Nortel To Sell Manufacturing Operations To Flextronics - InformationWeek

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Nortel To Sell Manufacturing Operations To Flextronics

The move could raise about $500 million and create long-term savings for the troubled company.

Nortel Networks Corp. is selling its remaining manufacturing operations in a move that could raise about $500 million and create long-term savings for the company as it deals with accounting investigations in the United States and Canada.

The telecommunications equipment supplier said Tuesday it is turning over factories that employ 2,500 people in Canada, Brazil, Northern Ireland, and France to contract manufacturer Flextronics International Ltd. The sale will leave Nortel with 32,500 employees, down from 95,500 in 2000.

Brampton, Ontario-based Nortel, Canada's biggest technology company, had already divested 85 percent of its manufacturing operations over the past five years. The possibility of this deal with Flextronics had been disclosed in January.

Getting out of manufacturing will "enable us to respond with increasing effectiveness to significant ups and downs in market demand and customer needs," said the president of Nortel's global operations, Chahram Bolouri.

The factories had accounted for $2.5 billion in annual costs for Nortel. Cutting them from the mix is expected to add $75 million to $100 million to Nortel's before-tax earnings within four years.

Singapore-based Flextronics, a $14.5 billion contract manufacturer for many telecom and computer companies, is paying Nortel $475 million to $525 million for inventory and equipment, plus $200 million for engineering and design assets.

However, Nortel will incur about $200 million in costs related to the transition. That includes potential severance costs for employees, although Nortel spokeswoman Tina Warren said the affected workers "will have the opportunity to work for Flextronics."

The sale of the factories affects about 900 Nortel employees in Montreal; 650 in Calgary, Alberta; 380 in Monkstown, Ireland; 330 in Chateaudun, France; 100 in Ottawa; 30 in Campinas, Brazil, and 60 who are scattered at other Nortel sites.

Lehman Bros. analyst Steven Levy said Nortel's strategy posed only slight risks. Although companies that outsource manufacturing generally lose some flexibility and control, he pointed out that contract manufacturers like Flextronics often handle production faster and more efficiently. "I think the outsourcers have gotten the process down sufficiently," he said.

Nortel has yet to resolve accounting investigations by Ontario regulators and the U.S. Securities and Exchange Commission, though the company fired chief executive Frank Dunn, chief financial officer Douglas Beatty, and controller Michael Gollogly in April.

The company has said it will restate earnings for the past four years, with the $732 million profit it initially reported for last year likely to get cut by half; losses reported for 2001 and 2002 are expected to be reduced.

Nortel said Tuesday it expects to provide "updated assessments" of the restatements in mid- to late July. The current year's results also are expected to be released late.

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