Should Canada Bail Out Nortel?

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.

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