Telecom: In Wi-LAN, a path for Nortel's rebirth?

By J. Sturgeon | Ottawa Citizen | March 3, 2010

TORONTO -- It was in early 2006 when Wi-LAN Inc.’s board was forced to make a bold decision. Faced with a fast-approaching bankruptcy, the Ottawa-based telecommunications equipment maker moved to radically alter course and once and for all sever its deteriorating manufacturing operations.

“There were no employees left, very little cash in the bank and debts were more,” said Jim Skippen, Wi-LAN’s chief executive. “It was a desperate situation.”

Wi-LAN approached the would-be CEO, then working for cross town rival Mosaid Technologies, and persuaded him to help purge the firm of its business lines and focus solely on obtaining licensing royalties from its small but powerful patent portfolio.

“That was the only possible option, the manufacturing had not worked out very well and the company was in serious financial straits,” he said in an interview.

In the four years since the brush with near-collapse, Wi-LAN has seen its growth profile rise steadily. Now, the firm of roughly 40, comprised mainly of engineers and lawyers, is on the brink of its biggest financial windfall to date. An upcoming hearing in a long-running litigation process against some of the largest handset and wireless device makers in the business including Apple Inc. all but promises to net the firm tens of millions in recurring revenue, analysts say.

In Wi-LAN’s rebound there may lie a pathway to resurrection for a much, much larger telecom compatriot: Nortel Networks Corp.

Similar to Wi-LAN, Nortel’s fate as a maker of wireless and wireline networks was sealed when it filed for creditor protection on Jan. 14, 2009. Nortel filed under a mountain of debt that surpassed US$10-billion. To settle up with a long list of creditors, Nortel has proceeded to auction off its core operations through a handful of so-called “stalking horse” sales since.

The sales of its vaunted wireless and enterprise network businesses have generated more than US$3-billion, however, the Toronto-based firm only held $5.7-billion in assets as of Sept. 30. The auctions have handed rivals like Sweden’s Ericsson AB and New Jersey-based Avaya Inc. key assets and personnel as well as the legacy of the 128-year-old Canadian firm.

“The corporate structure that was in place simply does not exist now,” said one former executive that has moved on to one of the successful bidders.

But, Nortel has retained an enviable portfolio of patents -- about 3,000 across a product base encompassing advanced, next-generation wireless networks and ultra-high speed broadband technologies. Certain companies, including Wi-LAN, have been approached by Nortel to gauge interest on a sale. But there is much speculation that Nortel is considering another option.

“They’ve talked about maybe going it alone with their patents,” said Peter Imhof, a fund manager with Sprott Asset Management.

“It’s absolutely conceivable,” said Joseph Compeau, professor of information systems at the University of Western Ontario’s Ivey School of Business. “There is a model there to license this stuff. Especially the LTE portfolio.”

Led by a suite of patents covering cutting-edge wireless technology vaguely termed Long-Term Evolution (LTE), some have pegged the value of the entire portfolio at US$1-billion.

For months Nortel has been weighing a one-time payment of that magnitude against emerging from bankruptcy as a patent licensor. “It came down to whether they were going to sell them for a big chunk of cash or was there more value in getting a recurring dividend on them,” the former Nortel executive said of the situation before he left.

A spokesperson for Nortel declined comment. Ridout & Maybee LLC, an IP law firm in Toronto that represents Nortel, also declined comment.

There may be good reason in hanging on.

The size of Wi-LAN’s telecom patent portfolio is less than a third of Nortel’s. About 50 of those form the nucleus of what Wi-LAN developed over a decade and a half as an operating entity. Through numerous licensing deals, Wi-LAN has grown into a thriving concern. Its biggest came in 2007, when Finnish handset maker Nokia Corp. signed an agreement worth US$49-million, which included handing over of some additional patents to Wi-LAN.

Now, two nondescript patents named 222 and 802 pertaining to local-area WiFi and CDMA cellular networks, respectively, lie at the heart of a dispute with nearly 20 manufacturers of wireless products, including Apple.

On March 11, the company will attend a so-called Markman hearing in a Texas court that will define the parameters of what the two patents cover. The Markman will give Apple and others, including PC makers Dell and Hewlett-Packard a sense of whether the court believes those firms are willfully infringing on Wi-LAN’s patents.

Failing a financial settlement, a trial is scheduled for next January. Most companies simply will not take the risk. Instead, Mr. Skippen says more than 90% of patent cases are settled “on the courthouse steps.”

Sean Peasgood, equity analyst at Wellington West Capital Markets, says the date will serve as a “catalyst” for Wi-LAN’s bottom line. The public firm is expected to generate between $28-million and $50-million in revenue this year. But the analyst suggests the firm could bring in as much as $100-million as settlements are signed.

That does not approach the billions of dollars a company the size of Nortel generated during its heyday, but revenues in that range and higher collected on a patent portfolio of a few thousand could go a long way in making creditors whole if they are patient, as well as address pension shortfalls.

Still, in Nortel’s case, the idea of a reborn company may be a pipe dream. “There’s a lot of people pulling for pieces of the company,” said Mr. Peasgood, who has covered Nortel. “Whether the company can move forward and try and monetize those patents, I’m not sure.”

Patience is not a virtue found in most bankruptcy proceedings, he said. “Generally, the rule of thumb is, that on a new licensing program, it can take two years to get up and running.”

As for Wi-LAN, its board pursued the licensing strategy before it ever had to file under the Companies’ Creditors Arrangement Act and therefore was not forced to leave ultimate decision-making powers to a judge, whose main focus is getting as much value back to stakeholders as orderly and quickly as possible.

“It’s much harder to do this once entered into bankruptcy. You don’t have that flexibility,” said Mr. Skippen, who admits that his company would be interested in the event of a formal sale of Nortel’s patents. “[Nortel] waited too long maybe.”

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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.

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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."

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Ericsson confident of Nortel sale, but braced for hurdles

Jamie Sturgeon | Financial Post | July 28, 2009

Swedish telecommunications giant Ericsson said Monday it was confident that its acquisition of Nortel Networks Corp.'s wireless business would be approved by bankruptcy courts as well as Canadian and U.S. regulators, but acknowledged that hurdles remain.

Primarily, Hans Vestberg, chief financial officer of Ericsson noted Canadian technology giant Research In Motion Ltd.'s attempts to interfere with the sale, including urging federal authorities, which still must approve the deal, to intervene.

"We feel confident that this will go through but we have a lot of respect for the process that will come," Mr. Vestberg said on a conference call. "There are some regulatory issues left to be defined."

Ericsson won a three-way auction for most of bankrupt Nortel's wireless assets early Saturday, agreeing to pay US$1.13-billion for the Toronto-based company's technology and certain patents related to CDMA and LTE wireless network technologies.

The unit, Nortel's biggest by revenue, makes and develops CDMA networks used by many major mobile-phone carriers including Bell Mobility and Telus Corp., as well as next-generation Long-Term Evolution, or LTE networks.

Led by North American carriers, LTE, which will be able to deliver data at high speeds to mobile devices even more sophisticated than today's smart phones such as Apple Inc.'s iPhone or RIM's BlackBerry, is poised to become the global standard over the next several years.

Ericsson outbid European telecom rival Nokia Siemens Networks, as well as U.S. private equity firm MatlinPatterson Global Advisers LLC.

Waterloo, Ont.-based RIM has expressed interest in the assets, saying last week it would have bid as much as US$1.1-billion for them, but said it was blocked by Nortel from participating in the auction.

In a statement released late Sunday, RIM said it remained interested in pursuing certain assets, and urged Canadian authorities to review the sale, which would see Nortel's extensive technological base fall to a foreign firm.

"The government has the authority and responsibility to get involved to protect vital Canadian interests," the company said.

Tony Clement, the federal Industry Minister, has said it was his preference to see Nortel's technology remain in Canada, but has so far declined to step into the sale process.

Nortel will bring a request to have the sale approved by bankruptcy courts in the U.S. and Canada on Tuesday. The deal will also be subject to further regulatory approval.

Mr. Vestberg said Ericsson expects the deal to close late in the third quarter and have the business fully integrated by the fourth.

He said that while there were synergies to be found between its existing North American operations and the new assets, Ericsson planned to keep Nortel's wireless operations in Dallas and Ottawa unchanged for the time being.

The unit employs about 2,500 people, with about 800 workers based in Canada, primarily in Ottawa, Nortel's historical research and development hub.

Nortel, an icon of Canada's technology sector for more than a century, filed for bankruptcy protection in January, citing the recession for thwarting a turnaround plan begun in 2005 with the appointment of Mike Zafirovski, the company's current chief executive.

The company, which has its shares delisted from the Toronto Stock Exchange on June 26, is in the process of selling off its major business lines.

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Feature: Nortel employees caught in tax trap

By J. Sturgeon | Financial Post | 05. 25. 2009

Richard Smith gave the biggest part of his working life to Nortel Networks Corp.' s telecommunications services unit.

As division director, he witnessed and contributed to the Canadian technology company's rapid growth into a global titan in the 1980s and 1990s. Like other employees of the firm, which filed for bankruptcy protection in January, Mr. Smith was compensated in part with company-granted options on stock.

For many, it was a dream. They exercised their options and sold the shares for a handsome profit at the height of the dot-com boom, when Nortel was the toast of the Toronto Stock Exchange with a share price well above $100.

Yet for an untold number, emotional turmoil has been their only return, and now, as the enervated telecom firm faces a possible dissolution, those optioned shares threaten them with financial ruin.

The reason is a little-known amendment to federal income-tax laws made at the beginning of the decade on options allotted as part of employees' pay that allows for a tax deferral on optioned stock until it is disposed of.

The effect has left current and former Nortel workers such as Mr. Smith saddled with colossal tax liabilities on paper profit they never realized.

"It's been a nightmare," says Mr. Smith, who's name has been changed at his request. "I have to come up with $200,000."

The 68-year-old retiree's ordeal began in the mid-1990s when he was awarded the right to purchase Nortel shares at a discount set by the company.

Times were never better for Nortel. It was selling fibre-optic cable and other network components in spades as the Internet mania was in full flight. The stock was soaring, eventually inflating to occupy a full third of the market value of the entire Toronto exchange.

Mr. Smith retired in 1999 with options on about 13,000 shares, which he exercised in the fall of 2000. He spent about $90,000 of his savings to acquire shares worth $900,000. He could have sold, paid his tax obligation on the profit and still had enough to live in relative comfort for the rest of his life.

But he didn't.

Instead, he thought the stock would go higher still, so he held on. He also deferred the taxes owed to the Canada Revenue Agency (CRA), which were assessed at the time he optioned.

The deferral amendment had just been written into the Income Tax Act through that spring's federal budget. Wary of losing top tech talent (among other sectors) to U. S. companies then offering lucrative stock-option plans, Canadian legislators passed measures allowing for the payment delay on exercised options until the point of disposal.

What was not amended was when the tax assessment is made, which remained -- and still does -- at the point of exercise.

"It created a tax risk," says Ken Snider, a senior tax lawyer at Toronto-based Cassels, Brock & Blackwell LLP. Like a capital gain on an investment, taxes charged on optioned shares are punishing. The CRA applies the same policy it does on capital gains to shares awarded through options to employees -- 50% of the profits at the individual's tax rate.

What no one seemingly saw at the time was a scenario in which a stock collapses, obliterating employees' equity stakes while leaving them with a tax burden from an assessment made when a company's share price was through the roof.

"That is the trap," Mr. Snider says. "If the value of the shares dropped significantly, the proceeds of the sale would be insufficient to pay the tax liability."

Mr. Smith assumed his shares at $104 apiece. After nearly a decade of watching with dread as Nortel's stock price crumbled, his shares are now worth about 2¢ each, accounting for reverse stock splits. His tax liability is about $204,000, he says.

"This is my all-encompassing issue. It's been nine years and it's grinding me down."

Nortel, which declined comment for this story, filed for creditor protection on Jan. 14, succumbing after years of distracting accounting scandals and poor operating results. The filing has bought Nortel -- still North America's largest telecom-equipment maker -- time to restructure into a viable company.

That is clearly the most agreeable outcome for Mr. Smith and others in his position. If Nortel survives, he'll simply keep his shares and defer the tax perpetually.

Failing that lies some "horrific" scenarios. If Nortel sells itself, the acquirer could take it private, cancelling the public float and trigger his tax liability. If Nortel cannot find a suitor, liquidates and ceases to exist as a corporation, the tax will again come due.

The financial recourse for Mr. Smith, who lives with his wife on a $30,000 annual pension (which is also at risk because of Nortel's misfortunes) and old-age security, is to sell his home or empty out his retirement savings.

Nortel employees are not alone. A group called Canadians For Equitable Taxation (CFET) estimates thousands of Canadians share Mr. Smith's misfortune. Many are unwilling to come forward out of embarassment or fear they'll draw the eye of the CRA, says Gary Hawe, a spokesman.

In a rare instance that cast light on the issue, 35 former Canadian employees of California tech giant JDS Uniphase Corp. received a federal reprieve or "remission order" on their obligations in 2006 after lobbying their local Member of Parliament, Gary Lunn, then the natural resources minister.

Since then, awareness has grown. In late April, CFET, a group of several hundred, met with the federal finance committee to ask for a change to the rules. How far did discussions go? In short, nowhere.

The CRA argued its bound to administer the law so long as it is in place, says committee member John McKay, Liberal MP for Scarborough-Guildwood. Meanwhile, Jim Flaherty, the Minister of Finance, is "refusing to take on the issue."

Each side is "blaming the other for this problem and in between the crossfire there are a lot of dead taxpayers," Mr. McKay says.

Mr. McKay says the rules have created unintended consequences and need to be corrected. "It is an anomaly and it's wrong. You shouldn't tax people on phantom income."

"The best thing that could happen to me," Mr. Smith says, "is that the shares remain worthless and that's it. Then I can sleep at night."

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