End of an Era, RIP Nortel

Yesterday, Nortel announced that it will be selling it's wireless division to Nokia-Siemens for $650 million. It's noted that Nortel's wireless division is it's most valuable asset and that Nortel has plans to sell of it's other divisions as well as it liquidates its assets for bankruptcy.

This is also a good lesson in debt tranches, as although Nortel is liquidating it's assets, there isn't enough to cover the entire debt load (as is usually true with all bankruptcies). As a result, some debt holders will get heavily reduced value back for the Nortel debt they hold (and some none at all - the junior debt holders - preferred shares etc.). In this case, the obvious debt holders (from a finance perspective) are the holders of bonds and preferred shares etc, but also don't forget suppliers to Nortel (for instance, one of the larger holders of Nortel debt is reported a company which buys ad time for Nortel). After all, Accounts Payable is a fairly senior debt tranche.

This is in contrast to a restructuring in which "everyone gets a haircut" and holders of all forms of debt get some reduction. The idea is that there is a hope of recovery and everyone can get "something" back. However, in a bankruptcy, there is no illusions and the company is packing its things and closing shop.

Other notable points is that Nortel has made the sale contingent upon their employees of that division being given jobs with Nokia Siemens. In this scenario, where the division is actually valuable, it's isn't a bad thing. Generally, when buying parts of a failing company, there is usually an option to only take on the parts that you need. It's a fancy and seemingly cruel way of saying that an acquiring company can pick up only what they want in the sale (talent, equipment, intellectual property etc) and I think it makes sense. After all, with all due respect, the reason we are buying your division (especially in bankruptcy) is because there is something in it that doesn't work and we hope to fix (or "synergize" with our existing business). Buying things "as is" is generally not a good idea (especially in bankruptcy). However, as stated, this is one of the best chunks of Nortel, so it's forgivable in this circumstance.

Otherwise, it's usually a good reason to consolidate costs (systems, labour etc) and pick the best talent from both sides of the fence (as Jack Welch is such an avid proponent of). Yes, this implies possibly letting go of some of your own (his fifth sin of M&A - the "conqueror syndrome").

Nortel will be delisted, with it's final stocks closing price at 18.5c from highs in 2000 in the $120s. Look for Nortel stock certificates soon in Toronto convenience stores as souvenirs (just like Bre-X a few years back).