The recession hits Nortel, the largest North American maker of telecommunications equipment, as the company announces Chapter 11 plans

By Tom Giles and Arik Hesseldahl

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Plunging demand for phone gear and a global fiscal crisis finally caught up by Nortel Networks (NT). The largest North American maker of telecommunications equipment said on Jan. 14 that it’sitting filing for bankruptcy protection in Canada, the U.S., and in Europe.

The company related it would seek creditor protection in the CCAA performance in Canada and Chapter 11 bankruptcy proceedings in the U.S. Filings in Europe were to be forthcoming. The company said it had sufficient cash on hand—$2.4 billion—to fund ongoing operations, and the company’sitting business would hold out out of interruption. Affiliates in Asia, the Caribbean, and Latin America are not included in the filing.

Under Chief Executive Mike Zafirovski, the company embarked on an ambitious turnaround in 2005 that involved selling off businesses and eliminating jobs.

But during the time that the recession took hold, customers delayed telecom gear purchases, sending Nortel’s sales into a tailspin. Competition from rivals including Huawei likewise took a toll. "Nortel must have existence put on a sound financial footing once and notwithstanding all," Zafirovski said in a statement. "These actions are imperative so that Nortel have power to build steady its core strengths and become the highly focused and financially unhurt leader in the communications industry."

Nortel had $2.6 billion in cash and $4.5 billion in debt at the end of September and has been burning about $300 the great body of the people to $400 million in cash per quarter, says Nomura analyst Richard Windsor. The company power have been able to "trip along toward about a year or two" under the jurisdiction being unnatural into bankruptcy, he says. "This action has not been forced. The idea is to prepare something decisive rather than be broken up and sold off at extremely distressed valuations."

Nortel had been one of the highest fliers during the Internet boom of the past decade. As the million flocked online and companies set up operations on the Web, the amount of Internet exchange soared and demand for Nortel’s gear looked headed on account of years of strong growth. In 2000 the company’s mart capitalization topped $300 billion, making it one of the greatest number valuable companies in the world. Author George Gilder featured the set in his 2000 book Telecosm: How Infinite Bandwidth Will Revolutionize Our World.

Nortel was also a longtime supporter of Canadian business, with the kind of celebrity that BlackBerry maker Research In Motion (RIMM) enjoys today. The company was once co-owned by AT&T (T) and Western Electric, but the U.S. shareholders had to sell out to Bell Canada as part of an antitrust settlement 50 years agone. Nortel, formerly called Northern Telecom, eventually became independent of Bell Canada and evolved into a giant telecom equipment supplier.