Nortel customers don't need to panic, analysts say

But big customers should start looking at other vendors

Nortel Networks customers: Don't panic and rip out your Nortel gear.

That's the advice of analysts who follow the Toronto-based network equipment provider, which filed Wednesday for protection from creditors under chapter 11 of US bankruptcy laws.

While the Chapter 11 filing may sound dire, it is not as serious as it might have been with a Chapter 7 filing. The Chapter 11 law is designed to give companies in financial trouble some to organize a plan for paying off debts, analysts noted.

But having Nortel in Chapter 11 can be a thorny problem for the CIO of a large company that has entrusted its vital networks to Nortel, especially because Nortel has been under financial strain for around four years and faces debts of US$4 billion, analysts said. The company's stock price has slipped well below a $1, and closed Tuesday at 32 cents.

"If I was a board member of a company using Nortel for mission critical needs, I'd be asking the CIO what the hell they were doing," said Zeus Kerravala, an analyst with Yankee Group in Boston.

Kerravala said that a potential bankruptcy filing was expected last fall, so Wednesday's news is not a surprise.

At the same time, Kerravala and analyst Jack Gold of J.Gold Associates, said nothing urgent has happened Wednesday. In fact, a Chapter 11 filing will help Nortel protect what cash it has, they noted.

What CIOs face is a more strategic decision, and if they are undergoing a upgrade of a part of a network, it might be time to look to other vendors, analysts agreed.

"Nortel does face a customer perception issue with customers saying, 'Do I want to invest any further money with a company whose future is unclear?'" Kerravala said. "When they come out of Chapter 11, they may look a lot different, but during this period, Nortel won't invest in small companies with innovative technologies."

Gold said that big Nortel customers need to weigh what is happening carefully. "If I were a big company using all kinds of Nortel gear and I was facing an equipment refresh, I'd be very hesitant to use Nortel," he said

In a video address on the company's Web site, Nortel CEO Mike Zafirovski addressed Nortel customers head-on, assuring them that Nortel is "100 percent commmitted to customers" and that Nortel employees "all remain very committed to the future of Nortel."

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