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Nortel headed to Chapter 11 bankruptcy

by on16 January 2009

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Will have to shed assets in an attempt to remain solvent

Nortel, one of the most recognized names in telecommunications and networking equipment, has announced that it has filed for Chapter 11 bankruptcy protection in the U.S. in an effort to reorganize. Nortel subsidiaries in Europe and Canada are also likely to file for protection over the next several days.

Nortel has been had hit by shrinking budgets due to the current economic crisis, and companies are simply not buying the products that Nortel makes. The company will be forced to examine its assets and dump at least some of them just to remain solvent and attempt to reorganize, which could lead to fire sale prices on some of the old Nortel inventory to raise cash.

Nortel is listing Bank of New York Mellon as the company’s biggest creditor, with Nortel owing them an estimated $4 billion. Perhaps the most important company that Nortel owes money to is Flextronics, the company responsible for building of much of the equipment that Nortel sells. It is unknown how much money Flextronics is owed by Nortel or if Flextronics is still extending credit to Nortel in order for products to be built.

While the company did not directly announce it today, it seems almost a given at this point that the company will have to lay off more employees beyond the 1,300 cuts that it announced late last year. It is unknown yet what form the restructuring of Nortel will take, but almost certainly the Nortel company that might emerge from this restructuring effort will be much different from the Nortel that we know today.

Analysts suggest that while Nortel should have enough cash on hand for the short term, it does not have enough cash on hand to remain viable within the current business climate. At least some potential help might be on the horizon, as the Canadian government has said that they would be willing to offer C$30 million in short-term financing to the company. The news from the Canadian government is not surprising, since over 32,000 of Nortel’s employees are in Canada.
Last modified on 16 January 2009
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