Nortel Caves: Equipment Giant Goes Bankrupt

North America’s largest telecom equipment maker is filing for Chapter 11 bankruptcy protection.

Canada-based Nortel Networks Corp. (NT) confirmed Wednesday it wouldn’t make a $107 million bond interest payment that was coming due this week, so it has taken the step everyone knew was coming – it was just a matter of when.

The Toronto Stock Exchange halted trading of Nortel’s shares – which dove 77 percent – on the bankruptcy news.

Nortel has been trying to avoid bankruptcy by slashing jobs and reducing overhead. But it still couldn’t hold up against the forces of a failing global economy. The recession and fewer sales, combined with all of its other struggles, have pushed Nortel over the edge.

Nortel’s problems stem from several misguided strategies, including selling its high-speed mobile phone division to Alcatel to instead focus on WiMAX. Sales fell markedly after that decision.

Then came the fraud settlement with U.S. financial regulators. That cost Nortel $35 million. After that, Nortel started talking about selling another of its most valuable units, the Metro Ethernet Network (MEN) division. The decision kerflummoxed analysts, who considered MEN to be Nortel’s most promising asset. However, it turned out that Nortel could barely eek out a $1 billion sales price for MEN and no handover has taken place, despite rumors that Huawei was set to purchase the unit.

So what’s next for Nortel? It holds $2.4 billion in cash (and $4.5 billion in debt) and has provided no specific strategies. Yes, it has the cash to pay that $107 million debt, but executives chose bankruptcy anyway, as many observers expect the company to run out of cash regardless.

“Nortel must be put on a sound financial footing once and for all,” said Nortel President and CEO Mike Zafirovski in a prepared statement. “These actions are imperative so that Nortel can build on its core strengths and become the highly focused and financially sound leader in the communications industry that its people, technology and customer relationships show it ought to be.”

Zafirovski said he aims to improve operational efficiency, push productivity into the double digits and focus on R&D – typical executive jargon that gives little insight into how a company will make improvements happen.

Nortel has lost nearly $7 billion since Zafirovski took over in 2005. In its most recent earnings reports, for the third quarter of 2008, Nortel lost $3.4 billion; a year earlier, it had booked a $27 million profit.

The company said daily operations will continue as normal. A big question mark, of course, is how customers, partners and suppliers will react to the bankruptcy news.