Odd man out.

Day 606

It gets curiouser and curiouser, the telecom-equipment world's sudden interest in the corpse of Nortel.

  

Ericsson yesterday joined Nokia Siemens and Research in Motion in pursuit of Nortel's wireless patents.

The buzzards were joined yesterday by Sweden's Telefon LM Ericsson, which once suffered the indignity of Stockholm ordering equipment superior to Ericsson's from what was then Northern Electric. Then there's the frontrunner, a joint-venture of Nokia Corp. and Seimens AG (Nokia Siemens Networks B.V.); and a New York private equity outfit, MatlinPatterson Global Advisors LLC, which holds about 10 per cent of Nortel's debt and believes Nortel can be restructured as a "stand-alone entity." Which, for public consumption at least, was what Mike Zafirovsky, Nortel's discredited CEO, was saying a few months ago before his volte-face in deciding to rapidly dismantle Canada's longstanding tech flagship. 

And, most noisily, there's Research in Motion Inc., maker of the BlackBerry, and Canada's lone remaining global champion in the telecom sector since Nortel filed for Chapter 11 bankruptcy protection in January. Only now, late in the hour, and still without submitting a formal bid, RIM says it's willing to pay $1.1 billion (U.S.) for the same hundreds of key Nortel patents in next-generation wireless technology the vastly larger predators are after.

The formal bidders have this in common: They're all foreign owned. For that matter, Nortel's advertised "turnaround CEO," Mike Zafirovski, who inexplicably is still at Nortel, running a hasty fire-sale auction of the 127-year-old industrial icon's assets, is a U.S. import from the ailing Motorola Inc. Zafirovski's idea of restoring Nortel to its former glory includes an attempt awhile back to peddle the firm to German industrial powerhouse Siemens - no Canadian economic nationalist he.

What they also have in common is that they're bidding considerably less for Nortel's prized wireless operation than RIM. The highest formal bid, Ericsson's $730 million (U.S.), is 34 per cent lower than what RIM says it's prepared to pay. 

So what's the attraction? 

Even in its near-comatose state since the Tech Wreck of the late 1990s, Nortel has been spending about $1.8 billion a year on research, which continues to qualify it as Canada's R&D flagship. A company you might think worth keeping in Canadian hands, an incubator accounting for an estimated 260 spin-offs and start-ups.

That R&D has culminated in Nortel leadership in LTE, for Long Term Evolution, a new wireless technology that promises to increase by a stunning 10 times the bandwith of existing networks. Telcos scrambling to adapt LTE will be able to charge cellphone users for lucrative bells and whistles like video blogging, interactive TV and advanced gaming.

As with Gillette, which makes its money on the blades, not the razors, the likes of France Telecom S.A., AT&T Corp., Bell Canada and Telus Corp. make their most lavish profits on uploaded applications, from customized ringtones to photo-file management systems, for which cellphone users have an insatiable demand.

Particularly in North America, wireless systems are nearing maximum capacity because of all these add-ons, and have been known to crash. Nortel holds the golden key, as it happens (who would have thought?) by having the jump on LTE development. It's also a leading supplier to telcos of an older wireless standard, CDMA (code division multiple access), on which more than half the U.S. market relies. 

In France, the world's best-known CrackBerry addict displays his ever-present digital lifeline.

Nokia has been repeatedly stymied in cracking the upscale sector of the U.S. "smartphone" market because it is CDMA-challenged. Nokia's world leadership in cellphones - it has 36 per cent of the global market - derives from its mastery of the CDMA rival GSM (global system for mobile communications), the standard for Europe and most of the world outside North America.

So the two European bidders are trying to crack the North American market on the cheap by getting their hands on as Nortel's hundreds of patents for LTE and CDMA networks. They don't really want Nortel's wireless carrier division, whose engineers will soon ankle in any case. They want the patents. Nortel is trying its best not to sell, but merely license, those patents to the highest bidder for its wireless operation.

RIM also wants the patents without the bother of Nortel's physical business, and has spent a year or so in sub rosa haggling with Nortel over obtaining those patents as affordably as possible. Nortel's holding out for what RIM considered an unreasonably steep price is one reason the Waterloo, Ont.-based BlackBerry maker waited so long before committing this week to interest in the entire wireless operation.

RIM would know about patents, having shelled out hundreds of millions of dollars to patent holders claiming RIM's technology too closely mimics the patents they've bought from obscure and failed outfits with the sole purpose of shaking down the likes of RIM. These "patent trolls" have tied up RIM and other victims for an average of five years per patent dispute. Such altercations tend to culminate in the troll - with assets of one cramped office and some rented litigators - trousering $200 million or $600 million to just go away. 

Patents are Nortel's game, too. In his rapid sell-off of Nortel divisions, Zafirovski has sought to retain as many patents as he can. Eventually, Nortel could be a shell company in business only to license its patents. And to collect, by one estimate, almost $1 billion (U.S.) in patent revenue over the next 15 years, profit that would sheltered by Nortel's massive tax-loss carryforwards. 

It seems a mystery to some why RIM appeared in public for the first time only this week, demanding Ottawa inject it into a bidding process it claims Nortel has frozen it out of. The solution is that the well-run RIM, like any sensible firm, would have preferred not to buy any of Nortel's physical assets or even take charge of its skilled engineers. Nortel managed to lose almsot $7 billion (U.S.) in the past two years alone, and carries a debt load of $4.5 billion (U.S.) 

RIM just wants the patents, with which it could build one of the world's most formidable wireless networks. But RIM cofounder and co-CEO Jim Balsillie (shown right) was too cute by half, hoping the current asset auction at industry sad-sack Nortel would turn up no credible bidders. 

So now it comes down to public relations, pure and simple. Donning the cloak of Captain Canada, RIM has to force Ottawa to inject it into the bankruptcy-court-monitored bidding process. Or convince Ottawa to withdraw the ludicrous $300 million the federal Export Development Corp. has advanced to Nokia Siemens to finance its planned acquisition of Canadian technology - itself subsidized by Ottawa over the years - with which it hopes to compete with RIM's own U.S. smartphone line-up on an equal footing. Or convince Ottawa to chat with Siemens about the status of that portion of Seimen's $2.6 billion in Canadian revenues that comes from government-related contacts.

The odds have to be against RIM  for choice in holding back from submitting a formal bid. Still, there is a compelling precedent in its favour. That would be Ottawa's decision only last year to abruptly block Macdonald Dettwiler & Associates planned sale of its Canadarm technology - also federally subsidized - to a U.S. firm. That little-noticed episode started with Peggy Nash, then the NDP MP for Parkdale-High Park, convincing Tory backbenchers that the iconic Canadarm falling into foreign hands would do the Tories no favours in public-opinion polls.

Nortel is vastly bigger and more important to Canada's shrinking centre of excellence in tech than the Canadarm. From a standing start Monday, when RIM's first salvo was greeted dismissively by Ottawa, RIM has already made sufficient progess that Tony Clement, the federal industry minister, now pronouces himself displeased that the one Canadian firm interested in carrying the Nortel torch has been excluded from the bidding. And the quiescent Liberals came to life Wednesday in this fighting statement by Grit leader Michael Ignatieff:

"At a time when they were rescuing GM and Chrysler, they didn't ask the simple question: Could we restructure Nortel to preserve the enormous intellectual property and research capacity in Canada? It's a huge loss, and it means a leading Canadian player - RIM - is going to be faced with competition from intellectual property that was originated in Canada and is now being sold to foreign companies."

To be sure, Jim Balsillie takes an unorthodox approach to dealmaking. But he's mindful that France would never allow Michelin S.A. or Renault S.A. to fall into non-French hands, that Germany would similarly protect Daimler A.G. and Deutsche Telekom A.G. from foreign predators. And that the U.S. thwarted the planned foreign acquisitions of California oil firm Unocal Corp. and a collection of Eastern Seaboard ports. (See Michael Ignatieff's latest comments below.)

Free-marketers like the National Post's Terence Corcoran are appalled by any prospect of government intervention. Which, I guess, means they've been okay with the relatively recent loss of most of our world-class firms to foreign owners: Inco, Alcan, Abitibi, Falconbridge-Noranda, Hudson's Bay Co. (itself an amalgam of Zellers, Simpsons, Morgans and Woodwards), MacMillan Bloedel (long B.C.'s dominant private-sector employer), Molson, Labatt, Sleemans, Seagram (Chivas Regal), Hiram Walker (Canadian Club, Courvosier), Newbridge Networks, Cognos, Masonite, Fairmont Hotels & Resorts (the former CP chain of historic hotels, including the Royal York, the Frontenac, the Banff Springs Hotel and the Empress in Victoria), Four Seasons Hotels (world's largest luxury hotelier, now globally synonomous with upscale innkeeping)...

It's utter nonsense to gauge outside business reaction to state effort to hang on to an iconic Canadian business asset. In China, India and most other emerging markets, you don't set up a branch plant without first finding a locally owned partner to take a 50 per cent stake - in China's case, a partner owned by the state. Germany pronounced the mid-decade encroachment of foreign private-equity and hedge funds as an invasion of "cockroaches," and the foreigners soon pulled in their horns. A Swiss drug giant, Sanofi, made a move on a French rival, Aventis, and the result was government intervention to create today's French-controlled Sanofi-Aventis S.A., headquartered in Paris. 

That kind of thing goes on all the time, everywhere but in Canada, where corporate owners happily sell out to the highest, almost always non-Canadian, bidder. attracted by the big For Sale sign someone erected long ago over Corporate Canada. Which wouldn't matter, except that we lose our economic sovereignty as all of the decisions suddenly are made somewhere else, and our best and brightest are obliged to seek work far from home.   

A lot gets publicly unsaid in these episodes. Siemens will be thinking hard about its prospects for landing that next big Canadian power-generation contract if Ottawa is miffed by a successful Nokia Siemens grab for Canada's tech patrimony. Ericsson might not be quite as attractive a supplier to Bell, Telus, Rogers and Videotron if Ottawa is slow in helping with the typical taxpayer subsidies of capital equipment purchases by said firms.

RIM, meanwhile, has Barack Obama as an unwitting endorser, along with 535 U.S. senators, members of Congress and staffers, and just about everyone on Wall Street who hasn't been laid off yet. As icons go, RIM is almost up there with Tim Hortons. Except that RIM is a major exporter, the kind of "knowledge-economy" firm the likes of which Dalton McGuinty have been promoting for years as Ontario's manufacturing base disappears.

The bankruptcy-court-auction process, contrary to Nortel's assertions, is not set in stone. And for a U.S. CEO of Nortel to dictate the sale of a venerable Canadian company's world-class assets to another foreigner - so soon after the loss of Alcan, Inco, Falconbridge and Abitibi on the Tories' watch - is coming perilously close to the Avro Arrow ignomy for which Dief's Tories are still cursed decades after the fact.

Not sure I'd bet on Balsillie just now, but I know I wouldn't bet against him. 

Update

In a scrum with reporters Thursday, Ignatieff got to the heart of matter - the LTE patents:

"I sit there watching this and think to myself: What other country in the world would allow world-class patents and world-class technologies, that are the key to the future of an industry, be auctioned off to foreign companies without a Canadian champion even getting a chance to bid?

How did we get here? No other country would let that happen. I urge the Industry Minister, Mr. Clement, to think again, see whether there's any way to get Nortel and RIM at the table.  Everybody may have made mistakes here, but the hour is not too late, it is never too late, to do the right thing.

This is a crucial issue for the future of Canada. These LTE patents are the key to a whole new industry where Canada is a world leader. I can't understand how the Harper government is letting it go."

 

In French, Iggy said the Harper government was making a "gross error" with Nortel.

 

For the purposes of this blog, the inception of the Great Recession in the U.S., the epicentre of the crisis, is taken as the start date for the global slump. The U.S. has been in recession since December 2007.

Comments

[Julian Egelstaff]

Thank you for the detailed analysis. This situation makes me sick. What is wrong with the leaders of this country?! I don't like Iggy, but this time, he's on the money.

[Galib]

David, again, excellent insight and thought.

[sam]

David,

I never can understand the Canadian Psyche which always looks at the short term picture but never long term.

The govt's have money to throw billions to GM pensioners who had absolutely no reason to get the free money. Ever heard of Govt bailing out the pensions of a private company?

Granted, Nortel was mis-managed but none of the govt officials know of technology, the importance of it, but they keep telling people in other countries that we want knowledge based companies to prosper here and also tell prospective immigrants that their tech dreams can be realized but their policies are totally in reverse.

Never seen people like here so eager to sell their soul for a bagful of coins and have no pride at all.

[Lee Loc kwood]

As a person involved with Nortel for over 35 years and with 25 as an employee, we are dumping a treasure which has jump started 100s of other companies with its intellectual capital.
When we let is disappear, we will regret it even more than the dissolution of Avro aircraft.

My pleas to the PM and various ministers have gone unreplied to, let alone acknowledged!

[David Olive]

You're right Sam that the government message of needing a more tech-oriented Canadian economy flies in the face of its conduct on Ericsson-Nortel. And Lee, I think it's even higher, maybe 260 spin-off companies from Nortel. Odd that feds wouldn't appreciate how Canadian firms basically "disappear" after takeover, given that Newbridge Networks, based right in Ottawa, and also a huge generator of spin-offs, is a word and a legacy you stopped hearing about almost the month Alcatel bought it. And to think Nortel has its biggest R&D centre in Ottawa...right under the parliamentarians' noses.

[David Olive]

Julian, yes, Iggy had the most forceful defense of hanging onto the Nortel legacy. Surprising Layton wasn't faster into the pool, though he's the one that got last Friday's hearing scheduled. Can't imagine the Yanks letting go of, say, Boeing. But in fairness, they let Alcatel buy Lucent, the Canadian counterpart to (and former parent of) Nortel.