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 firm said yesterday 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 firm, 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, 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 said contract manufacturers often handle production faster and more efficiently.
Investors reacted favorably, sending Nortel's US shares up 25 cents to $4.99 on the New York Stock Exchange. Flextronics shares rose 61 cents to $15.98 on the Nasdaq Stock Market.