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TORONTO — Nortel Networks Corp. (TSX:NT) reported a multibillion-dollar quarter loss and said it is cutting 1,300 more jobs and slashing spending, moves analysts say are affecting the company’s long-term viability and could lead to it being bought up in “bite-sized pieces.”

“Nortel is substantially less attractive the more it cuts,” said Duncan Stewart, president of Duncan Stewart Asset Management.

“These sorts of pieces of news make it ever more likely that Nortel will get bought, either in a single chunk, which is actually pretty unlikely, or in bite-sized pieces.”

Andy Woyzbun, lead analyst at Info-Tech Research Group, described the effect of the economic downturn on Nortel as “just another kick in the head to someone who is trying to stay upright,” and said his clients are starting to express concern about the company’s long-term viability.

“The long-term viability has been an issue for some time now, and it’s only getting worse,” agreed Stewart.

The Toronto-headquartered telecommunications equipment maker, reporting in U.S. dollars, posted a third-quarter net loss of $3.41 billion.

Sales declined 14 per cent to $2.32 billion as a result of “a more cautious view” among customers, chief executive officer Mike Zafirovski said.

The net loss was swollen by a $1.14-billion writedown of goodwill - the amount paid for previous acquisitions above their tangible value. There also was a $2.13-billion non-cash charge on a tax-loss benefit - indicating Nortel does not expect to be earning significant profits any time soon.

The news sent Nortel’s stock plunging by as much as 33 cents or 22.2 per cent to C$1.16 on the TSX, its lowest level ever and down from about $19 a year ago.

Stewart said Nortel is worth so little that it’s going to be difficult for the company to find a buyer willing to pay enough to cover its massive debt of approximately $4.5 billion, but “people who are buying and selling Nortel now are making a bet on a takeover.”

In releasing the results, Nortel also said it is suspending dividend payments on two series of preferred shares.

The 1,300 job cuts are to be made “incrementally” - 25 per cent by the end of this year and the rest through 2009.

For the survivors, there will be no pay increases, while an existing freeze on hiring will be extended.

In its heyday back in 2000, the company had almost 100,000 employees globally and briefly pushed aside Lucent Technologies to become the world’s biggest supplier to the telecommunications industry.

Then the telecom spending bubble burst and Nortel was forced to sell or shut numerous business units and product lines, resulting in the loss of about 60,000 jobs over several years of downsizing.

Zafirovski said the company is restructuring its business model to reduce costs, and will eliminate or consolidate various management positions.

Among departing executives will be chief marketing officer Lauren Flaherty, chief technology officer John Roese, global services president Dietmar Wendt and executive vice-president of global sales Bill Nelson.

“Our new structure will be simpler, streamlined and appropriate for a business today,” Zafirovski told the quarterly conference call.

He said the latest expense-reduction moves, combined with ongoing restructuring and other cost-cutting measures, are expected to leave 2,500 fewer employees and reduce annual gross costs by $400 million in 2009.

Chief financial officer Pavi Binning said Nortel is focused first and foremost on “preserving cash and maintaining liquidity.”

“It is clear we are in challenging times and Nortel continues to experience significant pressure on its business,” he said.

“This in turn puts pressure on our cash and liquidity position, and the continuing weakening of the economic environment makes things even worse.”

He added: “I don’t rule out any other actions we may need to take.”

Woyzbun said too much cost-cutting can lead to a slowdown in innovation as research and development falls to the wayside.

“This is an industry that’s about change, innovation, being ahead of the other guy, and they’re competing against some pretty aggressive competition,” he said.

He said Nortel will need to narrow its product emphasis to stay innovative going forward.

“We like their products, but I think the smart thing for Nortel to do in this situation is focus, focus, focus and decide where they want to continue to be competitive,” Woyzbun said.

“Starving all of their product areas is not smart. They need to decide who they want to starve and who they want to feed.”

UBS Investment Research kept its 12-month rating for Nortel unchanged at “neutral” and said the company’s broad-based product lines could be making it more difficult to compete with “bigger and likely more resilient competitors… with scale and more focused portfolios.”

“The cost savings goals set by the company are ambitious, given ongoing pricing and competitive pressures in the industry, and reinvigorating revenue growth is likely to be challenging in the near-mid term,” UBS analyst Nikos Theodosopoulos said in a note to clients.

Nortel’s third-quarter net loss was worth $6.85 per share, compared with net income of $27 million or five cents per share in the year-ago period, when revenue was $2.71 billion.

The latest quarter’s loss excluding one-time items was $150 million or 30 cents per share, which was in line with the consensus expectation among analysts surveyed by Thomson Financial.

Tags: info tech, info-tech research group, nortel, sustainability