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Nortel crashes in tech pileup

Tech spending slump takes a big chunk out of Nortel.

By Scott Moritz, writer
September 17, 2008: 11:58 AM EDT

NEW YORK (Fortune) -- The tech slowdown forces another supplier into the breakdown lane as Nortel slashes its forecast and puts one of its key businesses up for sale.

Citing order cuts and product delays, Nortel (NT) said Wednesday that it now expects third-quarter sales of $2.3 billion, well below the $2.7 billion level in the year-ago quarter and 13% below the $2.66 billion level analysts were looking for. Looking ahead to the full year, Nortel says sales will fall to about $10.8 billion, which is down from the $11.2 billion recorded last year and way under the $11.4 billion analysts had expected for 2008.

The news sent the Toronto communications equipment giant's shares down 43% to a multi-decade low, as investors threw in the towel on hopes that the company could make good on a two-year-long turnaround effort.

With new information technology equipment orders drying up amid a slumping economy and a credit crisis in the financial sector, other big tech shops like Dell (DELL, Fortune 500), Nokia (NOK), Texas Instruments (TXN, Fortune 500) have seen a challenging market turn more difficult.

Tech fans have held out hope that healthy growth markets outside the U.S. would help offset some of the swoon in stateside tech spending. But as Dell pointed out for the second time in two weeks, the IT spending slump is broadening in Europe and Asia.

The squeeze on Nortel highlights the even more rapidly deteriorating spending picture in the U.S. market. With Sprint (S, Fortune 500) and the other big phone companies putting a clamp on expenses, and big businesses trying to preserve cash through the economic turbulence, Nortel's opportunities are a bit hampered.

Nortel - a big player during the Internet construction boom - had never fully regained its footing after the industry collapse. Nortel's recovery process was also hampered by an accounting scandal in 2003 that led to a complete sweepout of the company's executive ranks. After the shakeup, Nortel hired Motorola's (MOT, Fortune 500) No.2 executive Mike Zafirovski as the CEO who could best restructure the company. Zafirovski trimmed business units and staff, but Nortel found stability to be elusive.

Zafirovski pulled out his well-worn ax again Wednesday.

"It is clear that the business environment in which we operate requires additional immediate and decisive actions," Zafirovski said in a press release. "A comprehensive review of our business is taking place and we are determined to reshape the company to maximize its competitiveness," Zafirovski continued.

Zafirovski's plans to seek buyers for the company's metro ethernet business come as a surprise - it was these high-capacity upgrade products that were considered Nortel's best hope for supplying the next generation of corporate networking systems.

But with few buyers and lots of gear suppliers, Zafirovski says the sale of this promising unit, "is in line with the further consolidation necessary in the industry."

Analysts were quick to surmise that Nortel's prospects now seem limited.

JPMorgan analyst Ehud Gelblum downgraded Nortel to sell from buy Wednesday, citing the U.S. spending slump and the weakness the company faces in two of its core businesses.

"We now believe it is unreasonable to assume that Nortel can grow either its carrier Ethernet or enterprise business materially in the near term," Gelblum writes. To top of page

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