I went to Ottawa last week , the R&D capital of Canada and the home of Nortel Networks' vaunted research operation. Despite the financial travails of Nortel, the company remains a major employer in Ottawa (a region of nearly 1 million Canadians), and the top R&D player in the country, which has just about the same population as California.
It was there, or perhaps during the long drive home through the Adirondack mountains (saved 50 miles, but took same traveling time as going west to 81, south to Syracuse and then rte 90 East) that a fabulous idea struck me. Nortel needs to be part of something bigger, but what?
Why should they?
Gives Verizon faster access to new technologies. Verizon buys all of the core technologies that Nortel offers – landline, CDMA including LTE, optical and enterprise – which are four major competencies of Nortel. Verizon's capex budget is $16.8 Billion/year. Although Nortel only represents 7% of that budget, they could represent more share of that budget if there were price or economies of scale advantages for inter-division transactions. AT&T operated with manufacturing too until the IPO of Lucent in 1995 which rewarded AT&T shareholders handsomely. Why not have competitors and off-shore peers finance part of your operation through their purchases of products and services from your equipment subsidiary?
The price is right. Nortel was trading at $0.5813 earlier today, which gives it a market capitalization of only $289.2 Million; valuing the revenue stream at about 35¢ per $ of revenue. At twice the price, it's still a good deal.
Stabilizes supply. Verizon is Nortel's largest customer, accounting for 11% of Nortel's 2007 revenue (total spend with Nortel was $1.15 Billion last year and $0.79 Billion in the past three quarters which will make it about the same $ as 2007) and 10% of Nortel revenues of the last nine months.
Nortel has services expertise that is growing quickly, and could grow faster if coupled with Verizon's strategic services. Verizon Business (formerly MCI) calls out the 'Strategic Services' revenues including Private IP, Managed Services, Security and Hosting services as a segment of solid growth – revenues up 15.4% in the 3Q08. These services are a perfect mesh for the Nortel Global Services unit which accounted for $2 billion of Nortel revenue in 2007 and a third of the workforce. Merging these professionals and operations with Verizon Business would give Verizon Business added scale, increasing revenues by 30%, providing thousands of new customers and service offerings.
Low risk investment. If it doesn't work in 2 years, spin the equipment units back out. How much lower can their value go? I mean really go? Logical business rules no longer apply in this stockholder environment, so it makes sense for Verizon to seize this techology foundry and services unit.
