Monday, July 27, 2009

Influential call for government to review Nortel wireless sale

Update (4:00 p.m.): The Ontario government weighs in too:
Ontario is calling on the federal government to stop the transfer of the next generation of wireless technology developed by troubled Nortel in its sale to LM Ericsson.
Ontario's finance minister, Dwight Duncan, says Canadian taxpayers helped fund research that led to Nortel's creation of LTE, or long-term evolution, technology and it shouldn't go to a foreign company.
Mr. Duncan says he wants Ottawa to block the Nortel sale to Ericsson and to help broker a deal with Research In Motion Ltd.

Morning post: A former Progressive Conservative deputy prime minister, Don Mazankowski, comes out for a Nortel Investment Canada review: "Ottawa must use all the tools at its disposal to protect the national interest." Pretty significant political pressure embodied in this op-ed that will be difficult for current members of the Conservative family to ignore:
I have always felt that an open investment policy is essential for Canada. However, I have always also believed that there are certain circumstances where the government must look very carefully at the effect of proposed foreign acquisitions on the long-term national interest. How the assets of Nortel are disposed of is one of those circumstances. Nortel, supported by the Canadian taxpayer, played a critical role in putting Canada on the map as a leader in the knowledge-based economy and it has been a very important part of Canada's high-tech economy for many decades. It is the biggest investor in R&D and the source of many successful spin-off businesses. Even more important, the wireless industry is a critical industry and a country like Canada is best served economically, and even in terms of national security, if it is home to a global leader in that industry The government, therefore, has a responsibility to use all the tools at its disposal to satisfy itself not only that the acquisition of Nortel's assets does not prejudice Canada's economic and security interests, but also to do everything it can to bring about a meaningful positive Canadian solution.

When strategic assets like Nortel's are at stake, the government needs to take the time required to consider the impact carefully. Canada's national interest should not be held hostage to artificial deadlines established by private interests. In this case, the process was dictated by Nortel and its mostly non-Canadian creditors through Nortel's application to the U.S. bankruptcy court that conducted the auction. For whatever reasons, RIM, a relatively new player in the telecommunications sector that has become a household brand around the world, claims unambiguously that it has been prevented from even getting out of the starting block. Nortel is understandably looking to fulfill its obligations to creditors and others. However, the federal government has a much broader national responsibility.

While an auction for the assets of Nortel took place in New York on Friday, there is much more to be played out. RIM has stated publicly that it is ready to bid for key technology assets from Nortel in the course of its bankruptcy proceedings. If successful, it would mean RIM's position as a global leader in this critical industry would be significantly enhanced.

In the current circumstances, it is incumbent upon the government to exercise its leadership in seeking a resolution that is in the national interest, and that includes using all the tools at its disposal to ensure Nortel and RIM thoroughly explore all options. I am encouraged that both Industry Minister Tony Clement and Finance Minister Jim Flaherty have given strong signals that the government is prepared to use both its regulatory power, if necessary, and its persuasive powers to promote a “Canadian” solution.
Combine that persuasive piece with this view from the weekend, "Nortel a sweet deal for the Swedes." It suggests that the $1.13 billion offering by Ericsson was a steal and that the Nortel board may start to feel some pressure to reconsider as a result:
In the proposed deal, subject to regulatory and bankruptcy court approval in Canada, the U.S. and Europe, Nortel will be paid only $1.13 billion (U.S.) for its most valuable business. That's about half what Nortel was expecting the unit to fetch when it filed for bankruptcy protection in January and began a rapid dismantling of Canada's long-time R&D flagship in fire-sale deals with foreign buyers.

Ericsson may just have struck one of the best deals in the industry's recent history. It will almost double the Stockholm-based firm's sales in North America, which will become its biggest wireless market. Over the next two to five years, Ericsson's North American market share will soar by almost 30 per cent, and its global share by more than 5 per cent.
Ericsson by no means has a lock on the prize. Its deal with Nortel is not set to close until later this year, plenty of time for Nokia Siemens to trump Ericsson's offer. Or for Waterloo-based Research in Motion Ltd., the BlackBerry smartphone maker, to launch a formal bid. RIM last week expressed a willingness to pay roughly the same $1.1 billion (U.S.) with which Ericsson won yesterday's auction.

The near giveaway price Ericsson is offering for Nortel's prized CDMA and LTE technology and patents, which alone are expected to generate an effortless revenue stream of $2.9 billion (U.S.) over the next 15 years, is likely to bring pressure on Nortel's board from creditors anxious to see more generous proceeds from Nortel's fire sale of assets.
It all seems to be adding up to an unfinished story to any objective observer.

It's been pretty remarkable to watch this situation catch fire in the past week as the consequences of the government's inaction have come quickly to fruition. The hypothetical consequences of letting foreign companies raid the best of Nortel's assets have become that much closer to reality. Now the government finds itself in somewhat of a catch-up position, of having to deal with an auction process that's produced a foreign winning bid. Steps they take now may fuel those who would cry foul about interfering with an established legal process that to date the Conservatives had indicated no hesitation about. So if they do act now, they'll have to manage that predictable fallout.

It'll also be interesting in coming days to watch Clement et al. try to recover their footing. They've really left themselves open to the charge of being asleep at the switch and on an issue that has raised a lot of nationalistic passion. That's what's so ironic about how events have turned out. For all their efforts to act as the most pro-Canada party and wrap themselves in the flag and all our national symbols ("Canada's back," flags at military events, red t-shirt days, hockey, etc.), they really didn't get the national interest here at all.