Nortel - The End Game Begins

Perhaps I should apologize first for adding to what is by now a deluge of blog posts and media coverage on the latest milestone in Nortel's downfall - protection from its creditors. It is nevertheless wrong to pass it over without a few words since I am a part of the Ottawa tech scene and was employed by Nortel in the past.

Despite the media attention, in the near term things will be pretty much business as usual for Nortel and its employees. They have a real and viable business, and customers that depend on them being there. That won't change. What will happen is that behind the scenese the company will be solely assessed on its present market value by the financiers. Promises, leadership, vision, strategy... all those things are now dead. Now it's a matter of coldly looking at the assets, including the value of the various enterprises, and selling them to willing buyers. No one believes that there is any added value in keeping those pieces together except perhaps as a bundle to simplify the sale to a single buyer, if there is one. If there's any money left over after the assets are sold, shareholders may see something out of it. Realistically the chance of that is slim to none. Nortel shares are now truly worthless.

The attempt to stick the blame on someone will continue as it has for some time already. In that regard I am in agreement with Gordon Pitts that it is unfair to tar and feather Mike Zafirovski. His error was to take on the job of CEO with insufficient due diligence, so that he would know that he did not have all the resources needed to turn the company around. True, he could not fully predict the melt-down in the economy but he could have at least known that Nortel was more fragile than expected. Like with the flu, when a healthy person gets it you are out of commission for a few days; when you are already critically ill, you die.

I hope that matters work out for the best with the company and its employees. Those I have spoken to recently are incredibly fatalistic. Ask them about the company and all they would do is shrug their shoulders and give a thin smile. It seems that all they want is closure instead of this long drawn out uncertainty. At least now they may get that.

As to the market, I have to say I am very often wrong about my guesses yet I am unhappy to have gotten it right with my most recent post on Nortel's stock. Perhaps like the proverbial broken clock that is right twice a day I sometimes, too, am right.

For market players there is one lesson to be learned from the trading in Nortel's shares the past few days and most especially in pre-market (and post-announcement) trading in the stock this morning. You might wonder, who is buying all those shares that everyone is dumping like rats jumping off a sinking ship? Short sellers are the most likely answer. They've made their money and now want to lock in profits by covering their short sales with shares bought on the market. This activity keeps the shares above zero. While shorts could get a few more pennies by holding their positions down into shareholder oblivion, their positions would then be locked in for a protracted period which can be costly. So they buy. Anyone else who was buying this morning made a bad mistake.