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Nortel Customers Opt to Stick Around After Bankruptcy

January 21, 2009 | Chris Payatagool


By Amy Thomson

(Bloomberg) -- Nortel Networks Corp. customers said they will stick with the bankrupt phone-equipment maker for now, although analysts say competitors may pick up some business over the long term.

Nortel Chief Executive Officer Mike Zafirovski contacted customers yesterday to reassure them that North America's biggest maker of phone equipment is operating as usual since seeking protection from creditors yesterday in Canadian and U.S. courts, said Mark Langton, a spokesman for client BCE Inc.

Verizon Communications Inc., Nortel's largest customer, Sprint Nextel Corp. and BCE said they will maintain ties with Nortel in the near term. Demand for the century-old company's products has eroded as customers reined in spending and switched to newer technology from Cisco Systems Inc., so the company probably would lose clients as the restructuring drags on, said Morningstar Investment Services Inc.'s Grady Burkett.

"This is more of a slow bleed, more of a long-term thing," the analyst said in an interview yesterday. "A lack of innovation, a lack of understanding their customers and a lack of marketing is going to, more likely than not, have customers slowly allocate less of their business to Nortel."

Nortel has lost about $7 billion since Zafirovski took over more than three years ago, pushing him to cut 18 percent of the workforce to preserve cash.

Nortel shares dropped 0.5 cent to 11.5 cents at 4 p.m. in Toronto Stock Exchange trading. The stock, which closed at a high of C$1,231 ($987) in July 2000, has declined 99 percent in the past year.

Verizon, the largest U.S. phone company and Nortel's biggest customer, "isn't doing anything different about Nortel today than yesterday," spokesman Eric Rabe said. The company accounted for 11 percent of Nortel's $10.9 billion in 2007 sales. Rabe said Verizon probably won't change its relationship with Nortel in the short term.

Move to Cisco

Should Nortel be dissolved, Verizon has agreements with other network providers, including Cisco, for the parts it needs, Rabe said. Verizon has already moved some of its business to Cisco to meet demands for new technology, he said.

Sprint, the No. 3 U.S. mobile operator, also doesn't anticipate any near-term impact from the bankruptcy, spokesman Scott Sloat said. AT&T Inc. declined to comment. The two carriers' contributions to Nortel's 2007 sales weren't available, as the company only discloses customers that account for more than 10 percent of annual revenue.

The global recession stymied turnaround efforts and compounded Nortel's financial problems, the company said in a filing yesterday. The company posted its biggest sales drop since 2004 last quarter, recording a 14 percent decline. Its largest business, which makes network equipment for mobile phone companies, dropped the most, plummeting 21 percent.

"Customers trust our products," Jay Barta, a Nortel spokesman, said in an e-mail. "We remain 100 percent focused on meeting our customers' long-term needs."

Still, competitors stand to benefit from Nortel's bankruptcy as customers seek new suppliers, according to ShoreTel Inc. CEO John Combs. Also, other struggling equipment makers also may be about to collapse, opening up the field to the survivors, said Chicago-based Burkett, who doesn't own Nortel shares.

"We are pretty well-positioned to take advantage of the downturn for Nortel," Combs said in an interview. ShoreTel, a provider of Internet-based phone equipment, has marketed its products as rivals to Nortel's and some customers have already switched, he said.

To contact the reporter on this story: Amy Thomson in New York at [email protected]


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