installed base) will be candidates for shutdown or sale to the highest bidder.

Industry restructure

We believe, though, that in Nortel's bankruptcy lies the opportunity for broader industry rebalancing. Specifically:

Taking on Cisco: In data networking, Cisco remains dominant in every region and in most product segments. In 1H08 its $20.2 billion revenues were second worldwide in telecoms supply only to Nokia/NSN, and Cisco's financial results are far stronger: 1H08 net profit margin of just under 19%, and a level of cash and short-term investments 10.3Ã— its monthly opex. For the same timeframe, Cisco with its peer group averaged a 6% profit margin and a 4.0Ã— ratio of cash/investments to opex. Cisco uses its market power and cash horde wisely to enter into new markets.

For a company targeting Cisco, bits and pieces of Nortel's Enterprise and MEN units are clearly attractive. Juniper, Tellabs, and Ciena would benefit from looking carefully at Nortel. All have some experience with growth through M&A, and have geographic and cultural similarities. They also have some product overlap, but buying a competitor just to get them out of the market is not an unheard of strategy. More important, Nortel has channel depth outside of North America, which is of high value to these companies.

40G/100G jumpstart: MEN's 40G/100G business, which Nortel now puts at 42 customer wins - defined as purchase orders or contracts that include 40G, not deployments - is an attractive focal point for a slimmed down Nortel or a competitor looking to limit its own R&D and jumpstart its customer list. Nortel has done a good job promoting its solution's viability over competitors' networks, so virtually all its competitors should be interested in this asset.

Diversification through acquisition: Ericsson's purchase of Marconi and Redback - after their respective bankruptcies - provides a blueprint for what is likely to be the ultimate outcome for Nortel: acquisition by a firm looking to fill out its equipment product line. For example, Ericsson and NSN both have gaps in their wireline portfolios and little position in enterprise. Acquiring significant chunks of Nortel may be attractive to both, and their relatively high cash reserves could make it possible: as of September 2008, both vendors had just under $10 billion in cash and short-term investments.

Evolution to 4G: Nortel's mobile infrastructure business is now focused on LTE/SAE (long term evolution/system architecture evolution). It is working hard to develop a strong LTE/SAE ecosystem including LG Electronics, LG Nortel, and other partners. It is doing its best to demonstrate its capabilities through trials (e.g. Verizon and T-Mobile Germany) and announcements (e.g. a deal with KDDI) and expects some commercial launches in 2009. Its LTE assets (part of the Carrier division) may be attractive for another player, perhaps Alcatel-Lucent, NEC, or ZTE.

There may also be some "Ëœrediscovered jewels' from the recent acquisitions that became lost in the Nortel shuffle (e.g. Tasman) and may be of specific interest to some acquirers. Nortel emphasizes that its decision to file now - when its cash reserve is $2.6 billion - rather than 6-12 months down the line gives it added flexibility. That may be so, and may allow it to re-emerge as a smaller, better version of itself in the future.

However, the scenarios mapped out above, in which rivals use Nortel's bankruptcy filing as a chance to reshuffle the supplier landscape dramatically to their benefit, seem more likely. While public credit markets are tight and investors cautious, more aggressive capital sitting on the sidelines may also see this as an opportunity too ripe to pass up.