Divesting at any costs

Contact: Brenon Daly

We recently noted how VCs are having to settle for scrap sales as they go through a bit of portfolio clean-out. But, hey, at least the value destroyed in each of the companies is only in the tens of millions of dollars. Companies that have been recently cleaning out their own portfolios in the form of divestitures have been eating hundreds of millions of dollars. Even billions of dollars.

Last week, two companies were in the news for what we would consider ‘divest at any cost’ transactions. First up, Motorola unwound its two-year-old purchase of Good Technology. After paying about $500m in November 2006 for Good, we would guess that Motorola almost certainly received less than $50m in selling the mobile messaging infrastructure vendor to privately held Visto. (At least there was something left to sell. The same can’t be said of Intellisync, which Nokia bought three years ago for $354.3m but recently said it will be shuttering.)

More dramatically, Nortel Networks looks likely to pocket just two pennies for every $1,000 that it handed over for Alteon WebSystems in mid-2000. (Keep in mind, however, that Nortel paid the $7.8bn total is stock, not cash.) The bankrupt telecom equipment vendor has put Alteon on the block, and the reported frontrunner is Israel-based Radware, which has put forward a bid of some $14m. (Since Nortel filed for Chapter 11, Alteon is being sold under an auction process run by the bankruptcy court, and other bidders could emerge.) As a final thought on both the Motorola and pending Nortel divestitures, we would note that both castoff divisions are landing in other companies, rather than a buyout shop.

Telco equipment troubles

Contact: Brenon Daly

For communications infrastructure equipment vendors, it seems that the only thing worse than doing a major acquisition is not doing a major acquisition. At least that’s the only conclusion we can draw from the relative performance of Alcatel-Lucent and Nortel Networks in recent years. Shareholder returns since the Franco-American combination was announced on April 2, 2006: Alcatel-Lucent ‘only’ down 85%, compared to Nortel’s drop of 99%.

Both companies have been in the news recently as they look for ways out of their protracted slumps. For Alcatel-Lucent, the future appears to be in Web 2.0, whatever that means. (That’s a bit of an oversimplification. To read what the company actually plans, view my colleague Gilad Nass’ report on the company’s restructuring.)

Meanwhile, the outlook at Nortel has gotten so bad that some reports last week indicated that the company may be forced into bankruptcy in the near future. Nortel quickly dismissed this, pointing out that it still has a cash cushion and doesn’t have any debt coming due until 2011. Nonetheless, Nortel shares are changing hands at their lowest-ever level (closing at 33 cents each on Monday) and may get booted off the Big Board because the stock price doesn’t meet the NYSE’s minimums for listing. Nortel’s current market capitalization is just $164m, but because of all the debt it carries, its enterprise value is $2.5bn.

We honestly can’t envision another strategic acquirer stepping in to buy Nortel, even at its current bargain-basement price. And forget about a buyout shop making a run at the company, given the frozen credit market and Nortel’s cash burn. But what about a piecemeal sale of the vendor, continuing its already announced divestiture plan?

Well, we suspect Microsoft would be interested in some of Nortel’s unified communications (UC) technology. There have been rumors of a deal between the two companies ever since they announced their UC partnership, dubbed Innovative Communications Alliance, in July 2006. (That was back when Nortel shares were changing hands at about $20 each, giving it a market capitalization of roughly $10bn.) Despite that rumor, we don’t see Microsoft getting into the business of selling base stations and routers, which would come with all of Nortel. If indeed Nortel goes bankrupt, however, Microsoft might be able to snag the UC assets in a court-supervised auction.