NSN bids for Nortel units, taking huge risk on CDMA

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Mobile Industry & Technology Journalist - freelance

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NSN bids for Nortel units, taking huge risk on CDMA

By CAROLINE GABRIEL

Published: 22 June, 2009

Nokia Siemens is the first to show its hand in defining the fate of Nortel, bidding $650m for the Canadian firm's CDMA and LTE infrastructure businesses. This points to an almost-certain break-up of the company, as a plan by former executives to raise private and government funding to take Nortel out of bankruptcy protection appears to have run out of time. The NSN deal sets a low bar in terms of the prices Nortel is commanding for its units, but higher offers could possibly emerge.

Under US bankruptcy law, this is a 'stalking horse' deal, and would be superseded by any better bid. The process is managed entirely by the courts and Nortel is not permitted to show any favor to the 'stalking horse' bidder, which means there will be very little indication of how the resulting company might operate.

If the acquisition goes through, NSN will gain one no-brainer - a strong base of LTE patents and developments to add to its portfolio, for a low price tag - and one high risk purchase, the CDMA unit. This is the opposite of the LTE business - lots of customers, but in a market under huge revenue and margin pressure, where differentiation will increasingly be on price in emerging markets, rather than services or cutting edge technology. NSN would overnight go from having no CDMA business at all to being number two - but in an unfamiliar market, where GSM majors like Ericsson have painful memories of how tough it is to enter the space, even in times of growth.

And in recent times, NSN will be keenly aware that the squeeze on the CDMA sector has been one of the main factors behind the struggles of market leader Alcatel-Lucent - one of the reasons why ALU's merger has been such a painful affair, while NSN's has delivered the benefits of streamlining and scale far more quickly.

Meanwhile, if NSN is after greater volumes, Nortel's number two market position may not last long, with the two Chinese majors progressing rapidly in CDMA, especially in the emerging markets where its main growth lies. In the first quarter of 2009, the swing to the Chinese suppliers was even more marked in CDMA2000 than W-CDMA, according to figures from dell'Oro Group. The total CDMA2000 market declined by 20% to $1.5bn. Alcatel-Lucent remained in first place, but with its revenues in this technology down by 31%, while second placed Nortel slumped even more sharply, by 48%. Huawei's CDMA2000 sales were up a massive 430%, putting it in third place, followed by Motorola (down 36%) and ZTE (up 397%). Not a promising outlook for NSN's entry into CDMA - though it could, of course, sell on this business to one of the Chinese challengers.

As for Nortel itself, the company is applying to be delisted from the Toronto stock exchange, and CEO Mike Zafirovksi said in a statement on Friday that selling Nortel's parts is now the best course for the company. "Maximizing the value of our businesses in the face of a consolidating global market has been our most critical priority," he said. "We have determined the best way to do this is to find buyers for our businesses who can carry Nortel innovation forward, while preserving employment to the greatest extent possible."

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