Notrel Networks Case Study

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NORTEL Networks Case Study

Chief Strategy Office

Outline

■ ■ ■ ■ ■

Nortel Overview Nortel’s Decline & Fall Recent events Our Proactive approach Summary

Confidential , not for distribution

NORTEL Overview

■ ■ ■ ■

Founded at 1914 Headquarters in Toronto, Canada 33K Employees (before recent layoffs) $10Bn 2008 revenue 2008E Sales by Product Line

2008E Sales by Geography 6%

16% 41%

16%

18%

53%

25% 25%

Carrier

Enterprise

GS

MEN

NA 

EMEA 

APAC 

LA 

Confidential , not for distribution

Decline & Fall

2001/2 2001/2: 2000: Wrong Technology bet Revenue drop, Losses, expensive M&A’s Huge Layoffs Slowing growth & Managers and key personnel churn abandonment

$3.2Bn for Xros

$7.2Bn for Alteon

2003: Signs of recovery and going back to Profit R&D offshore New Optical products p

2004: Financial reporting g mess…. CFO leaves CEO fired!

2005: 2005 New initiatives overshadowed by losses, losses lawsuits and CEO replacement p

Revenues ($Bn)

30

Out of DSL

25 20

Closing Xros

Back to DSL

Failing DSL

15 10 5

Terabit Router

Stoping Terabit Router

Ignoring IP/MPLS

Wimax

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Confidential , not for distribution

Decline & Fall Continues… 2006: New CEO 2007: appoints new Offensive management moves and a new vision to get back while cutting costs and selling non on track in light of continued strategic product lines SEC problems

$3.2Bn for Xros

$7.2Bn for Alteon

2008: 2008 Focus change from IPTV to optical transport

Revenues ($Bn)

30

Out of DSL

25 20

Closing Xros

Back to DSL

Failing DSL

IPTV

PBT

15 10 5

Terabit Router

Stoping Terabit Router

Ignoring IP/MPLS

Wimax

0 2000

2001

2002

2003

2004

2005

UMTS Sold to ALU 2006

2007

2008

Confidential , not for distribution

Recent Events

9/2008: MEN division for sale

11/2008: Decentralization…

1/2009: Chapter 11

Decentralization

MEN announcement

Chapter 11

Confidential , not for distribution

Recent Events

9/2008: MEN division for sale

11/2008: Decentralization…

Approaching Nortel’s Tier-2/3 customer base, proactively, with plans / tenders for NG networks p Offering Nortel’s customer base replacement of their legacy equipment q p Offering Nortel’s customers maintenance / managed services for the existing install base

1/2009: Chapter 11

Recruitment of services personnel Addressing Nortel’s Nortel s partners

Confidential , not for distribution

Summary

■ ■ ■ ■ ■ ■

Nortel s fall begun in 2000 Nortel’s Accelerated fall in 2008 Constant monitoring of every move Tracking key competitors with the similar core businesses… businesses … but be ahead of your competitors Proactive approach Tiger, Tiger, burning bright In the forest of the night…

Confidential , not for distribution

Nortel Revenue Breakdown MEN Sales Breakdown ($m) 400 350 300 250 200 150 100 50 0

55

78 62

305

300

Q3 2007 Q

Q2 2008 Q

Optical Networking

255

Q3 2008 Q

Data Networking  and Security

■ MEN 2008 revenues are ~ $1.6Bn ■ Optical p networking g sales are declining g at 15% q q/q q and 16% yr/yr [we suspect that customer churn has already begun] Source: Global Insight

Confidential , not for distribution

Decentralization

■ On Nov 11th 2008 ; Nortel issued Q3 results announcing: ■ Operational cost cuttingg aimed to save $400m on 2009 ■ Decentralization of several business functions and refocus ■ ■ ■

around vertically-oriented business units: Enterprise Solutions; Carrier Networks and MEN. MEN R&D, marketing, sales, services, and operations will all be decentralized into these vertical business units. Workforce reduction of ~1,300 people (25% on 2008 & the rest on 2009) Executive departures due to the decentralization process

To our view the decentralization process was aimed towards selling assets rather than keep the company as an intact entity entity. Source: Nortel 3Q08 Press Release

Confidential , not for distribution

Chapter 11 When a business is unable to service its debt or p pay y its creditors, the business or its creditors can file with a federal bankruptcy court for protection under Chapter 11 I Chapter In Ch t 11, 11 in i mostt iinstances t th the d debtor bt remains i iin control t l of its business operations as a "debtor in possession", and is subject to the oversight and jurisdiction of the court. The court can grant complete or partial relief from most of the company's debts and its contracts. Sometimes, if the business's debts exceed its assets, the bankruptcy restructuring results in the company's owners being left with nothing; instead instead, the owners' owners rights and interests are ended and the company's creditors are left with ownership of the newly reorganized company. Source: Wikipedia

Confidential , not for distribution

Global Partners

■ Approach Nortel partners http://app89.nortelnetworks.com/partnerlocator.asp

Confidential , not for distribution

Potential Negative Outcomes for Nortel ■ Most vendors have already begun seeing Nortel less and ■ ■ ■ ■ ■ ■

less as a threat in light of a history of weak financials, restructuring and layoffs Under Chapter 11 Nortel Nortel’s s competitive position will be extremely vulnerable across all of its product lines and businesses Customers will question Nortel’s ability to meet their longterm networking and communications systems needs Customers will lower their purchases until they see if the buyers just want to gain market share or be able/want to deploy / support / improve Nortel’s product lines E i ti customers Existing t are certain t i to t delay d l sizable i bl investments Demoralizing g effect on p personnel Previous restructuring failed to bring Nortel back on track Confidential , not for distribution

Potential Negative Outcomes for Nortel

■ Customers have long term uncertainty regarding ■ ■



which product lines are going to remain under Nortel OPEX cuts, especially R&D, will hurt product competitiveness and consequently push customers to look for alternative vendors Global services – Carriers using Nortel’s application services and managed services may question the ability bilit tto maintain i t i th the same llevell off service i iin lilight ht off the decentralization process of the GS into the business units Customers relying on Nortel alone should establish a secondary supplier relationships Confidential , not for distribution

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