In mid-2000, Nortel Networks Corp.'s only problem as it tried to sell its optical components division was to convince Corning Inc., one of a host of panting suitors, to shell out a reported $100 billion for the red-hot business.
Today, in a much cooler market, Nortel is struggling to find a buyer for the same unit at just about any price.
Frank Dunn, president and chief executive of Nortel, announced this week that the company is exploring various reorganization options that include further job cuts and the potential sale or resizing of the optical components business.
Nortel's situation underscores just how much the mergers and acquisitions market has changed for technology companies.
Many of the dot-com companies and start-up service providers that powered the upturn are gone and Nortel itself is a vastly different enterprise.
Since 2000, when its annual revenue peaked at $28 billion, Nortel has been on a downward slope. In 2001, the company recorded revenue of $17.5 billion and analysts expect it to post a further drop to between $11 billion and $12 billion this year. Hence, the need to cut costs and streamline operations, according to Dunn.
"Our focus is to bring all of our business units into a profitable position at the current market levels," Dunn said in a statement. "We are aligning our optical business model to where we see the industry going to ensure we are well positioned when spending resumes."
Nortel, Brampton, Ontario, is now targeting break-even fourth-quarter 2002 revenue of $3.2 billion, down from a prior estimate of $3.5 billion, and expects to cut an additional 3,500 jobs in its embattled Optical Long Haul business, a development that will result in a cash charge of $200 million in the second and third quarters.
These job cuts, which would bring the number of employees down from 94,500 at the end of 2000 to 42,000 now, still may not be enough, according to analysts.
"Getting back to break-even is nice in the fourth quarter, but it's hardly a major milestone given the much lower profitability of the other three quarters," said Alexander Henderson, an analyst at Salomon Smith Barney Inc., New York. "We don't see a lot of momentum in any of Nortel's businesses, so we think there's still a lot of necessary cost-cutting."
Nortel's optical components unit may be just one of the divisions that could be sacrificed to assure the parent company's survival. The Optical Long Haul business, which includes the optical components operation, has been piling up huge losses over the last four quarters. Revenue has also dwindled, falling 78% to $271 million in the first quarter of this year from $1.2 billion in the same period last year.
Nortel may have no alternative but to radically scale back the optical components unit, analysts said.
"It appears Nortel has come to the conclusion that the optical long-haul and components businesses are not likely to see a recovery soon," said Tom Astle, an analyst in the Toronto office of Merrill Lynch & Co. Inc. "It plans to sell, or more likely significantly reduce, its facilities in components. We applaud this move even though the company will use another precious $200 million in severance costs."
That scenario is a long way from the company's initial plan for the business. After scuttling the 2000 discussions with Corning, Nortel floated the idea of spinning off the unit, but that foundered in the 2001 stock market crash as investors shied away from most technology IPOs.
Even under the current plan of selling the business, Nortel may not have any serious takers.
Analysts said Agere Systems Inc. and JDS Uniphase Corp., Nortel's main rivals in the optical components market, are unlikely to be interested in acquiring the competing business because of continuing concerns about weak end-market demand. Agere did not immediately return calls for comments and JDS Uniphase declined to address the issue.
"I don't think Agere, Corning, or JDS Uniphase have the appetite to do a deal like this now," said a New York analyst who asked not to be identified. "Most of the other optical components suppliers are too small to even afford the deal."
A Corning spokesman said the company was focused on managing its operations through the current downturn, implying that it was unlikely to resume discussions with Nortel.
"The discussions we had with Nortel were over a year ago and the situation was very different," the spokesman said.
Intel Corp.'s spate of acquisitions of optical communications properties in the last three years makes it "one of the primary candidates" for the Nortel unit, said the New York analyst. Intel has a small optical components division, said a spokesman for the Santa Clara, Calif., company.
"Clearly, we have gone through a very aggressive rate of acquisitions to grow our communication business since we made our first foray into optics three years ago, but we can't comment on the Nortel business," the Intel spokesman said.