why nortel went bankrupt
TRANSCRIPT
Went Bankrupt
On January 14 2009, Nortel, a Canadian telephoneequipment maker filed for Chapter 11 protection, oneday before deadline on a $107M interest payment.
It’s easy to blame this bankruptcy on the
financial crisis.
However, recessions are always
particularly hard on companies which
have structuralproblems.
Nortel hade plenty of structural problems.
The main reason for the bankruptcy is the disruptive nature of
digital technology, notthe financial crisis.
The digital revolution has put hundreds of industrial giants out
of business, or created massive
problems.
Let’s take a fewexamples.
When watchesbecame digital, about 1000 Swiss watchmanufacturerswent out of business in the 70s and 80s.
The manufacturers of mechanical calculators
Polaroid
AMD
The music industry
The oldradio industry
Industries whichhave become digital
ended up as red oceans where profits diminish and manyactors go bankrupt.
One reason for this is the incredible pace at
which digital technology is
developed.
Gordon Moore, one of the founders of Intel recognized a
fascinating patternback in the 1960s.
Over time, the amount of transistors that could be puton a circuit for the same price doubled every 18th month!
So for the same price you can buy something whichcan store twice as much information, every 18th month!
This observation is commonly
referred to as Moore’s law.
The implications are enormous!
If the price/performance ratiodoubles in 18 months…
And then doubles again in 18 months…And then doubles again in 18 months…
Then the price/performance is 8 timesbetter in only 4,5 years!
16 times higher in 6 years!
This is afurious pace of development!
And it is the main reason
why Nortel wentbankrupt.
It is very, verydifficult to keep
up with competitors in a digital industry.
In the end, Nortel just
couldn’t do it.
Let’s take a look at how the stockhas developed.
Nortel had beenfighting the digital war for decades.
In 1976, Nortel decided to focus its efforts towards
digital technology.
It was the first company to announce and deliver a
complete portfolio of digital communications products.
The DMS line of central office
telephoneequipment launched
in 1976 createdexplosive growth for
the company.
The future wasindeed digital.
Nortel wentfurther into this
technology.
The company madebig investments in high-speed fiberoptic systems
in 1993 and lead the industry forward.
In the late 1990s Nortel grew at about100 percent annually!
The company soughtto dominate the
emerging market for public and private
networks.
This had to be done by trying to transform a
century old telephonecompany into a modern IP
technology based firm.
Those skillswere beyond
what Nortel wasused to do.
Thus, the company had
to acquirethese skills.
Nortel had to pay a huge price for acquiring Bay
Networks in 1998.
It also bought AlteonWebsystems for 7 billion USD. Given that this firm had a
revenue of 200 millionUSD, the price must be regarded as huge.
As the Internet revolution createdmassive growth in
fiber optic gear, Nortel grew rapidly.
And so did its stock.
At its height, Nortel accounted for more
than a third of the total valuation of all the
companies listed on the Toronto Stock
Exchange.
Nortel expandedrapidly and entered
new markets.
Though the company paid a huge price for these acquisitions, it
failed miserably in integrating them and
transforming its business into IP
routing.
As a large and old firm, Nortel never really
embraced the IP shiftin the marketplace.
And then the stock market bubble burst in
2000-2001.
The recession wasparticularly hard on
companies like Nortel, which had paid
excessive prices for firms which were never
really absorbed.
In 1999, Nortel had paid $2.1 billion for Clarify Inc. This firm was sold in 2001
for only $200 million.
Its stock plunged from C$124 to $0.47.
Nortels market capitalization went from
C$ 398 billion in September 2000 to less
than $5 billion in August 2002
60 000 people were fired!
(In the bubble years, the company had about 95 000 employees)
When the recession finallywent away, the problems
stayed at Nortel since it hadnever really embraced the
new technology.
While telco router companies like Cisco and
Juniper kept growing, Nortel was left with a poor
4% market share.
As Nortel’s competitors (Cisco, Huawei, Ericsson, Alcatel) kept pushing the
new technology further the firm was essentially left
behind.
In 2004, an investigation was launched into Nortel's financial statements. The agency accused Nortel of manipulating its books in
2000, 2001 and 2003.
The decline continuedeven during the years of high economic growth
2004-2007.
When the financial system collapsed in 2008, the
situation was worsened.
In the end, there was no way out of it, and Nortel filed for
bankruptcy in early 2009.
Summing it up:
It was Moore’s lawand the permanent revolution of digital
technology that killed Nortel.
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.
Just like Polaroid, the music industry and all the
other examplesmentioned, Nortel failed to
transform its business.
Under conditions of rapid technological developmentand fierce competition, this
eventually lead to the bankruptcy of Nortel.
