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Nortel explores bankruptcy

Nortel Networks is reportedly seeking legal counsel to figure out its bankruptcy option in case its restructuring fails.

Nortel Networks is reportedly seeking legal counsel to figure out its bankruptcy option in case its restructuring fails.

According to the Wall Street Journal, a Nortel bankruptcy filing isn't imminent, but remains an option. Nortel unveiled its latest cost savings plan last month.

Nortel is currently struggling to land customers and is competing with well-heeled rivals like Cisco. The company has enough cash to last about a year, but analysts expect it to be carved up in parts as a best case scenario.

Cowen analyst John Marchetti said in a recent research note that Nortel was in a tough financial spot that will lead to a cash crunch by 2010.

The company had aggressively cut costs by restructuring four times in three years, he wrote, but achieving ongoing profitability remained a challenge.

"In 2008, we estimate the company will burn through more than [US]$1.2 billion in cash," he wrote. "Management has stated that it needs approximately [US]$1.5 billion annually to run its business, and we think the company may exit 2009 with only [US]$400-700 million to spare."

"This need for cash has led the company to announce that it is seeking to sell its Metro Ethernet Networks business, one of the few profitable segments, and which many view as a leader in optical networking."

The analyst said the potential sale illustrated his firm's concern over Nortel's financial position; in short the company needs to sell one of the more valuable pieces of its business in order to raise cash to help restructure lagging segments.