pearce as well as John Manley, James Hunt, Richard McCormick and Claude Mongeau stepped down.

Pavi Binning, Nortel's chief restructuring and financial officer will remain to manage operations for the time being. Nortel is also seeking a greater role for Ernst & Young, its court-appointed monitor, in its restructuring activities.

-30-

Telecom: Ericsson poised for supremacy in North America

By J. Sturgeon | Financial Post | Aug. 01, 2009

The sun had set on the Statue of Liberty hours before on Friday, July 24, harkening the arrival of another summer weekend in New York City. Far above the din of the streets, executives from Telefon AB LM Ericsson and Nokia Siemens Networks BV, two of the world's biggest telecommunications firms, remained hard at work.

"We had Nokia Siemens sitting on one side of the table and Ericsson on the other," James Bromley, Nortel Network Corp.'s lead U.S. attorney, told a Delaware court this week. Representatives of the two international tech giants had been huddled since the morning around the U-shaped boardroom table on the 39th-floor offices of Cleary Gottlieb Steen & Hamilton LLP, in the heart of Manhattan's financial district. They were bidding at a live auction for the most coveted assets bankrupt Nortel Networks had up for sale.

Shortly before midnight, Ericsson emerged the victor with a bid of US$1.13-billion. Mr. Bromley called the court-supervised sale a "milestone transaction." And for Ericsson it was. The Swedish teleco's prize was Nortel's vaunted wireless assets - the very technology powering the tens of thousands cellphone calls, text messages and mobile tweets being made by New Yorkers on the streets below.

The sale, which will close on Sept. 30 barring any regulatory hurdles, will help transform Ericsson into a mobile network behemoth in North America, giving it the technology it needs to sign lucrative contracts with Canadian and U.S. carriers for years to come.

It caps a remarkable string of deals by Ericsson since February that has made North America the company's most important.

"Being able to acquire this part of Nortel gives a very well-rounded base to tackle the business that we already have, plus a lot of the new business that we're going to have," Angel Ruiz, head of Ericsson North America, said in an interview. "It positions us very well."

North American operations will represent upward of 20% of the company's business worldwide after the deal closes, making it far and away its most valuable region. "With the added market share this brings to the table with customers like Verizon and Bell and Telus and US Cellular and a number of Tier-2 carriers, it's going to go from a US$2-billion business to perhaps over a US$5-billion business [annually]," the executive said.

The completion of the Nortel sale will finish off a troika of deals that have catapulted the company to a market-leading position in a North American market readying itself for a massive upgrade cycle.

In February, Ericsson won the contract to become the principal supplier of U.S. giant Verizon Wireless's build-out of its next-generation network. That was followed by a seven-year, US$5-billion deal to manage the networks of Sprint Nextel Corp., another major U.S. operator.

The transactions will leave Ericsson with more than 14,000 employees in North America, including 2,700 in Canada spread between offices in Vancouver and Toronto, where its Canadian operations are headquartered, as well as a sizeable research facility in Montreal. The acquisition will also hand to Ericsson Nortel's highly regarded research labs in Ottawa.

It's no surprise the sudden and formidable rise has left many wondering where Ericsson has come from.

The history of the company in many respects mirrors Nortel's, once a chief rival. Founded in 1876 in Stockholm, Ericsson spent much of the past century developing and selling phone equipment and systems, fuelled in part by the same nationalistic patronage from the Swedish government that Nortel enjoyed from Ottawa through contracts and generous tax incentives.

"They've been around for a very long time," says Douglas Reid, professor of international corporate strategy at Queen's University's School of Business and an expert on the telecommunications industry.

The company has held a presence in Canada for decades, as well, opening its first offices here in 1953. Ericsson is also a considerable investor in Canadian R&D, spending more than $2-billion over the past 10 years - more than $126-million in 2008 alone - primarily through its labs in Montreal, which represent the company's second-biggest facilities in the world.

Mr. Ruiz said the political furor that has erupted in recent weeks over the Nortel sale has come as a bit of shock to the company. "Considering our history," he says," I'm a bit surprised at some of the comments and perception."

Dwight Duncan, the Minister of Finance for Ontario, for example, has called for the sale to be stopped on grounds that it constitutes a national security concern and could spell the end of some high-tech jobs. The federal Liberals have also implored Industry Minister Tony Clement to conduct an in-depth review of the transaction to see if it violates foreign-ownership provisions in the Investment Canada Act.

Echoing what Ericsson's incoming CEO Hans Vestberg said this week, Mr. Ruiz said the company has no plans to scale back Nortel's Ottawa operations for the time being. "We have always touted our R&D presence in Canada, and that will continue to be very, very strong," he said.

The two product lines that comprise Nortel's wireless unit are CDMA networks, a technology still widely deployed by North American carriers, but which is undergoing a gradual decline here and around the world, and so-called long-term evolution or LTE systems, the ultra-fast technology now gaining ascendance with carriers and the gear that will most likely power the next generation of wireless networks.

In LTE, the 500 or so researchers that work at Nortel's Ottawa labs are resources that Ericsson will want to retain, and indeed grow, as the race toward the commercial deployment of the new technology gathers pace through 2010 and beyond, Prof. Reid said.

"The people will likely remain," he said, adding that "meaningful and important telecom work here will still be done."

The only difference? "They'll be doing it under the Ericsson flag not the Nortel."

-30-