Wireless Connectivity

Does Nortel have a future after all?

As potential bidders size up its offerings for the next auction, Nortel Networks Corp. appears like a heap of rubble being picked over by rivals at the end of a long bankruptcy liquidation process.

Its major wireless unit has just been sold to Telefon AB LM Ericsson of Sweden, while other suitors have turned their sights on the technology giant's second-biggest business line, enterprise solutions, which will soon be sold off.

It would seem that Mike Zafirovski, Nortel's chief executive, is finally executing on a plan.

Or is he? There is increasing skepticism over whether this really is the end for the 127-year-old Canadian icon, or if a viable business - such as a lessor of patents - could emerge from the carcass of the former technology giant.

"It was never stated categorically that they were going to liquidate the entire company," says Richard Powers, associate dean at the Rotman School of Management at the University of Toronto. "It was always thought the Nortel name would not drop off the board and that it might retain some format to continue in a downsized version of what it was."

Adds research analyst Ronald Gruia at Toronto-based Frost & Sullivan: "The are other options, absolutely. Chapter 11 doesn't have to be the last."

Some say that may be Nortel's unstated plan.

During its two-week public relations battle with Research In Motion Ltd. over the bidding process for the wireless business that Ericsson won for US$1.13-billion, the BlackBerry maker accused Nortel of blocking it from participating in the auction. RIM, which is after Nortel's leading-edge patent portfolio of next-generation wireless network technologies, refused to sign the non-disclosure agreement required by the court-approved sale process to gain a seat at the auction table because it would have been prohibited from bidding on those assets for a period of 12 months.

Further, a source familiar with RIM's plans says the Waterloo, Ont.-based company's interests "obviously extend beyond simply getting the [wireless] patents."

As a result, RIM has been pressuring the federal government to intervene on the basis of national security.

Nortel rebuffed the claim it was blocking RIM, saying the company did not choose to abide by the confidentiality agreements that the other three parties, including Nokia Siemens Networks and U.S. private equity firm MatlinPatterson Global Advisers LLC, had all agreed to.

While the courts in Canada and the U.S. were blessing Nortel's deal with Ericsson this week, Nortel's Canadian lawyer Derrick Tay said that about 600 patents would be "transferred" to Ericsson, but those were likely for older CDMA network technologies.

More importantly, Mr. Tay revealed that none of the coveted rights to the LTE (long-term evolution of wireless networks) patents had actually been sold. Rather, they had been leased to Ericsson.

"The licensing agreement to Ericsson will get Nortel a lot of cash for little risk while not giving up a lot," explains Joe Campeau, an instructor of management information systems at the Richard Ivey School of Business at the University of Western Ontario in London. "Ericsson is going to do what Nortel would do if it wasn't in bankruptcy - manufacture and then market the technology."

Nortel's interest in retaining the LTE patents is simple. The patents, an estimated 5,500 of them, are the most valuable assets in the company's stable.

Although it is difficult to assess the intellectual property's true value and potential, recent research by JP Morgan analysts pegged the potential recurring royalty payments Nortel could receive from the LTE wireless patents at US$2.9-billion. The valuation is generous, according to some, but still underscores their financial potential.

"If those leases are as valuable, there's the business model moving forward," says Prof. Powers.

Those valuations explain RIM's interest in Nortel's patents and why it has demanded Ottawa intervene in the auction process under the guise of national security.

"RIM wanted both the patents and the licensing agreements and Nortel was separating them out," says Ivey's Mr. Compeau. "If I'm RIM, I want to make sure that I have a fair shot at those patents because those are where the real long-term value is. So they're trying to get themselves an advantage by framing it in a political way so the government can get behind it."

By leasing the patents rather than selling them, Nortel is attempting to diffuse RIM's line of attack.

Apparently, Nortel is pursuing the same course with its Enterprise sale as it did with its wireless line - selling off the product line and some patent rights, but retaining ownership of the most valuable ones.

Most industry analysts and experts agree that a "new Nortel" could emerge from bankruptcy and operate as a smaller research and development entity, on the strength of the patents alone.

"I'm not sure that's what RIM would like to see," says Ivey's Mr. Compeau. "They'd like to gain control of those patents, have the core business and the R&D to extend their business."

He added: "At the end of the day, I don't think either outcome is bad for Canada."

Still, any possible Nortel resurgence will depend on how much the company is able to collect from the sale of other parts to pay off its creditors.

Aksay Sharma, a U.S.-based telecom analyst who says he's in constant contact with Nortel executives, is doubtful Nortel can do that without selling the lucrative patents.

Jamie Sturgeon and Theresa Tedesco

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