Nortel fails

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As the recession deepens, it is possible to see the previous five years of growth as a debt-driven blip in a downturn that began with the popping of the dotcom bubble. Another reverberation of that first bust was felt on Wednesday as Nortel Networks filed for bankruptcy protection. The Canadian maker of telecoms equipment, which at its peak in 2000 boasted a market capitalisation of about $250bn, but has struggled through losses and scandal since, now seems set for a break–up and sale of its parts.

The timing, just a month after new advisers were spotted on the premises, came a day before $107m of interest payments fell due. But this was earlier than might have been expected. The group had $2.4bn of cash on hand at the end of the year and no debt to refinance until 2011. Plunging prices for Nortel’s bonds and equity on Wednesday suggest there had been a hope for asset sales outside of bankruptcy. A reorganisation announced in November appeared to pave the way for a such a fix.

But since telecoms equipment can last for more than a decade, buyers want to know suppliers will still be solvent and servicing their hardware. So uncertainty over Nortel’s future will have made winning new business very difficult. With North American telecoms companies cutting capital spending, the prospect is for Nortel to burn through significant amounts of cash in the months ahead.

Prior to bankruptcy, suitors for the attractive parts – existing customer relationships, technological expertise and patents, and a desirable Metro Ethernet business – knew that time and depressed valuations for all assets were on their side. Nortel bowed to the inevitable with enough funds left to try and shape its own destiny. With cash still so valuable, more companies seem likely to follow the decision to fall swiftly on their swords.

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