How a Made-in-Canada Nortel solution died

Posted on September 18, 2009 in Debates, Governance Debates – News/technology – How a Made-in-Canada Nortel solution died: Lack of support from Ottawa ended plans for a foreign-owned, Toronto-based technology giant, sources say
Sep. 18, 2009.   Andrew Willis

A year-long drive by a German company to create a Canadian-headquartered, $5-billion-a-year telecom equipment maker from the remnants of Nortel Networks Corp. ended in failure because of a lack of support from Ottawa, according to people close to the situation.

Plans to create a Toronto-based global tech giant by merging a Nortel manufacturing arm with that of Germany’s Siemens Enterprise Communications fell short despite the full backing of the Ontario government, according to numerous sources in the finance and telecom sectors. Instead of a domestic champion, the iconic Nortel unit is heading into foreign hands, as New Jersey-based Avaya Inc. won the unit with a $900-million (U.S.) bid.

Avaya won the Nortel unit by offering $15-million more than Siemens Enterprise, sources say, although the Avaya bid was all cash, while Siemens offered Nortel’s creditors a combination of $700-million in cash and an IOU on the remainder.

Sources close to Nortel and Siemens Enterprise said the shortfall came after the federal government failed to step up following an abrupt about-face this summer at Industry Canada and the Export Development Corp., or EDC. The government stance changed after BlackBerry maker Research In Motion Ltd. denounced the planned sale of another Nortel division, its wireless unit, to European companies.

The new U.S. owner is expected to cut at least 25 per cent of Nortel’s work force, and all head-office duties will move south. There were reports Thursday that 400 of 1,000 Canadian employees will be laid off, at plants in Ottawa and Bellville, Ont., speculation that Avaya called “premature.”
This is the latest in a series of foreign takeovers, across mining, tech and manufacturing that have cost the country both head offices and jobs.
The EDC, a federal agency, denies that it had made any firm commitment to supporting the Siemens transaction.

A spokeswoman for Industry Canada and Mr. Clement said the federal government could not intervene in a court-supervised restructuring.
While Canadian and U.S. courts blessed the Avaya purchase on Wednesday, the takeover still faces scrutiny from Industry Canada and competition regulators on both sides of the border.

This tale of missed opportunity began a year ago, when executives from Munich-based Siemens Enterprise first approached Nortel chief executive officer Mike Zafirovski with a plan to merge their enterprise division – which makes routers, phones and other equipment that form the backbone of corporate telecom networks. This Nortel unit has roots that stretch back to the company’s founding in 1895.

“We wanted to take Nortel’s North American market leadership and Siemens leadership in Europe, and create a world beater in the field, based in Toronto, that would take the fight to Avaya,” said a source close to Siemens Enterprise. Avaya is the other major North American player in telecom hardware.

However, both sides concluded a deal was precluded by Nortel’s financial problems, which included onerous severance and pension costs. They agreed to resume talks after Nortel’s bankruptcy filing in January, which saw the tech company shed many of these costs.

When the formal, court-supervised auction of Nortel kicked off in June, Siemens Enterprise executives were at table with their merger plan, and began lobbying for government support. They asked for loans from the EDC and an endorsement of the new Canadian company from the Ontario government and federal Industry Minister Tony Clement, or better yet, Prime Minister Stephen Harper.

“In any other industrial company in the world, governments get the nuances of these arrangements. If this was France, they would have fallen over themselves to support this concept of a global champion in tech,” said one source who worked with Nortel and Siemens.

Ontario agreed to provide $75-million of grants, in part to help move Siemens’ head office from Munich to Toronto, sources say. The EDC weighed making a $300-million loan to the combined companies, after the merger took place.

“Ontario Industry Minister Sandra Pupatello got it, right from the start, and so did the rank-and-file at EDC,” said another source close to Nortel. “Even a verbal commitment of support from the federal government would have gone a long way.”

Ms. Pupatello said in an interview Thursday that she had talks with Siemens and that the province had a number of programs that would back an Ontario-based tech company. She never heard from Avaya, she said.

While Nortel moved in early July to make Avaya /what is known as/ the stalking horse in the auction, with the company making an initial bid of $475-million as part of a court-supervised process, a number of professionals said the auction was wide open, and Siemens Enterprise had a legitimate chance at winning the day.

But the landscape in Ottawa changed in late July, after RIM co-CEO Jim Balsillie publicly attacked the planned sale of Nortel’s wireless unit, claiming RIM had been shut out of the process. EDC arranged a $300-million loan to one of the bidders, Nokia Siemens Networks, and the business was eventually bought by Sweden’s Ericsson.

While RIM did not take part in the auction, Mr. Balsillie framed the issue as one of foreigners being favoured over a home-grown tech play.
Sources close to Siemens Enterprise said when the storm broke, EDC pulled support for the planned merger with Nortel.

EDC chief spokesman Phil Taylor confirmed the agency worked with Siemens and gave a “ballpark estimate” on the financial support available to the merged tech companies.

“We could not formalize our support until the auction had concluded,” said Mr. Taylor, adding that Avaya did not get financing from EDC. He flatly denied that RIM’s objections to the Nortel auction had any influence on the government agency, saying: “If there are benefits to Canada, we are there to help. We’re not concerned about whether the decision is popular.”

Executives at Nortel and Siemens Enterprise also declined to comment on what played out in the auction, although an Nortel official confirmed Siemens took a serious run at the company. One source close to Siemens Enterprise said: “We remain ready and willing to bid on these Nortel assets.”

Why didn’t Siemens Enterprise simply outbid Avaya in the auction? An executive close to German company said: “Avaya was willing to pay a premium to block a major rival out of its home market. We had a price we were willing to pay, and weren’t willing to go above that price.”

“But every dollar of support from EDC, after the merger, would have been an extra dollar that could have gone into the bid,” said this source, who worked on the Siemens Enterprise offer. The German company is jointly owned by Siemens AG and Los Angeles-based private equity fund Gores Group LLC.

Judges in Delaware and Ontario controlled Nortel’s fate, and approved the Avaya sale on Wednesday. The $900-million purchase price is earmarked for Nortel’s creditors, most of whom are U.S. funds that invest in distressed debt. One Toronto lawyer working on the auction said: “The destiny of an iconic Canadian company is being dictated by U.S. bankruptcy courts and U.S. vulture funds, and that just doesn’t feel right.”

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