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