Industry Committee on Aug. 7th, 2009

[The Chair, Conservative, Michael Chong]

Order. Good morning.

Good morning, everyone.

Pursuant to Standing Order 108(2) and the motion adopted by the Committee on Friday, August 7, 2009, we are studying the proposed sale of certain Nortel Networks assets.

We're here today, pursuant to Standing Order 108(2) and the motion adopted by this committee on Friday, August 7, 2009, to study the proposed sale of certain Nortel Networks assets.

I'd like to welcome our three witnesses this morning. From Nortel Networks Corporation, we have Mr. George Riedel, who is the senior vice-president and chief strategy officer; Mr. Richard Lowe, president of Carrier Networks; and Mr. Derrick Tay, legal counsel.

Welcome to you all. We thank you for appearing in front of our committee.

We'll begin with a 10-minute opening statement.

[George Riedel, Senior Vice-President and Chief Strategy Officer, Nortel Networks Corporation]

Good morning, Mr. Chairman. Thank you.

My name is George Riedel. I'll briefly introduce my colleagues. Richard Lowe, as has been said, is the president of the Carrier business and will be answering business-related questions. Derrick Tay, from Ogilvy Renault, will handle any legal issues.

There is a matter of protocol, Mr. Chairman; we have a document that we received from the courts only yesterday, and as a result, it's only in English. I gather we have to table this document for consideration for the committee to be able to talk to it later. We did not have time to translate it, so our apologies.

[The Chair, Conservative, Michael Chong]

We'll accept the document. You can table it with us. I'll instruct the clerk to have it translated into both official languages and have it distributed later to the committee members.

[George Riedel]

Thank you, Mr. Chairman.

So let me make a few comments, please.

Nortel operates, as you know, in an integrated global industry as an integrated global company. It's important, in terms of the implications, to set the stage here. We have, as of January, a number of jurisdictions where we are filed. These jurisdictions have certain considerations about how they deal with our assets and our intellectual properties. The sale of any of our businesses or any of our intellectual property rights requires the participation of all these jurisdictions--Canada, the U.S., EMEA, and the like. As a result, it's a complex equation that we have to sort through. Consequently, there is really no “Canadian only” answer to any business question here, because each of these estates has to be consulted and involved.

As you may know, the Canadian estate is in part funded by the other estates. So part of the equation that we try to solve for here is maximizing value. Preserving jobs and maximizing value is what we're trying to achieve here. Things that would interfere with either the funding of the Canadian estate or the transparency or the integrity of the process bring that into challenge. So our intent is to, in a complicated equation, maximize value and preserve as many jobs as possible.

Let me put that in the context of the global wireless industry we operate in. The global wireless industry is about $50 billion in capital expenditures. The business we're talking about today has about $2 billion in revenue. So we're about number six or number seven in that industry on the global scale.

Consolidation is a requirement in this industry. Customers have consolidated already. The vendors are continuing to face pressures to generate additional returns. Scale is a very important requirement for competition--scale in terms of R and D, scale in terms of footprint, scale in terms of balance sheet. So it's in that backdrop that we sit here today to talk about the transaction.

We went through a process, a process that was approved by the courts in both Canada and the U.S. That sales process has been overseen by our number of creditors as well. The court monitor has been involved. A range of advisers has also been involved. The courts have found conclusive evidence, supported by the monitor, that the process was properly followed, and they have approved the sale.

As I mentioned earlier, yesterday we received a document from the court here in Canada. It's worth noting that the court has reaffirmed that any party who wanted to bid for the business and complied with the bidding procedures was permitted to do so. That's an important fact to get on the record. Secondly, the court found they were satisfied that the unchallenged record clearly established that the sale process had been conducted in accordance with the bidding procedures and the guidance of the court.

So basically, we followed a process. The court was very firm with us about wanting apples-to-apples comparison of the stalking horse bid so that it was able to determine what was the best and highest value for this asset. There were objections throughout the process. Those objections were dealt with and resolved. But the courts have in fact guided us as to how to execute this process, and endorsed the process.

Our third point is that one of the comments made in the press and by others is that we have somehow utilized federal funds to develop this technology. It's important to point out that in the last 10 years, Nortel has not been able to utilize federal R and D tax credits to fund either the CDMA or the LTE technology development in Canada and the generation of related patents. Specifically, Nortel has suffered cumulative tax losses since 2001 and has not used any R and D tax credits to reduce its federal tax liabilities. As such, these technologies have not been developed by federal direct grants contributed to the company.

Fourth, on the value of these assets relative to the Investment Canada Act, we have conducted an analysis of the assets being acquired by Ericsson. The book value of these assets is $149 million U.S. That's $111 million in current assets and $38 million in fixed assets. So the total of $149 million does in fact fall below the threshold of $312 million in book value.

It's important to note the difference between book value and market value. The purchase price paid in the auction was in excess of that book value. Market values tend to be higher than book values because they capture a range of benefits in the intangibles--customer relationships, brand, intellectual property, growth opportunities, and the like. The distinction between the asset purchase price paid by the auction versus the book value is explained by that.

The other point I'd make is that the analysis was conducted in conjunction with PricewaterhouseCoopers to do the carve-out economics for the balance sheet. So we feel very good about the comment that it does in fact go below the threshold of $312 million.

The fifth point is that it's important to note that both CDMA and LTE are open standards. They are technologies developed around the world that are embraced by a number of vendors and are set by standards and committees in the industry. And in our mind in regards to any national security issue, it doesn't appear to us that this poses any significant concern. They're open standards; they're international technologies. We're not aware of any issues, but we are obviously happy to work with the government to confirm that this sale does not in fact raise any national security issues.

In addition, there has been a question about the sale of, or situation with, our remaining patents. Nortel has a very rich intellectual property portfolio. Some of these patents are being assigned to businesses, and some of them will be held for further evaluation. No process has been put forward yet for the sale of the remaining Nortel patents. Any process that we would put forward would have to be discussed with the court monitor, the credit constituencies, and be brought forward to the courts for approval, where any interested party would be able to participate in that process.

In summary, our view is that this is a good deal for Canada, as Ericsson's purchase of these Nortel CDMA/LTE assets preserves jobs, creates growth, and provides certainty for customers, partners, and employees.

And those are my remarks, Mr. Chairman. Thank you.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Riedel.

We'll have about an hour of questions and comments from members of this committee, beginning with Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chairman.

I would like to start with a few remarks. The Liberal Party very clearly recognizes the importance of the knowledge economy for the future of our country, and our leader has very clearly said so on numerous occasions. As we all know, Nortel has more than 5,000 patents and a talented staff of researchers, scientists, engineers and technologists whose jobs are at stake. We should also not forget retirees whose pensions are at risk. This is the largest corporation in Canada in terms of R & D expenditures. When this kind of corporation is being dismantled and is at risk of disappearing, we as parliamentarians definitely all have a duty to examine this extremely important situation for Canada's future.

The Liberal Party very clearly relies on the high technology sector to ensure our country's future prosperity. That's why our leader, Michael Ignatieff, sent a letter to the Prime Minister last week to encourage him very strongly to focus on this issue in view of its importance for Canada and Canadian taxpayers.

With that preamble,

First of all, I would like to thank Mr. Riedel, Mr. Lowe, and Mr. Tay for being here this morning. We very much appreciate the fact that you are here to help us shed some light on what has been happening, as you pointed out, to some extent, in the media or behind closed doors. So we definitely want to shed light on many unanswered questions, and I do appreciate some of the clarifications you have provided.

I'd like to focus my first question on any meetings that have occurred between Nortel and the federal government over the course of roughly the last year and a bit.

When it became clear to Nortel that it was not going to be possible to engineer the turnaround and you began to contemplate options, did Nortel management meet with federal officials? If the answer to that is yes, I would like to hear from you how those meetings unfolded.

[George Riedel]

Let me start.

We had a number of meetings with both the federal and Ontario governments. On the federal side, about 13 different meetings took place beginning in the fall of last year and going through January of this year. Those meetings were about seeking support for a plan for Nortel. A number of different plans were discussed, because we were looking at a range of options. There was an ask on the table for funding and support for those plans.

At the end of the day, the government chose to not provide any pre-filing support. The feedback we got was that the government did not see the plan or plans presented as being viable; the industry was not at risk, unlike other industries like auto; there were no overarching national interest issues; and perhaps most troubling for us, the Nortel brand was politically tarnished by the range of challenges and legacy issues we had to deal with. As a result, there was no support.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Riedel.

If I can summarize what I've just heard, you said that the government did not consider the plan you proposed to be viable; it did not consider the industry to be in the same predicament as perhaps GM and Chrysler; and the brand had been tarnished. I would like to ask you for a little more clarification on that specific issue of the brand being tarnished.

[George Riedel]

The best I can do is offer some comments around the well-chronicled set of challenges that have faced Nortel--whether they were financial, operating, or other--and the concern that the business had reached a point where it was difficult to see a successful turnaround.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

Getting back to another point you made about the plan not being viable, did the government specify in which way it considered the plan you proposed to not be viable?

[George Riedel]

To go back to one of my opening remarks, the industry faces significant scale challenges. In the businesses in which we operate, the R and D required, the balance sheet required, and the footprint in terms of global reach required all represented structural challenges to the business. So it was our view and the government's view that without a resolution to some of the structural challenges—some form of partnership or merger to address some of the scale challenges—while you could continue to see some operating profitability in the short term, on the horizon as you looked down the track it was very difficult.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

You mentioned 13 meetings. Can you give me the time scale from when the first meeting occurred until when the last meeting occurred?

[George Riedel]

I can. The first meeting occurred on October 6, 2008, and meetings continued until June 2009.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you. Perhaps we'll come back to some of these points later on.

I would like to begin a second question on financial support. You very clearly said that Nortel could not avail itself of SR and ED credits for its CDMA and LTE technology, and therefore there was no direct investment.

I am very interested, on behalf of the government and taxpayers, in knowing the big picture on financial support going back quite some time, because Nortel became a very big player. I think we need to get some idea of the financial assistance that has been provided to Nortel going back a few decades, because it's all part of a long progression. Have SR and ED credits been used in other areas of technological development other than CDMA and LTE? Has EDC financing been used by Nortel over time? Have other forms of government financing, such as TPC and DIP, been made available? I want to get a sense of how much investment has been made by the government.

I realize you may not have those figures at hand, but we would ultimately like to get a sense of that to know to what extent the government has been involved in the financing and development of Nortel.

[George Riedel]

Let me try to take each one in turn.

In 2003 EDC stepped in to provide a bonding facility that enabled us to post performance bonds for support of customer commitments, not R and D commitments. So they were very helpful in providing a bonding facility so we could sell a network or a piece of technology in different markets. At that time the facility ranged between $250 million to a maximum of $750 million, so that was very helpful.

In more recent times EDC provided post-filing support of $30 million to help us continue to operate after the January filing. That's the extent of my knowledge on EDC funding.

On the SR and ED tax issues, my knowledge only goes back to 2001. Prior to that, I'm sorry, I just don't know. I can find out. As I mentioned earlier, from 2001 on we were not able to use those tax credits because of the losses.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Riedel.

Mr. Bouchard, go ahead please.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

Thanks as well to you for coming to testify before the Industry Committee.

I must tell you that we of the Bloc Québécois are open to the idea of studying this Ericsson-Nortel transaction in committee. We want to know the impact of that transaction so we can determine whether it is beneficial for Quebec and whether Ericsson's commitments are indeed met. I assume that, in the context of that transaction, you have had to talk about projects and development, and we hope that Quebec receives its share.

I must also tell you that, at first glance, we are in favour of this transaction, but we want to know its conditions.

We are pleased to have learned that the legal proceedings have been conducted within a regular framework. I even read the comments by one judge who expressed a certain amount of enthusiasm over the way it had taken place. We are taking part in this committee meeting in order to carefully examine the guarantees given by Ericsson regarding the number of jobs retained in Quebec and the pension fund. We also want to ensure that the rules have been followed.

I'll give you an example of a situation that we had back home—I come from the Saguenay-Lac-St-Jean region of Quebec. Rio Tinto, a foreign company, acquired Alcan, a Canadian company that had its headquarters in Montreal. Our party had set certain conditions, but unfortunately the minister approved the transaction in haste. Even though we made those conditions known, the minister quickly short-circuited us and imposed no conditions on Rio Tinto. I therefore believe it's normal to have a discussion on this to ensure that Quebec receives its fair share.

Earlier my colleague talked about timetables, about the date of the end of negotiations. That timetable no doubt includes stages. When did you start the negotiations? Was there an important stage that occurred on a given date? When did you complete the negotiations? I know the date because you mentioned October 6, but I would nevertheless like you to give us an overall picture.

[George Riedel]

Let me make sure I address your question correctly. It's the negotiations with Ericsson that you're speaking of?

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Yes, indeed.

[George Riedel]

Okay.

Let me try to take this in two stages. In the court-approved process, you go through what's called creating a stalking horse. We had several conversations, starting in the fall of 2008, with a number of parties to create a stalking horse. Ultimately, Nokia Siemens Networks prevailed, on June 19, to become that stalking horse. That defined the scope, the terms, and the arrangements for this asset sale. That then created an auction process, which concluded, as you know, two weeks ago with Ericsson and the winning bid.

In terms of the actual negotiations between the different parties, we've been talking to Ericsson since June of last year, on and off, about opportunities to do something together. In earnest, they picked up pace and intensity in the May timeframe of this year, and then concluded with the auction process just recently.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

During that period, you no doubt had contact with Industry Canada officials or perhaps even with the minister. Did you provide Industry Canada with any documents? What kind of information did you communicate to Industry Canada?

[George Riedel]

I'm not aware that we produced any documents on this topic for Industry Canada. I can go back and check the records, but I'm not aware that we did produce any documents on this topic.

Derrick, go ahead.

[Derrick Tay, Legal Counsel, Nortel Networks Corporation]

Perhaps I can add some further clarification on that.

In the court-approved process, what the court was trying to do was to provide a process whereby, number one, the market could be tested in terms of the scope of assets, and number two, we had a process that would get us the best deal possible. That means getting not only the highest price but also the cleanest deal. As a result of the auction, a lot of the conditions that were originally attached to the stalking horse bid and to other people's bids were removed so that we got as clean a deal as possible.

These deals are always subject to the extent that, by law, any regulatory approvals are needed. The deals would be subject to that. As Mr. Riedel has said, based on the existing tests under the Investment Canada Act, we do not meet the threshold. So there was no communication during that process with the government.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Tay.

Merci, Monsieur Bouchard.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

Thank you to the witnesses for appearing before us today.

In your opening comments, you talked about maximizing value and preserving jobs as the goals here. In the area of maximizing value, I know it's not really a particular focus of the study today, but we'd be remiss if we didn't address the issue of the pensioners who are on the Hill today. I'll take a couple of minutes to do that right now and then follow up with some questions more related to the topic of study today.

In your opinion, as you maximize value through this process, this auction and future auctions, what impact will that have on your ability to address some of the concerns of Nortel pensioners and former workers who've been fairly severely impacted by developments with Nortel over the last few years?