20 Comments

Summary:

It seems as though our Canadian neighbors have imported our “too big to let fail” economic policy. The Canadian government on Wednesday pledged to give telecom equipment maker Nortel Networks, which has suspended efforts to sell its Metro Ethernet unit, up to C$30 million ($24 million) […]

It seems as though our Canadian neighbors have imported our “too big to let fail” economic policy. The Canadian government on Wednesday pledged to give telecom equipment maker Nortel Networks, which has suspended efforts to sell its Metro Ethernet unit, up to C$30 million ($24 million) to emerge from bankruptcy. The decision to use taxpayer money to save the telecommunications equipment giant has generated a lot of heated discussion, in the private equity and IT communities both in Canada and stateside. But is it the right one?

Nortel has long been considered the technical jewel of the Great White North. The company’s origins date all the way back to 1895; it was responsible for inventing and deploying many fundamental telecom technologies, perhaps the most prominent example being the digitizing of phone calls. Its most successful product, the DMS-100, was a digital central office switch that provided telephone service for some 100,000 phone lines. The name Nortel has evolved as well: The firm began life as Northern Electric, then went on to be known variously as Bell-Northern Research, Northern Telecom Limited and finally, after its merger with Bay Networks, Nortel Networks.

But is preserving the country’s technological heritage reason enough to spend millions in taxpayers dollars? I am not an economist, but rather a venture capitalist, and from that standpoint I could argue that the telecommunications market needs strong global competition to be successful and that the absence of Nortel would leave a notable hole in the marketplace. On the other hand, Nortel has clearly suffered from poor leadership and operational execution, so perhaps the market has spoken — and we should just listen.

All of which, of course, sounds eerily similar to the arguments here in the U.S. over the government-led bailouts of certain financial and auto companies. On that note, one small piece of advice for Nortel executives as they work with the Canadian government on their bailout: Don’t fly the corporate jet from Toronto to Ottawa.

  1. [...] has a piece today written by Venture Capitalist Allan Leinwand asking whether Canada should bail out Nortel.  He asks:  “But is preserving the country’s technological heritage reason enough to [...]

    Share
  2. [...] For more thoughts on how much support Nortel should receive, check out GigaOm. [...]

    Share
  3. So I am as big a free market guy as there is on the planet, but here is the argument.

    (1) Canada, US, France, Sweden, Germany, China, Korea, and Finland all used their domestic PTTs spending over the last 50 years to create Nortel, Lucent, Alcatel, Ericcson, Siemens, Huawei, Samsung, and Nokia. They used purchase barriers to build these companies up.

    (2) The G7 in the late 90’s decided to take the barriers down and let these nationally protected companies have a winner takes all fight for the global market. All the companies encouraged this because the market was growing so fast that all boats where rising.

    (3) The Canadians played by the rules and split up BCE (Bell Canada Enterprises) which owned both Nortel and Bell Canada taking away the dependable high margin customer/subsidy. China, Europe, and the US did not. The Chinese have turbo boosted Huawei (government owned) with mandated domestic product sales and government global leveraged trade to destroy the economics of the sector. The US and Europe have used military/defense/national security and soft trade barriers to keep “non-native suppliers to a minimum. The Canadian PTTs now spend only 20% of their capex with Nortel down from 80% while the other countries PTTs are still buying 80% of their capex from domestic suppliers.

    (4) Nortel Management starting with Paul Stern screwed up by financially engineering the company instead of keeping with the history of the company by engineering great products. They loaded Nortel with debt, played games with earnings, over paid for companies like Bay Networks leaving the company a financial mess while taking out $100Ms of dollars in cash & stock personally.

    (5) Canada has only two high tech “anchor tenants” that have the revenue and global reach to keep the tech eco-system healthy – RIMM and Nortel. Anchors are important because when a customer comes to visit Nortel they typically will go and meet 3 other start ups that are potential suppliers in the same area. Anchors provided the feeder stock (business & technical) to other start-ups (Canada would not have Newbridge, Mitel, RIMM, etc if it were not for Nortel). Anchors are needed to guide and shape the University programs to produce commercially relevant talent and provide the base line hiring to support the University engineering programs.

    (6) Supporting Nortel will do more to create sustainable high paying jobs in Canada than the $4B that the Canadian government is giving to the three dying companies in Detroit. I understand why Bush did it, but Harper???

    In short, did Nortel management grossly misjudge and mismanage the crown jewel of the Canadian high tech industry from an engineering, finance, product, M&A, public policy, and understanding global trade dynamics? Yes they did. Can Canada afford to have Nortel broken up for parts and lose the high tech anchor to be globally relevant in their technology sector? No they cannot.

    Rgds,
    Chris

    Share
  4. I don’t think a nortel bailout is solely to ‘preserve technological heritage’. More than the institution, it is the people who matter, and there are some very talented engineers at Nortel, Ottawa. These folks may well spawn another tens of companies over the next few years and preserving the R&D ‘incubator’ that is Nortel. At levels above C, I have yet to come across a talented Nortel manager and I hope that issue gets fixed after they get federal money. At levels below C, there are hundreds of spirited engineers that form a brain bank for canada. Get the toxic assets/managers away from this core and good things will happen. Save Nortel/BNR not because it gave us DMS/64QAM/cellular/fibre-world…. save it because its the only hope Canada has of giving us the next Google.

    rohit

    Share
  5. “These folks may well spawn another tens of companies over the next few years”

    If they’re all laid off, they may well spawn hundreds of companies over the next few months. Nothing drives insipiration like a swift kick in the ass.

    Share
  6. Dear all, no offence, but i persnoally feel, before seeking a bailout, would it not be in order, that the company seeking a financial package / bailout from the public money, in the first place cut down all its flambount expenditures, like business class tickets, 5/7 star hotel stays, super luxury cars, etc to its top executives, CEO’s, directors / promotors, etc.

    Share
  7. Absolutely no Canadian taxpayers $ should be provided to help keep Nortel in business. The company has self-destructed with crazy buyouts of Bay Networks and a host of others all of which have been huge failures and never-ending accounting frauds with associated criminal prosecutions of ex-Nortel executives. What kind of example would Nortel be to other viable Canadian industries if they get government support?

    Share
  8. @ianbell

    if ottawa had a functioning venture capital sector _and_ embraced failure like silicon valley does, i’d agree w/ you on layoffs leading to greater incentive to figure out something entrepreneurial…. in absence of a healthy venture capital ecosystem, nortel-nanny may be a necessity.

    rohit

    Share
  9. @Chris – You’re Canadian, right? :)

    @VIVEK – Nortel got it’s bail out from Canadian taxpayers. Do you know if they have cut down on the flambount expenditures (or have any proof that they ever existed)?

    @Alan Davidson – I’m afraid the bail out has already been finalized, it’s a fait d’accompli (http://money.cnn.com/news/newsfeeds/articles/reuters/MTFH12426_2009-01-14_17-19-01_N14462869.htm)

    Share
  10. I need to be bailed out too. Maybe President Obama can spot a boy on $30,000 to pay off some of my personal debts? Who knows!

    Share

Comments have been disabled for this post