Industry Committee on Aug. 7th, 2009

[Mike Lazaridis]

This week.

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

Okay. So you've been talking to the minister as well.

Have you reached out to Ericsson in any way to talk to them as well and explore opportunities, potentially?

[Mike Lazaridis]

My staff has reached out to all the parties and has continued to reach out to all the parties. Some have been successful, and others have not.

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

Okay.

I'm just going to transition--we're limited on time here--to this national security question again. I'm still having a hard time getting my head around how this technology would represent a national security issue.

I use a BlackBerry, as most of us do. My wife would say I'm horribly addicted to it. It has the Rogers name on the bottom. As you probably know, the Rogers network was set up by Ericsson back in 1984, and they continue to maintain that network now, I believe exclusively. I believe they have several Canadians working in R and D that contribute to that network. Are we facing a national security risk in any way, in your view, by using BlackBerrys on the Rogers network?

[Mike Lazaridis]

I would argue that if you don't use BlackBerry--sorry for the plug--you may be facing a national security issue, because we design security into our products. It was not designed into the networks. It is critically important that we understand where these networks are vulnerable so that we can build it into the standards going forward. This is our opportunity with the 4G technology.

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

But I would imagine that for a business, as you're developing technology with the view to selling that technology around the world, it's in your business interest to make sure that the security features are built in, and further, that governments choosing to use those technologies around the world would make their business decisions based on the national security features built into the technology.

Would that be accurate?

[Mike Lazaridis]

Certainly you would expect that to be the case, but that has not, sadly, been the case in the past.

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

I'll move to one last thing. The big question, I think, heading into this for a lot of people was why RIM never made a bid. I think you've talked about that a little bit in terms of some of the limitations to your making a bid. But in terms of the stalking horse process, if RIM had made the stalking horse bid, would you not have defined the parameters, in a sense, that all of the other bids would be defined by or judged by? Would it not have been one way around this to kind of negotiate a way to make the stalking horse bid in the first place?

[Mike Lazaridis]

We have to be very careful with 20/20 hindsight. The important thing was that we already thought we had a deal for the assets under the terms that we found acceptable. Then, when the auction was opened up and there were the other players, the stalking horse bid had already been made by NSN. So we couldn't change it. That's the key thing.

Remember, we felt we were done. We felt we had a deal. Then it just completely changed.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Lake and Mr. Lazaridis.

Mr. Rota.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Thank you for being here today.

This morning we heard a lot of statements regarding scale and how necessary it is to have a certain amount of scale in this industry to have credibility, an ability to produce, and have your product on the market.

It sounds like a silly question, but do you believe your company has the scale to take on Nortel Networks and the assets that they have?

[Mike Lazaridis]

That's a very interesting question, and I want to be clear in my answer.

The first thing you have to understand is that it's not scale, it's quality and innovation and ability to service your customer. Those are the number one most important things. If that weren't the case, RIM would not be the number one smart phone supplier in North America. So that's important.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

I needed to hear that, because--

[Mike Lazaridis]

The second thing is, yes, we do have the scale today to be able to support this R and D and make sure it benefits our country.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Very good.

It was mentioned earlier that you worked with the minister this week. Had RIM worked with the minister or this government prior to the change in the agreement? Obviously you've worked since, because you met this week, but prior to the agreement taking place, had you worked with government officials or the minister to make it happen or to make sure everything was in place?

[Mike Lazaridis]

I would not say that we worked with the minister to make sure anything happened. We kept him up to date because we felt that it was an important Canadian issue. In some cases we seek their guidance, but that's about it.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

It almost sounds like there was a conspiracy in place, and I hate to use that word, but I'm going to ask a question about promises that were made by Nortel.

Obviously you felt that you had a deal, you got to a certain point, you were ready to go, and all of a sudden the agreement changed somehow. Licensing seems to be one of the ways out of the agreement. Do you believe that might be one of the ways the deal was changed enough so that maybe there was an out to the agreement you had?

[Mike Lazaridis]

Yes, it's my belief that there is enough room in the current situation to make sure that if all the parties got together, we'd at least have an opportunity to come up with something more palatable to all the parties.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

In a press release issued on July 20, your company announced that, based on the preliminary review, “RIM [was] prepared to pay in the range of U.S. $1.1 billion, subject to due diligence and the entering into of appropriate ancillary agreements, for the CDMA and Long Term Evolution Access businesses and certain other Nortel assets”.

What are those other assets that you were interested in?

[Mike Lazaridis]

I think we were fairly clear on that: the LTE assets and the LTE patents as well.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

But no other assets, no hard assets, no commitments that the company would have that came with the corporation?

[Mike Lazaridis]

When you read it, there was the purchase of the actual business, which was not contemplated originally because that was never offered to us before they entered bankruptcy. Then, as I said, once they entered bankruptcy, the scope changed and increased because there was more available and they were more interested in selling more. We increased that scope again, but then when the stalking horse bid came in, it was a much bigger business purchase. So we said yes, we would put in $1.1 billion on that bid, based on due diligence, because we didn't have much time, but we also still wanted that piece that we were negotiating for, together. So that's the extra piece that's mentioned in there.

[The Chair, Conservative, Michael Chong]

Thank you very much.

I want to close, as chair, with one final point before we suspend.

You've indicated that RIM was precluded, as part of the auction process, from bidding on both assets, what you call the LTE assets and other certain LTE assets, at the same time, in the same auction process, but the courts have decided to separate these two assets into two separate auctions. They did this to maximize the money raised from the disposition of Nortel's assets so that Nortel creditors and pensioners could get as much money as possible for their bonds and for their pensions.

To me, there seems to be a bit of an inconsistency here, because your colleague Mr. Balsillie has argued that under one court-supervised bankruptcy proceeding in the southwestern United States, at Phoenix, the auction be awarded to the highest-dollar bidder, that the successful bidder be allowed to be a foreign buyer, and that the successful bidder be allowed to move the business outside the country. Yet on the other hand, at another court-supervised auction proceeding in the northeastern United States and here, you and your colleagues believe the auction should be split up, that the auction be awarded not to the highest-dollar bidder, that the successful bidder not be a foreign buyer, and that the successful bidder not be allowed to move the business outside the country.

You've put our government in a very difficult position, because foreign direct investment is a very important part of the Canadian economy, and we as governments need to be consistent about FDI rules and about the applications of those rules. As chair, that's a point I want to make.

I thank you both for spending the time, on very short notice, to appear before our committee.

I will suspend this meeting for 30 minutes.

[The Chair, Conservative, Michael Chong]

Good afternoon. It's 12:15 and we are coming out of suspension.

Good afternoon, 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.

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

We have in front of us four representatives from Ericsson Canada Inc.: Mr. Mark Henderson, president and chief executive officer; Monsieur Michel Peladeau, director of finance; and Monsieur Paul Schabas and Monsieur Richard Corley, legal counsel for the firm.

Welcome to you all.

We will begin with a ten-minute opening statement.

[Mark Henderson, President and Chief Executive Officer, Ericsson Canada Inc.]

Good afternoon.

Good afternoon.

Mr. Chairman, my thanks to you and your fellow committee members for this opportunity to appear before you today.

We're here to discuss Ericsson's acquisition of the assets from Nortel and how we believe it will benefit Canada. I and my colleagues have already been introduced, so we can go on from here. I'd like to take the first few minutes to talk about Ericsson's presence in Canada.

Ericsson in Canada began operations in 1953 and has gone on to become one of the top innovation companies in this country. In fact, over the past decade we have invested more than $2 billion towards R and D in this country.

We currently employ 1,900 people across the country, including 1,500 at our Montreal facility, which is one of Ericsson's largest R and D centres outside of Sweden. The remainder of our employees are based in Mississauga, Ontario, and in Vancouver, British Columbia. Once the acquisition is complete, we will employ approximately 800 more people in Canada, and our investment in R and D in this country will grow accordingly.

Our Canadian employees have contributed over 330 patents to Ericsson over the past quarter century, and we are confident that with the addition of Nortel's competence in Ottawa as a result of this acquisition, this level of innovation will continue.

Throughout its history in Canada, Ericsson has built much of the vital telecommunications infrastructure in this country. We have been the exclusive supplier of wireless technology to Rogers for the past 25 years. We also supply telecommunications solutions to Bell, Telus, and other Canadian operators, and to utilities in Quebec and New Brunswick, and have been the trusted supplier to the Government of Canada and the Department of National Defence.

As well, we are currently working with a number of Canada's new entrants into the wireless market. In fact, just this week we announced a major contract with DAVE Wireless, in which Ericsson will be supplying a wireless network in key markets across Canada.

Ericsson's history in Canada has shown that we have worked hard over decades to build a significant customer base, with a focus on growing innovation, job creation, and telecom leadership. We are committed to continuing this dedicated effort towards innovation and in providing leading-edge solutions to our customer base, both existing and new. In short, our commitment to Canada is strong and long-lasting.

As you know, Ericsson has entered into a purchase agreement to acquire substantially all of Nortel's North American CDMA business and certain LTE assets for $1.3 billion U.S. on a cash and debt-free basis. The deal is a result of an auction initiated by Nortel, which was closely supervised by the bankruptcy courts in both Canada and the U.S. The auction was open to all qualified investors, including Canadian investors, and was designed to maximize value for Nortel and its stakeholders. The auction was for a specific group of assets and number of employees predetermined by the court process. The auction process was determined by the presiding judges to be fair to all.

The Nortel CDMA business covered by the agreement is successful from both technological and profit perspectives, and it is our intention that this will continue. It will operate largely as a separate unit within Ericsson, led by its current management, headed by Nortel's president of Carrier Networks, Canadian Richard Lowe, who I believe appeared here earlier today.

While the CDMA business unit is a leading provider of network equipment to wireless carriers in this market, CDMA technology is experiencing a gradual decline as it's replaced by the next generation of wireless technologies, including LTE, or long-term evolution. These next-generation technologies provide faster data speeds, enable new broadband services, and enhance the consumer experience overall on mobile devices.

As it's these LTE assets that seem to have generated the greatest interest in the acquisition, I would like to clarify the nature of the agreement with respect to LTE technology.

There are two components. First, we will employ approximately 800 Canadian Nortel employees, of which approximately 400 are directly involved with LTE development. Second, we are licensing certain LTE patents on a non-exclusive basis. To be clear on the latter point, we are not purchasing any LTE patents from Nortel; we are simply licensing them on a non-exclusive basis. Nortel will remain the owner of its LTE patents and will be free to license or sell them to other companies, should they choose to do so. Therefore, these patents remain in the ownership of Nortel. These assets and rights being acquired are extremely complementary to Ericsson and upon completion of the acquisition they will make Ericsson one of the leading wireless technology and service providers in North America.

In response to comments in the press about national security, I note that CDMA networks, as we heard earlier today, are based upon common international standards, which means that the technology is widely shared in the industry. Consequently, we don't see national security concerns applying to this acquisition.

The approximately 800 Canadian Nortel employees who work in these areas, both CDMA and LTE, will be employed with substantively the same pay and benefits and based in the same locations. We do not anticipate any layoffs or major changes in the day-to-day work of these employees.

We see this acquisition as an opportunity to continue the tradition of excellence in innovation, with Canadian technology jobs being preserved and ultimately more being created, to continue Ericsson's significant investment in Canadian R and D, and to sell made-in-Canada technology solutions to our customer base around the world.

While the book value of the acquired assets is below the threshold under part IV of the Investment Canada Act, it is nevertheless the case that the proposed investment will benefit Canada. For example, the proposed investment affords an opportunity for Nortel's research to join Ericsson's global research force and to share knowledge and best practices with Ericsson Canada's researchers. It will assist Ericsson to keep Canada at the forefront of technological development with respect to next-generation wireless technologies such as LTE.

The benefit of this transaction will help fulfill the government's goal of attracting foreign direct investment in order to increase Canada's productivity. Ericsson will employ the approximately 800 Nortel employees in Canada defined by the court-approved auction. Ericsson's R and D facility in Montreal is one of its largest worldwide and is one of the top R and D firms in the country.

Ericsson has been a trusted supplier to this market for almost 60 years and will continue a high level of customer service to its existing and new customers. Ericsson has every intention to continue its presence in Canada, and the proposed investment will help ensure that Canada remains a very important part of Ericsson's global strategy.

Finally, Ericsson's history in Canada demonstrates a sustained commitment to carrying out not only sales but also high-level R and D that contributes to Canada's long-term prosperity and productivity. As a result, we believe this is a good opportunity for Nortel, for Ericsson, and certainly for Canada.

Merci beaucoup. Thank you again for this opportunity to speak to you. We'd be happy to answer any questions you may have at this time.