North America's largest but struggling telecommunications equipment maker, Nortel Networks is reported to have consulted with legal advisers to explore the possibility of filing bankruptcy protection in case it's planned restructuring fail.

Toronto-based Nortel's spokesman confirmed that the company has consulted legal advisors on helping Nortel's direction and the company is focused on reorganising and reducing expenses but denied that it is filing for bankruptcy.

Reacting to consistent media reports of it seeking to file bankruptcy, the company said in a statement that, "There are those who fuel negative speculation, but there are many more who believe that Nortel has put in place the necessary plans to strengthen our financial footing and reset our cost base."

During 2001 telecoms problems, Nortel was hard hit first by an accounting scandal. Now again in the current financial crisis there has been a scaling back of capital spending by some of its biggest wireless customers, including Sprint Nextel, the third-largest US mobile network operator.

Once Canada's largest company and a technology giant, Nortel's share price was C$0.51 in the Toronto Stock Exchange yesterday compared to high of C$1,100 in the mid 2000's and is valued at $194 million today compared with about $250 billion during 2000.

The company lost nearly $7 billion since 2005 and CEO, Mike Zafirovski who was appointed during the same time, has been struggling to make the company viable as its competitors like Alcatel-Lucent and low cost vendor, Huawei Technologies flourished with newer technologies while Nortel was still selling outdated ones.

Its problem has compounded by the fact that its cash reserve is higher than its debts As of 30 September 2008, Nortel's debt amounted to $6.3 billion, including adjustments for operating leases, pension deficits and other items, while It had only $2.3 billion in cash at hand. The company has about $1 billion in bonds that come due in 2011.

Its pension deficit is as high as $2.8 billion because of the decline in global stock markets.
Analysts have been anticipating the problems for some time now. Cowen analyst John Marchetti said in a recent research note that Nortel is in a tough financial spot that will lead to a cash crunch by 2010.

Nortel aggressively cut costs by restructuring four times in three years, but achieving ongoing profitability remains a challenge…In 2008, we estimate the company will burn through more than $1.2 billion in cash. Management has stated that it needs approximately $1.5 billion annually to run its business, and we think the company may exit 2009 with only $400-700 million to spare.

This need for cash has led the company to announce that it is seeking to sell its Metro Ethernet Networks business, one of the few profitable segments, and which many view as a leader in optical networking. This potential sale illustrates concern over Nortel's financial position; the company needs to sell one of the more valuable pieces of its business in order to raise cash to help restructure lagging segments.

Last month, Nortel reported a $3.4-billion quarterly loss, cut its 2008 outlook and announced 1,300 layoffs. It also said it would freeze salary increases, cut back on consultants and review its real estate portfolio.

Nortel, whose market value has nosedived 97 per cent this year due to the current global economic slowdown which has forced companies to curb spending as customers switched to newer and lower cost technology.

As demand slows down due to increased competition, the company has also approached the Canadian government for financial assistance, but the government is under stress to overcome its domestic political problems and do not see the need to bail out the telecom giant.

Nortel cited a recent finding by debt-rating agency Standard & Poor's that the company "should be able to sustain adequate levels of liquidity in the next 12-18 months." The company also said that it wants to preserve and strengthen its capital situation, and added that last month it had announced plans to cut its annual expenses by $400 million.

However, Nortel has been taking aggressive proactive restructuring measure to consolidate its position in November 2008. Last month, Nortel reported a $3.4-billion quarterly loss and cut its 2008 outlook, which prompted Mike Zafirovski, Nortel's chief executive, to announce plans to cut 1,300 jobs in cost cutting and restructuring efforts. 18 per cent of the workforce has be reduced  since taking over three years ago.

Zafirovski has undertaken sweeping changes in Nortel's organisational structure, including the departure of multiple senior executives: CMO Lauren Flaherty, CTO John Roese, global services president Dietmar Wendt, Executive VP of global sales Bill Nelson, chief legal officer David Drinkwater and chief compliance officer Robert Bartzokas (the latter two through retirement).

Each of these executives led a centralised functional group that supported the needs of Nortel's various business units. This ''matrix'' structure now gives way to a vertical focus, with marketing, R&D, sales and services (as well as other previously centralized functions) splitting up and moving back to a more fully integrated business unit structure.

Nortel expects to reduce gross costs by $400 million in 2009 from extensive cost-cutting plans, which unfortunately include a workforce reduction of 1,300 people. These steps, though, are critical in getting Nortel back on its footing and through a tough economic downturn.

If Nortel does file bankruptcy, then it will be the first major technology firm to take the disastrous route in the current global economic crisis.