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Tuesday, September 05, 2006

Nortel’s Alcatel Error


Nortel announced that it is selling its third generation cell phone network to Alcatel for $320 million. Buying the network, called UMTS, will put Alcatel in third place in this segment of the industry, behind Ericsson and new Nokia/Siemens joint venture.

According to Reuters, some analysts are concerned whether the merged Alcatel/Lucent can put together its two UMTS businesses with the one they will buy from Nortel. The work to bundle together the three pieces may be considerable.

Nortel made the comment that off-loading the business would allow it to focus on its larger businesses of next generation mobile networks and data and optical network solutions. But, it sounds a bit thin.

Nortel is still the weak sister among the large telecom equipment providers, and selling off units will not solve its problems. It continues to compete with larger and more well financed companies like the new Nokia/Siemen, Motorola, Ericsson and Alcatel/Lucent.

Nortel’s revenue over that last four quarters has been fairly flat. Losing a division is not likely to help that trend, although Nortel could use the cash. The company has $3.8 billion in debt and $6.1 billion in other liabilities.

There is, of course, the issue of whether Nortel’s new focus will work, or whether management may continue to sell of parts of the company.

Morningstar points out that Nortel’s core strength is in optical networking. Recent results at companies in this arena, including Ciena and JDS Uniphase, have been very poor. Both stocks have suffered. Ciena’s shares dropped from $4.30 to $3.80 in the two days after it posted results. JDSU dropped from over $2.60 to $2.20 after the release of its numbers.

Nortel’s stock still trades only a hair above its 52-week low of $1.90. Shares are currently changing hands at $2.14.

Alcatel may have gotten a good bargain in Nortel’s UMTS unit, but the news is not what Nortel investors want to hear. Selling units with no improvement in financial performance just doesn’t get it done.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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