Sale of key Nortel assets may be inevitable

Nortel may have no choice but to sell off key parts of its business, industry analysts said after reports that the company is in talks with competitors to do just that.

Nortel enterprise biz not on Cisco's plate

Nortel has had discussions with rival vendors about buying both its mobile infrastructure business and its enterprise networks unit, The Wall Street Journal reported Wednesday in an article that cited unnamed sources familiar with the matter. The company filed for bankruptcy protection in January after struggling with a financial scandal and a string of financial losses.

It has already sold its application acceleration business and pulled out of the mobile WiMAX market, along with announcing thousands of layoffs, though it is reconsidering the possible sale of its metro Ethernet unit. When it filed for bankruptcy, Nortel said it expected to emerge from a reorganization as a more focused and financially sound operation. But selling the wireless and enterprise divisions would gut the once-giant communications technology company. Nortel is a significant player in the areas of carrier wireless infrastructure in which it still competes, and it has a large customer base for its corporate phone and data networks.

Without those two businesses, Nortel would be a collection of operations including its metro Ethernet business -- if that is not sold -- traditional wireline carrier equipment and consulting services.

Bankruptcy law requires that Nortel's affairs be resolved in a way that delivers the maximum value to bondholders and others to whom the company owes money, JMP Securities analyst Sam Wilson pointed out. In many bankruptcy cases, that involves keeping the company intact and making them shareholders. But if Nortel can realize more value by selling off its biggest businesses, it has to do so, he said. Wilson believes parts of the company will be sold.

Other observers agreed.

"I don't think there's any way Nortel can make it without splitting up," said Yankee Group analyst Zeus Kerravala. And the wireless and enterprise units are the most promising candidates. "There are only so many parts of the business that have value," he said.

The main draw for Nortel's enterprise business might be its roster of customers, according to Kerravala. Avaya, the main rival to Cisco Systems in IP telephony, has a hard time attracting new customers because it's perceived as a legacy equipment company, he said. (Avaya traces its roots to the old U.S. Bell System.) Buying Nortel would give them easy access to companies that use that company's gear today.

Cisco itself might be a plausible buyer for Nortel's wireless business, said IDC analyst Godfrey Chua. Nortel has a well-respected product portfolio in both CDMA (Code-Division Multiple Access) and GSM and related 3G systems, he said. Cisco sells mobile operators gear for the core of their networks, such as routers, but not the actual wireless base stations at the edge that communicate with subscribers' devices. The edge is where cellular companies make roughly 60 percent to 70 percent of their network investment, so it could be a lucrative piece of the pie for Cisco as operators migrate to 4G, he said.

The IDG News Service is a Network World affiliate.