Nortel has been criticized for not jettisoning businesses sooner. The criticisms are valid to some extent. However, when you consider what the board and the CEO, Mike Zafirovski, have had to deal with it is a wonder if anyone would have even seriously considered acquiring chunks of Nortel. No one wants to buy pieces of a company from a company in the financial scandal sheets. As for joint ventures, am I missing something or did anyone notice that Mike Zafirovski was running a company that only recently emerged from its financial scandals. Why would anyone in 2006 want to do business with a company that looked like the bad boy of the telecom industry?

Let us not forget that Mike Zafirovski took over the job of CEO in 2005 while the company was in the midst of financial scandals; the types of nightmares that CEOs pray do not happen on their watch. Mike Zafirovski was considered a change agent. Let us be frank, Mike Zafirovski, was considered by many to be Nortel’s last hope. Nortel was reeling from bad news.

As uphill battles go, Mike Zafirovski’s task was like climbing a mountain wearing a suit of armor, concrete shoes, and a blindfold. I did not envy Mike Zafirovski. However, I would have loved the challenge.

When Mike Zafirovski exited the UMTS business he did so based on what facts he knew. Hindsight is 20/20. I like Nortel, always have. As an old Bell head, I do have fond memories of this company’s contributions to the industry. However, the company made some mistakes but I would not necessarily dump them on Mike Zafirovski.

Consider this; Nortel exited a part of the wireless industry (UMTS), a segment they never dominated (but they did do okay). Even though Verizon(NYSE:VZ) selected LTE as its 4G initiative, has anyone seen a multi-billion dollar LTE contract? The answer is No. Let us say Nortel stayed in the UMTS game, who exactly would have been buying from them in the last 2 years and would be buying from them now? The answer: either no one or contracts so small, Mike Zafirovski, would have been criticized for hanging in the wireless game for too long a time.

Between the late 1990s and early to mid 2000s, Nortel was the dominant optical gear maker in town. The company was also one of the most if not the most innovative optical gear maker in the business. Where did Nortel concentrate its resources? Optics. Who could blame them? During that time, TDM-based switching and wireless were on the downslide for Nortel and they were making a fortune in optics.

When the 2001 meltdown occurred, Nortel began scrambling to retool its optics business. Investment bankers were pushing Nortel to sell more and more optical gear to generate more and more sales and to cover their own investment portfolio failures. The 2001 recession was not pretty. During those days it had a huge cash cushion (thanks to its optics business) to ride out the storm. Then sometime toward the end of the recession, Nortel’s financial scandals hit the news and then the financial bottom fell out. At the same time, the entire optics market became saturated. Frankly many did not want to do business with a company that was going through the mess Nortel had been in. The company had been tainted. It is not easy to manage a company in the midst of such scandals. I am not making excuses for anyone just trying to take a step back and survey the scene.

In late 2006, Mike Zafirovski sells off one of its weakest units; the UMTS business. Remember he sold off the unit to Alcatel(NYX:ALU) for about $300 Million. Hey guess what? Alcatel has not done much with this UMTS unit either; gee I guess it is because the economy is in a recession and no carrier is spending money. Let us think carefully about this; in 2006, I don’t recall any carrier proclaiming a 4G strategy. The big UMTS carrier, AT&T, was not spending millions or billions on Nortel’s UMTS product line. By the way, in 2005 and 2006, AT&T was not even spending much on UMTS period but it was on GSM (and its enhanced versions).

In 2005, Nortel was not making any substantive cash in the UMTS business. Why in the world would Mike Zafirovski hang onto that business unit? I don’t care if Mike Zafirovski is from GE, he can’t turn water into wine. Further, in 2005, the telecom sector was not as robust as many investment bankers would have you thinking. The sector never fully recovered from the 2001 telecom/technology driven recession. Hence, you focus on what is making money and that was GSM and CDMA.

Let us not forget that around 2002/2003, companies like Cisco(NAS:CSCO) emerged as competitors and the Chinese were rapidly rising in the industry. Nortel was just beginning to reel from its emerging financial scandals. Who would have bought Nortel’s; business units? Circa 2005, most of the global telecom industry was finally emerging from the telecom/technology driven recession. Only a few companies had sufficient cash to do acquisitions and some of those companies are in trouble today. Could Mike Zafirovski have cleaned up the balance sheets at all? Probably not and that has nothing to do with ability but everything to do with times and situations being handed.

Mike Zafirovski had been dealt a bad hand from the get-go. Nortel was on life support when Mike Zafirovski arrived and he is now performing major surgery called restructuring.

Restructuring a company requires that you do a bit of second guessing and Monday morning quarterbacking. Restructuring also involves accepting the fact that management makes decisions based on what they know and not what they hope. However, when you look back at the decision within the context of the times, Mike Zafirovski made the right call to sell off the UMTS unit. In other words even with 20/20 Hindsight it was the right decision.

Let us get some sense of reality here. Nortel was in trouble in 2004 and the telecom economy had never recovered from the 2001 industry debacle. Nortel had to file for Chapter 11 protection. The cash burn had to stop. With Chapter 11, Nortel’s advisors can take appropriate action to protect the secured creditors. Equity holders and unsecured creditors are mostly out of luck. Unless, the secured creditors agree to be nice, equity and unsecured positions are going to lose everything.

Nortel will have to sell off business units to generate cash and to reduce future operating costs. One suggestion for Nortel’s experts: ask Cisco if it wants Nortel’s Metro Ethernet business unit. I got hammered for even suggesting the sale of it in September 2008. Sorry Nortel, if I were Cisco I would think buying it for pennies on the dollar. Nortel should not expect high valuations on any of the business units. Negotiating only works if the buyer needs the seller more than the seller needs them. Nortel is not in a negotiating position unless of course it can get multiple suitors bidding for the units in an auction. Think auction. I love auctions; when they work they work well.

Business Unit sell offs will allow Nortel to generate some cash and unload a ton of costs.

What Nortel needs to do is decide what they want to be when it emerges from bankruptcy. The Canadian government also needs to take a policy position on this company. I hate to see Canada’s premiere telecom technology company chopped up and sold off completely. My position is likely not going to be popular with creditors. Folks need to remember that telecom is an essential component of national security. At a minimum a restructured Nortel can look like the old Nortel I knew – a supplier of landline equipment to the telephone company. The company was always a top notch landline equipment maker. Canada needs its own key supplier.

Getting back to the issue of restructuring. Restructuring requires 20/20 Hindsight but from professionals not investment bankers. Professionals use this information to establish a basis for going forward; you need to know how you into the mess in order to fix the company and then grow it. To date, Nortel made all of the right decisions based on the information on hand and the times in which the decisions were made. Mike Zafirovski needs to focus on building a new Nortel.

When Nortel emerges from bankruptcy it will be substantially changed. My suggestion to Mike Zafirovski: Hire turnaround experts from telecom to advise you on what the company ought to look like. Outside experts can play a significant role in the turnaround.

The sky will feel like it fell on him but so far he has done the right thing. Their financial advisor, whoever that may be, did the right thing telling Nortel to file now.

One question comes to mind: Are we going to see any other major telecom manufacturers filing for Chapter 11 in the next 12 months?

P.J. Louis LLC is an independent advisory and turnaround firm providing operational restructuring leadership to companies and their stakeholders. We serve clients in the telecommunications, technology, Internet, media, and network security industries with creative solutions and ideas that enhance corporate value during adverse periods. P.J. Louis LLC possesses in-depth expertise in operational and technology management. Our expertise enables us to manage due diligence efforts that only professionals with deep insight in the industry can perform. The firm views intellectual property as a key component of any technology company’s value. Companies need to find new ways of generating value out of their intellectual property portfolios – our firm is dedicated to making that happen. We support private equity investors and creditors. We support USPTO patent re-examinations. We support intellectual property attorneys in patent infringement and copyright infringement litigations. For more information, see: www.pjlouis.com