Nortel files for bankruptcy

Nortel is attempting to put the brakes on its financial free fall by seeking bankruptcy protection in the United States, Canada and Europe.

Legal filings to protect the company from its creditors were filed Wednesday, one day before it has to pay a $107 million bond payment.

The company says it will take even more drastic measures to turn things around than the $400 million cost-cutting campaign it outlined in November that called for selling its metro Ethernet division, laying off 1,300 employees and shuttering facilities.

But the world economic crisis has changed the playing field so that plan is no longer enough. For example, the company has been unable to find a buyer for the metro Ethernet division.

Filing for Chapter 11 bankruptcy protection in the United States will allow the company to reorganize and undertake a comprehensive business and financial restructuring, says the company's CEO Mike Zafirovski.

“I firmly believe these are the right steps toward a solution for our company,” he says in a public letter addressed to Friends of Nortel (see entire letter). Despite its financial troubles, the company says in a press release that it will continue its day-to-day business as usual.

But filing for bankruptcy protection – which can result in creditors receiving less than they are owed – could influence decisions by suppliers and distributors about how to conduct business with the company. Already, competitors such as Enterasys, Extreme Networks and Juniper are swooping in to woo customers and channel partners away from the beleaguered company.

Enterasys says it is offering Nortel and other competitors' customers a 100% credit on their equipment.

Another possibility is that bankruptcy courts could order the sell-off of others of the company's divisions. These include an enterprise division that includes network infrastructure, VoIP gear and contact center gear, and its core telecom division that sells to carriers.

Some customers are remaining steadfast in support of Nortel, at least for the short term. The International Nortel Networks Users Association (INNUA) issued a statement this week saying it backed Nortel's decision and believes it will result in a stronger enterprise focus.

Zafirovski has been trying to turn Nortel around since he got there three years ago, but without much success. A year ago, Nortel had a net profit of $27 million in the third quarter, which plummeted to a net loss of $3.4 million. Between the same periods, revenues dropped 14%.

The company's market value, peaking at $250 billion in 2000, is now close to 0.1% of that at $275 million. Sales of its stock were halted today on the New York Stock exchange, with its price at yesterday's closing value of 32 cents a share. The company is under a NYSE warning that it will be delisted in six months if the price doesn't rise above $1.

Still the company reportedly has $1 billion in cash that it has been burning through. Preserving it may enable the company to weather a restructuring without need for more borrowing, something that is sometimes necessary in bankruptcy procedures, according to a report in Canada's Globe and Mail newspaper.