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Nortel offices in Toronto (Peter Power)
Nortel offices in Toronto (Peter Power)

Technology

Nortel breakup signals R&D power shift Add to ...

The federal government could have prevented the liquidation of Nortel Networks Corp. with a massive bailout, but instead Ottawa has decided that the best way to salvage something from the biggest corporate bust in Canadian history is to help fund a foreign breakup.

Through the Export Development Corp. (EDC), which normally helps Canadian exporters and investors expand their businesses abroad, the government will provide $300-million toward a credit facility for Nokia Siemens Networks' $650-million (U.S.) bid for Nortel's wireless assets.

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In return, the Finland-based equipment company has promised to keep at least 2,500 Nortel employees, most of whom are based in Canada and the United States.

"Part of the commitment was that we would ensure that we kept jobs in Canada," said Sue Spradley, head of North American operations for Nokia Siemens.

The unusual turn of events highlights the lack of confidence Ottawa has in Nortel's leadership to turn around the company after it entered creditor protection Jan. 14. The EDC, for example, was only willing to provide $30-million (Canadian) of support to Nortel until July 30. And despite numerous meetings between Nortel's senior management and members of cabinet, the government proved unwilling to back restructuring efforts.

The decision acknowledges a new reality in the telecommunications landscape, where larger and better-run players have risen to dominance and will increasingly decide how much research and development gets done by Canadian engineers and scientists.

China's Huawei Technologies Co. Ltd., for instance, is planning to bring several hundred R&D jobs to the Ottawa area in the next few years. The company has more than tripled revenues since 2005, to $18.3-billion last year, by combining cheap prices with reliable technology. It says it employs more than 80,000.

Nokia Siemens, meanwhile, has also been adding R&D staff to Canada in recent months. The company was created in 2007 as two tech giants (Nokia Corp. and Siemens AG) decided they needed greater global reach to compete in the field. The company employs about 60,000, and with offices around the world is able to focus on R&D around the clock, says Ms. Spradley, who served as president of global services and operations at Nortel before joining Nokia Siemens in 2007.

Huawei and Nokia Siemens won an approximately $1-billion wireless contract in Canada last October, securing the contract to upgrade BCE Inc.'s Bell Mobility and Telus Corp. to a new, jointly-owned wireless network.

Canadian policy makers are being forced to play a weak hand to ensure some Nortel jobs remain in Canada. But the situation leaves the long-term strength of the nation's technology sector unclear.

Besides being the greatest spender by far on R&D in Canada ($1.8-billion to Research In Motion Ltd.'s $254-million in 2007, for example), Nortel has also spawned at least 260 technology startups over the years, and played a crucial role in funding research partnerships with universities that have helped turn pure research into industrial research.

"Other high tech leaders have not been very good at supporting university research," said, Richard Van Loon, the former president and vice-chancellor of Carleton University. "Nortel has been a big funder, but a broken up Nortel isn't going to be able to do that."

Mr. Van Loon fears that without Nortel's commitment to universities, Canada will fall to the bottom of the rankings for industrial R&D within the Organization for Economic Co-operation and Development.

Michael Urlocker, an analyst with GMP Securities L.P., forecast last October that Nortel would have to sell all its assets because there was no path to sustained profits. He said Friday's news will be hard on individual stakeholders, but not necessarily the country.

"If the R&D is not relevant to customers, or ultimately produces products that can't generate sufficient profits to sustain the company, which was the case for Nortel, in my opinion, as tough as it is to say, it is not a significant loss to the nation," he said.

"My sense was that the probability of success of Nortel achieving an operational turnaround was near zero and therefore selling assets immediately was the best option. Clearly, management overestimated their options and considered that they could turn it around."

Nokia Siemens, in fact, had been talking to Nortel executives as far back as last September, when Nortel chief executive officer Mike Zafirovski announced the company wanted to sell another of its divisions, called the metro Ethernet networks unit.

Ms. Spradley said Nortel's wireless assets offer a natural way for her company to expand its market presence in North America, but she wanted to wait for the bankruptcy filing before bidding.

"We wanted to see where Nortel was going, and what they wanted to do with their customers. It was nothing negative. It's just the way it needed to run," she said.

Nortel has made clear that its wireless assets represent the first phase of liquidation, reporting Friday night that discussions are moving forward to sell the remaining pieces of the company. Reports put the value of liquidation of all of Nortel's assets at less than $2-billion. Yesterday, Ms. Spradley would not rule out her company's interest in some of those assets.

Nortel has been in talks to sell its enterprise unit valued at less than $500-million to two potential suitors, according to The Wall Street Journal. They are Avaya Inc., owned by the private-equity firms Silver Lake Partners and TPG Capital, and by Siemens Enterprise Communications, which is majority-owned by private-equity firm Gores Group LLC in a joint venture with Siemens.

As lawyers and bureaucrats put the final touches on the wireless agreement last Thursday, the House of Commons standing committee on finance had ordered Nortel chief executive officer Mike Zafirovski back to Ottawa to answer for his decision to cancel severance pay, cut pension payouts and award $45-million of bonuses to remaining employees.

This morning, Nortel shares will be suspended before the opening of the Toronto Stock Exchange, where they have traded since 1973 when the company went public. Nortel said it will apply to delist the shares.

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