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%
16%
41%
18% 53%
25%
25%

Carrier Enterprise GS MEN NA  EMEA  APAC  LA 

Confidential , not for distribution

 Decline & Fall

2003:
2001/2
2001/2: Signs of 2005:
2005
2000: Wrong 2004:
Technology bet Revenue drop, recovery and
Financial
New initiatives
expensive M&A’s Losses, going back overshadowed
Huge Layoffs to Profit reporting
g by losses,
losses
Slowing growth mess….
& Managers R&D offshore lawsuits
and key personnel churn CFO leaves
New Optical CEO fired! and CEO
abandonment
products
p replacement
p

$3.2Bn $7.2Bn for Revenues ($Bn)

for Xros Alteon

30
Out of
25 Closing Back to Failing
DSL
Xros DSL DSL
20

15
10 Terabit Stoping
Router Terabit Ignoring
5 Router 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 2008:
2008
management Offensive
Focus change
and a new vision moves
from IPTV
while cutting costs to get back
to optical
and selling non on track in light transport
strategic product of continued
lines SEC problems

$3.2Bn $7.2Bn for Revenues ($Bn)

for Xros Alteon

30
Out of
25 Closing Back to Failing
DSL IPTV PBT
Xros DSL DSL
20

15
10 Terabit Stoping
Router Terabit Ignoring UMTS
5 Router IP/MPLS Wimax Sold to
ALU
0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Confidential , not for distribution

 Recent Events

9/2008: 11/2008: 1/2009:

MEN division for sale Decentralization… Chapter 11

Decentralization

Chapter 11
MEN announcement

Confidential , not for distribution

 Recent Events

9/2008: 11/2008: 1/2009:

MEN division for sale Decentralization… Chapter 11

Approaching Nortel’s Tier-2/3 Recruitment of services

customer base, proactively, with personnel
plans / tenders for NG networks
p Addressing Nortel’s
Nortel s partners
Offering Nortel’s customer base
replacement of their legacy
equipment
q p
Offering Nortel’s customers
maintenance / managed
services for the existing install
base

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 55 78
300 62
250
200
150 305 300
255
100
50
0
Q3 2007
Q Q2 2008
Q Q3 2008
Q

Optical Networking 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 long-
term 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 ppersonnel
■ 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