Hitachi and Huawei Potential Bidders for Nortel Carrier Business

The consensus opinion, which I shared, was that bankrupt Nortel’s next step in its systematic dissolution would involve the auction of its Metro Ethernet Networks (MEN) business unit.

Instead, Nortel and its bankruptcy stewards have thrown a curveball, choosing to auction off its carrier-networks business first. From a Nortel press release issued yesterday:

Nortel Networks Corporation [OTC: NRTLQ] announced today that its principal operating subsidiary, Nortel Networks Limited (NNL), and its U.S. subsidiary, Nortel Networks Inc., plan to sell, by auction, the assets of its Carrier Networks business associated with the development of Next Generation Packet Core network components (Packet Core Assets). The Packet Core Assets consist of software to support the transfer of data over existing wireless networks and the next generation of wireless communications technology, including relevant non-patent intellectual property, equipment and other related tangible assets. In connection with this proposed sale, NNL also expects to grant the purchaser a non-exclusive license of relevant patent intellectual property.

As recounted at Unstrung, much of the technology in Nortel’s Carrier Networks business was developed from the acquisition of Sunnyvale, Calif.-based Shasta Networks, purchased in 1999 for cash and stock valued at $340-million. Building and extending that platform, Nortel has competed active in the mobile-data infrastructure market for the past decade, so the technology in the business unit is proven and tested.

Nonetheless, as the foregoing excepted paragraph from the Nortel press releases states, the buyer of the carrier-networks business will not relevant patents. Nortel will keep those for now, just as it kept its LTE patents. Rather than getting patents, the acquirer of the carrier-networks business will obtain a non-exclusive license to use relevant patents associated with the products and technologies included in the deal.

This approach is identical to the one Nortel took in auctioning off its wireless-business assets, eventually nabbed by Ericcsson for $1.13 billion. If you’ll remember, Ericsson procured the products and technologies comprised within the wireless business unit, but it did not get its hands on the LTE patents, which Nortel retained. Ericsson was granted non-exclusive rights to the LTE patents, however.

That provision antagonized RIM, which wanted the LTE patents and the unencumbered rights to license them on terms of its choosing. Hoping to scupper Nortel’s deal with Ericsson, RIM unsuccessfully appealed to the Canadian government on patriotic grounds, arguing that valuable intellectual-property assets were being sold into foreign hands. What was interesting about RIM’s case was that the Blackberry maker had no intention of acquiring the wireless business unit, which is involved in markets far removed from RIM’s strategic remit. Instead, RIM’s acquisitive sights were fixed exclusively on the LTE patents.

Apparently, Ericsson and RIM are set to battle for the LTE patents when Nortel decides to auction them off. Now we’ll have to wait for Nortel to decide when auction off the patents associated with its carrier-networks business, too.

As for likely candidates that will bid on Nortel’s carrier-networks business, Unstrung’s Craig Matsumoto thinks Hitachi is a probable player . He notes that Hitachi has been working with Nortel on an LTE packet-core network for Japanese operator KDDI Corp. What’s more, HItachi opened an LTE core-architecture R&D center in Richardson, Texas, next door to a Nortel R&D facility.

Just down the road is Huawei, which officially unveiled an LTE laboratory this summer in Plano, Texas. Huawei is a rising player in the wireless packet-core market, and it has plans to expand its footprint in North America. It also claims to have been granted 147 LTE patents by the European Telecommunications Standards Institute (ETSI), representing 12 percent of the 1,272 LTE patents assigned by ETSI as of August 2009.

While Huawei has the profile of a company that would bid on Nortel’s carrier-networks assets, I am skeptical as to whether it would step up to the auction plate and take its cuts.

A Chinese company with alleged close links to the Chinese government, Huawei probably would receive a rough ride from US regulators if it were to successfully bid on any Nortel assets. Even the acquiescent Canadian federal government might demur at the purchase of a Nortel unit by Huawei.

One last point: It is interesting that, as far as is known, Nortel is not seeking a stalking-horse bid for this business unit. It solicited stalking-horse bids for both the wireless business and its enterprise business.

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