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Why Nortel Went Bankrupt


Published on

The bankruptcy was a consequence of digital technology.

Published in: Business, Economy & Finance

Why Nortel Went Bankrupt

  1. 1. Went Bankrupt
  2. 2. On January 14 2009, Nortel, a Canadian telephone equipment maker filed for Chapter 11 protection, one day before deadline on a $107M interest payment.
  3. 3. It’s easy to blame this bankruptcy on the financial crisis.
  4. 4. However, recessions are always particularly hard on companies which have structural problems.
  5. 5. Nortel hade plenty of structural problems.
  6. 6. The main reason for the bankruptcy is the nature of digital technology, not the financial crisis.
  7. 7. The digital revolution has put hundreds of industrial giants out of business, or created massive problems.
  8. 8. Let’s take a few examples.
  9. 9. When watches became digital, about 1000 Swiss watch manufacturers went out of business in the 70s and 80s.
  10. 10. The manufacturers of mechanical calculators
  11. 11. Polaroid
  12. 12. AMD
  13. 13. The music industry
  14. 14. The old radio industry
  15. 15. Industries which have become digital ended up as red oceans where profits diminish and many actors go bankrupt.
  16. 16. One reason for this is the incredible pace at which digital technology is developed.
  17. 17. Gordon Moore, one of the founders of Intel recognized a fascinating pattern back in the 1960s.
  18. 18. Over time, the amount of transistors that could be put on a circuit for the same price doubled every 18th month! So for the same price you can buy something which can store twice as much information, every 18th month!
  19. 19. This observation is commonly referred to as Moore’s law.
  20. 20. The implications are enormous! If the price/performance ratio doubles in 18 months… And then doubles again in 18 months… And then doubles again in 18 months… Then the price/performance is 8 times better in only 4,5 years! 16 times higher in 6 years!
  21. 21. This is a furious pace of development!
  22. 22. And it is the main reason why Nortel went bankrupt.
  23. 23. It is very, very difficult to keep up with competitors in a digital industry.
  24. 24. In the end, Nortel just couldn’t do it.
  25. 25. Let’s take a look at how the stock has developed.
  26. 26. Nortel had been fighting the digital war for decades.
  27. 27. In 1976, Nortel decided to focus its efforts towards digital technology.
  28. 28. It was the first company to announce and deliver a complete portfolio of digital communications products.
  29. 29. The DMS line of central office telephone equipment launched in 1976 became created explosive growth for the company.
  30. 30. The future was indeed digital.
  31. 31. Nortel went further into this technology.
  32. 32. The company made big investments in high- speed fiberoptic systems in 1993 and lead the industry forward.
  33. 33. In the mid 1990s, Nortel sought to dominate the emerging market for public and private networks.
  34. 34. This had to be done by trying to transform a century old telephone company into a modern IP technology based firm.
  35. 35. In the late 1990s Nortel grew at about 100 percent annually!
  36. 36. In order to do so, Nortel had to pay a huge price for acquiring Bay Networks in 1998.
  37. 37. It also bought Alteon Websystems for 7 billion USD. Given that this firm had a revenue of 200 million USD, the price must be regarded as huge.
  38. 38. As the Internet revolution created massive growth in fiber optic gear, Nortel grew rapidly.
  39. 39. And so did its stock.
  40. 40. At its height, Nortel accounted for more than a third of the total valuation of all the companies listed on the Toronto Stock Exchange.
  41. 41. Though the company paid a huge price for these acquisitions, it failed miserably in integrating them and transforming its business into IP routing.
  42. 42. As a large and old firm, Nortel never really embraced the IP shift in the marketplace.
  43. 43. And then the stock market bubble burst in 2000-2001.
  44. 44. The recession was particularly hard on companies like Nortel, which had paid excessive prices for firms which were never really absorbed.
  45. 45. In 1999, Nortel paid $2.1 billion for Clarify Inc. This firm was sold in 2001 for only $200 million.
  46. 46. Its stock plunged from C$124 to $0.47.
  47. 47. Nortels market capitalization went from C$ 398 billion in September 2000 to less than $5 billion in August 2002
  48. 48. 60 000 people were fired! (In the bubble years, the company had about 95 000 employees)
  49. 49. When the recession finally went away, the problems stayed at Nortel since it had never really embraced the new technology.
  50. 50. While telco router companies like Cisco and Juniper kept growing, Nortel was left with a poor 4% market share.
  51. 51. As Nortel’s competitors (Cisco, Huawei, Ericsson, Alcatel) kept pushing the new technology further the firm was essentially left behind.
  52. 52. In 2004, an investigation was launched into Nortel's financial statements. The agency accused Nortel of manipulating its books in 2000, 2001 and 2003.
  53. 53. The decline continued even during the years of high economic growth 2004-2007.
  54. 54. When the financial system collapsed in 2008, the situation was worsened.
  55. 55. In the end, there was no way out of it, and Nortel filed for bankruptcy in early 2009.
  56. 56. Summing it up:
  57. 57. It was Moore’s law and the permanent revolution of digital technology that killed Nortel.
  58. 58. This is what pushed them into making many expensive acquisitions that they, because of the existing dominant logic in an old established company then failed to integrate.
  59. 59. Just like Polaroid, the music industry and all the other examples mentioned, Nortel failed to transform its business.
  60. 60. Under conditions of rapid technological development and fierce competition, this eventually lead to the bankruptcy of Nortel.
  61. 61. Christian Sandström
  62. 62. Image attributions