MASSE IN THE NEWS: Nortel Sale To Ericsson Stirs Protest In Canada

IDNUMBER 200908150028
PUBLICATION: The New York Times
DATE: 2009.08.15
EDITION: Late Edition - Final
SECTION: Business/Financial
PAGE: 1
ILLUSTRATION: PHOTOS: James Balsillie, left, and Michael Lazaridis, co-chiefexecutives of Research in Motion, say Nortel's patents should stay in Canada.(PHOTOGRAPH BY MIKE CASSESE/REUTERS) ; Nortel's Carling campus in Ottawa. Once Canada's largest company, Nortel is now bankrupt and its businesses are shrinking.(PHOTOGRAPH BY BLAIR GABLE/REUTERS)(B5) ;
DATELINE: OTTAWA
BYLINE: IAN AUSTEN
COPYRIGHT: © 2009 by the New York Times Company
WORD COUNT: 1169

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Nortel Sale To Ericsson Stirs Protest In Canada

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At the start of this decade, Nortel Networks was perhaps the most hated company in Canada. The collapse of technology stocks combined with an accounting scandal destroyed the widely held telecommunications company's share price and, with that, the savings of thousands of Canadians.

But now that Nortel is being broken up through bankruptcy proceedings, many Canadians have found, if not a renewed love, at least a feeling of nostalgia for the 114-year-old company.

The prospect of foreign companies' picking the bones of what was once Canada's largest corporation has prompted the hasty reassessment of Nortel.

James L. Balsillie and Michael Lazaridis, the two men who brought the world the BlackBerry, are among the prominent Canadians who are calling on the government to review the proposed $1.13 billion sale of Nortel's wireless infrastructure business to Ericsson, the Swedish company that dominates that business. Last week, the industry committee of the House of Commons in Canada held an unusual emergency meeting to discuss Nortel's fate.

Nortel is bankrupt, its shares are delisted, its former top executives remain under criminal indictment, its businesses are rapidly shrinking and its chief executive and most of the board resigned this week. But several Canadian politicians argue that the company may be too valuable to fall into Swedish hands.

"We need to put a magnifying glass on this," Brian Masse, a member of the industry committee, said from his constituency in Windsor, Ontario, on Tuesday.

The renewed interest in Nortel among Canadians has several roots. Mr. Balsillie and Mr. Lazaridis appear to have taken up the mantle because, in their version of events, Nortel reneged on a deal to sell the wireless assets to their company, Research in Motion.

Other Canadians are still smarting from sale of several prominent Canadian companies to foreign competitors before the credit crisis, including the mining companies Inco and Alcan. And there has been considerable publicity surrounding the decision by United States Steel to drastically scale back the operations of Stelco, a Canadian steelmaker it acquired in 2007. The Canadian government is arguing in court that the American steel company violated commitments it made under Canadian investment laws to maintain employment and production.

The debate over Nortel has focused on exactly what remains of value at the company and, more broadly, what Nortel owes Canadians.

"People are a bit miffed that a lot of government money went into Nortel through tax credits" for research and development, said Mihkel M. Tombak, a professor of strategic management at the University of Toronto.

While that was certainly the case in the past, the Nortel executives who appeared at the committee hearing repeatedly pointed out that the company's lack of profits had left it unable to claim tax credits since at least 2001. They were unable to discuss the government's contribution before then, and a series of financial restatements related to the bookkeeping fraud made it difficult to assess that from Nortel's published statements.

Under its deal, Ericsson will obtain the right to use the patents derived from that research although, at least for now, Nortel will retain ownership. Ericsson will also acquire the company's wireless business, including a research-and-development unit that is largely based in Ottawa.

Nortel's greatest strength is a wireless technology known as C.D.M.A. Used almost exclusively in North America, C.D.M.A. is now, as Nortel's executives at the hearing acknowledged, a technology that is gradually becoming obsolete.

In his testimony, Mr. Lazaridis, who directs Research in Motion's research, said that Nortel's most valuable property is patents related to the next generation of wireless networks.

"Nortel's intellectual property and work force, devoted to next- generation wireless research known in the industry as L.T.E., or long-term evolution, is nothing short of a national treasure that Canada must not lose," Mr. Lazaridis told the members of Parliament, adding that putting it in foreign hands could endanger Canada's national security and make it more difficult for Canadian carriers to restore future network failures. The Canadian government can turn down foreign purchases on national security grounds.

While Research in Motion runs a worldwide data network to support its BlackBerry e-mail service, it has never been in the business of producing the software and hardware used by carriers. But Mr. Lazaridis said that his company now wanted a stake in the development of L.T.E. and believed at several points it had struck a deal with Nortel to buy its technology for about $1.1 billion. He told the committee of shaking hands on deals and exchanging e-mail messages with Nortel over the wording of a press release to announce them.

In the end, however, Nortel surprised Research in Motion by filing in Canada and the United States for bankruptcy protection. "We felt like we were snookered," Mr. Lazaridis said.

Unlike Ericsson and Nokia Siemens Networks, Research in Motion did not enter the auction for Nortel's wireless assets, which was supervised by an American court. Mr. Lazaridis said that was because of conditions attached to the process, including the licensing rather than the sale of the patents.

Testifying after Mr. Lazaridis, Paul B. Schabas, a Canadian lawyer representing Ericsson, suggested that Research in Motion should have raised its complaints earlier and in court.

"It could have come and objected or made submissions," Mr. Schabas said. "It's never done that. It's only come here today to complain about the process."

Several Canadian politicians, echoing Mr. Lazaridis, have emphasized the value of Nortel's L.T.E. patents. But unlike its competitors, Nortel has found no carriers that are interested in buying its technology, and some analysts question the importance of what it has developed to date.

"It may be the crown jewels of Canada, but it's no longer a jewel of the wireless industry," said John Strand, the chief executive of Strand Consult, a wireless technology consulting company based in Denmark. "It's not like Nortel has the keys to L.T.E. Nortel is a like a sick old man who has been lying in a hospital bed for years."

Mr. Masse, who is a member of the labor-backed New Democratic Party, is unclear about what he wants the Canadian government to do with Nortel beyond reviewing the purchase under the Investment Canada Act.

During a visit to Panama on Tuesday, Prime Minister Stephen Harper told reporters that the sale would be reviewed under the act to see if it was "in Canada's national interest," but he ruled out any other intervention. Mr. Masse, however, suggested that rather than approve the sale of the Nortel wireless unit, the government might consider keeping Nortel intact through temporary government ownership, the solution that saved Chrysler, the chief employer in his hometown.

Mr. Strand, however, has a message from Denmark for anxious Canadians. Several Danish companies were once leading makers and designers of handsets. Acquisitions and failures, however, either eliminated them or put those companies under foreign control. But subsequent investments by foreign owners in Denmark, Mr. Strand said, have made the country's wireless industry bigger than ever and based largely around high-paying engineering, research and development jobs.

"If you have the right people with the right skills, you have no problem," Mr. Strand said.