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Nortel cuts 1,100 jobs, pension plan

Nortel, the telecom equipment giant, said it will cut 1,100 jobs, or 3.2 percent of its workforce, and squeeze its pension plan to trim costs and improve margins.
/ Source: Reuters

Nortel Networks Corp., the telecom equipment giant left out of the sector's recent mega mergers, said Tuesday it will cut 1,100 jobs, or 3.2 percent of its workforce, and squeeze its pension plan to trim costs and improve margins.

Nortel, which lost $2.58 billion in 2005, will eliminate about 1,900 positions around the world and create 800 new ones in "centers of excellence" in low-cost Mexico and Turkey.

It expects restructuring costs of about $100 million over two years, including $35 million in the second quarter.

The Brampton, Ontario-based company, said the changes will save it about $100 million in 2007 and $175 million by 2008 and help it meet its targets of growth in operating margins of more than $1.5 billion in 2008.

Several analysts lauded the initiatives, but said the struggling company — which has seen its payroll shrink from 90,000 employees to 35,000 over the past six years — needs further efforts to really get out of the woods.

‘No stranger to restructuring’

“Nortel is no stranger to restructuring. To date, its efforts have not been successful at returning the company to strong profitability,” wrote Scotia Capital analyst Gus Papageorgiou in a research note.

“Until management can deliver a clear strategic vision, we do not believe these initiatives alone can turn the company around,” said Papageorgiou, who has a ”sector perform” rating on Nortel's shares.

Desjardins Securities analyst Paul Howbold said the measures should have a marginal impact on Nortel's 2006 results.

“We view today's initiatives, and notably the headcount reduction, as being long overdue in light of the weakening telecom capex environment,” he wrote in a note to clients.

Howbold maintained his “hold” rating for the company and kept his stock price target of $2.50.

The stock has languished below $4 for much of the last year, a far cry from its tech-bubble high above $80.

Pension plan to be slashed

Nortel will also slash its North American pension plan to trim annual costs by about $100 million from 2008 and save more than $400 million by 2012. It will switch to a defined contribution plan in North America and change healthcare rules.

Nortel President and Chief Executive Mike Zafirovski, who left Motorola for Nortel last fall, said he was confident of progress in the company's turnaround.

“Today's announcements continue our efforts to increase competitiveness, better manage our costs, and secure the resources to fuel Nortel's innovation,” he said in a statement.

A.G. Edwards analyst Aaron Rakers said he maintained a cautious stance on shares of Nortel, but said further significant restructuring could prove positive for the company.

“We believe competitive dynamics will remain challenging and the company's restructuring efforts will remain a show-me story over the next several quarters,” Rakers wrote in a note.

Nortel has restated its results three times over the past three years after a string of accounting scandals. And the company was left on the sidelines in a recent wave of mergers in the communications equipment sector.

Last April, France's Alcatel said it would take over Lucent for $13.4 billion, forming a giant that could match industry leader Cisco System Inc. .

Last week, Nokia and Siemens said they would combine the bulk of their telecom networks businesses, a deal valued at $25 billion-$31.5 billion.

Several analysts have said Nortel needs to complete its turnaround before considering possible transactions.

Analysts have forecast a Nortel profit of 1 cent a share in the second quarter. The company lost $167 million, or 4 cents a share in the first quarter.