[Translation]
Good morning, everyone.
Pursuant to Standing Order 108(2) and the motion adopted by the Committee on Friday, August 7, 2009, we are studying the proposed sale of certain Nortel Networks assets.
[English]
We're here today, pursuant to Standing Order 108(2) and the motion adopted by this committee on Friday, August 7, 2009, to study the proposed sale of certain Nortel Networks assets.
I'd like to welcome our three witnesses this morning. From Nortel Networks Corporation, we have Mr. George Riedel, who is the senior vice-president and chief strategy officer; Mr. Richard Lowe, president of Carrier Networks; and Mr. Derrick Tay, legal counsel.
Welcome to you all. We thank you for appearing in front of our committee.
We'll begin with a 10-minute opening statement.
:
Thank you, Mr. Chairman.
So let me make a few comments, please.
Nortel operates, as you know, in an integrated global industry as an integrated global company. It's important, in terms of the implications, to set the stage here. We have, as of January, a number of jurisdictions where we are filed. These jurisdictions have certain considerations about how they deal with our assets and our intellectual properties. The sale of any of our businesses or any of our intellectual property rights requires the participation of all these jurisdictions--Canada, the U.S., EMEA, and the like. As a result, it's a complex equation that we have to sort through. Consequently, there is really no “Canadian only” answer to any business question here, because each of these estates has to be consulted and involved.
As you may know, the Canadian estate is in part funded by the other estates. So part of the equation that we try to solve for here is maximizing value. Preserving jobs and maximizing value is what we're trying to achieve here. Things that would interfere with either the funding of the Canadian estate or the transparency or the integrity of the process bring that into challenge. So our intent is to, in a complicated equation, maximize value and preserve as many jobs as possible.
Let me put that in the context of the global wireless industry we operate in. The global wireless industry is about $50 billion in capital expenditures. The business we're talking about today has about $2 billion in revenue. So we're about number six or number seven in that industry on the global scale.
Consolidation is a requirement in this industry. Customers have consolidated already. The vendors are continuing to face pressures to generate additional returns. Scale is a very important requirement for competition--scale in terms of R and D, scale in terms of footprint, scale in terms of balance sheet. So it's in that backdrop that we sit here today to talk about the transaction.
We went through a process, a process that was approved by the courts in both Canada and the U.S. That sales process has been overseen by our number of creditors as well. The court monitor has been involved. A range of advisers has also been involved. The courts have found conclusive evidence, supported by the monitor, that the process was properly followed, and they have approved the sale.
As I mentioned earlier, yesterday we received a document from the court here in Canada. It's worth noting that the court has reaffirmed that any party who wanted to bid for the business and complied with the bidding procedures was permitted to do so. That's an important fact to get on the record. Secondly, the court found they were satisfied that the unchallenged record clearly established that the sale process had been conducted in accordance with the bidding procedures and the guidance of the court.
So basically, we followed a process. The court was very firm with us about wanting apples-to-apples comparison of the stalking horse bid so that it was able to determine what was the best and highest value for this asset. There were objections throughout the process. Those objections were dealt with and resolved. But the courts have in fact guided us as to how to execute this process, and endorsed the process.
Our third point is that one of the comments made in the press and by others is that we have somehow utilized federal funds to develop this technology. It's important to point out that in the last 10 years, Nortel has not been able to utilize federal R and D tax credits to fund either the CDMA or the LTE technology development in Canada and the generation of related patents. Specifically, Nortel has suffered cumulative tax losses since 2001 and has not used any R and D tax credits to reduce its federal tax liabilities. As such, these technologies have not been developed by federal direct grants contributed to the company.
Fourth, on the value of these assets relative to the Investment Canada Act, we have conducted an analysis of the assets being acquired by Ericsson. The book value of these assets is $149 million U.S. That's $111 million in current assets and $38 million in fixed assets. So the total of $149 million does in fact fall below the threshold of $312 million in book value.
It's important to note the difference between book value and market value. The purchase price paid in the auction was in excess of that book value. Market values tend to be higher than book values because they capture a range of benefits in the intangibles--customer relationships, brand, intellectual property, growth opportunities, and the like. The distinction between the asset purchase price paid by the auction versus the book value is explained by that.
The other point I'd make is that the analysis was conducted in conjunction with PricewaterhouseCoopers to do the carve-out economics for the balance sheet. So we feel very good about the comment that it does in fact go below the threshold of $312 million.
The fifth point is that it's important to note that both CDMA and LTE are open standards. They are technologies developed around the world that are embraced by a number of vendors and are set by standards and committees in the industry. And in our mind in regards to any national security issue, it doesn't appear to us that this poses any significant concern. They're open standards; they're international technologies. We're not aware of any issues, but we are obviously happy to work with the government to confirm that this sale does not in fact raise any national security issues.
In addition, there has been a question about the sale of, or situation with, our remaining patents. Nortel has a very rich intellectual property portfolio. Some of these patents are being assigned to businesses, and some of them will be held for further evaluation. No process has been put forward yet for the sale of the remaining Nortel patents. Any process that we would put forward would have to be discussed with the court monitor, the credit constituencies, and be brought forward to the courts for approval, where any interested party would be able to participate in that process.
In summary, our view is that this is a good deal for Canada, as Ericsson's purchase of these Nortel CDMA/LTE assets preserves jobs, creates growth, and provides certainty for customers, partners, and employees.
And those are my remarks, Mr. Chairman. Thank you.
:
Thank you, Mr. Chairman.
I would like to start with a few remarks. The Liberal Party very clearly recognizes the importance of the knowledge economy for the future of our country, and our leader has very clearly said so on numerous occasions. As we all know, Nortel has more than 5,000 patents and a talented staff of researchers, scientists, engineers and technologists whose jobs are at stake. We should also not forget retirees whose pensions are at risk. This is the largest corporation in Canada in terms of R & D expenditures. When this kind of corporation is being dismantled and is at risk of disappearing, we as parliamentarians definitely all have a duty to examine this extremely important situation for Canada's future.
The Liberal Party very clearly relies on the high technology sector to ensure our country's future prosperity. That's why our leader, Michael Ignatieff, sent a letter to the Prime Minister last week to encourage him very strongly to focus on this issue in view of its importance for Canada and Canadian taxpayers.
With that preamble,
[English]
First of all, I would like to thank Mr. Riedel, Mr. Lowe, and Mr. Tay for being here this morning. We very much appreciate the fact that you are here to help us shed some light on what has been happening, as you pointed out, to some extent, in the media or behind closed doors. So we definitely want to shed light on many unanswered questions, and I do appreciate some of the clarifications you have provided.
I'd like to focus my first question on any meetings that have occurred between Nortel and the federal government over the course of roughly the last year and a bit.
When it became clear to Nortel that it was not going to be possible to engineer the turnaround and you began to contemplate options, did Nortel management meet with federal officials? If the answer to that is yes, I would like to hear from you how those meetings unfolded.
:
Thank you, Mr. Chairman.
Thanks as well to you for coming to testify before the Industry Committee.
I must tell you that we of the Bloc Québécois are open to the idea of studying this Ericsson-Nortel transaction in committee. We want to know the impact of that transaction so we can determine whether it is beneficial for Quebec and whether Ericsson's commitments are indeed met. I assume that, in the context of that transaction, you have had to talk about projects and development, and we hope that Quebec receives its share.
I must also tell you that, at first glance, we are in favour of this transaction, but we want to know its conditions.
We are pleased to have learned that the legal proceedings have been conducted within a regular framework. I even read the comments by one judge who expressed a certain amount of enthusiasm over the way it had taken place. We are taking part in this committee meeting in order to carefully examine the guarantees given by Ericsson regarding the number of jobs retained in Quebec and the pension fund. We also want to ensure that the rules have been followed.
I'll give you an example of a situation that we had back home—I come from the Saguenay-Lac-St-Jean region of Quebec. Rio Tinto, a foreign company, acquired Alcan, a Canadian company that had its headquarters in Montreal. Our party had set certain conditions, but unfortunately the minister approved the transaction in haste. Even though we made those conditions known, the minister quickly short-circuited us and imposed no conditions on Rio Tinto. I therefore believe it's normal to have a discussion on this to ensure that Quebec receives its fair share.
Earlier my colleague talked about timetables, about the date of the end of negotiations. That timetable no doubt includes stages. When did you start the negotiations? Was there an important stage that occurred on a given date? When did you complete the negotiations? I know the date because you mentioned October 6, but I would nevertheless like you to give us an overall picture.
Let me try to take this in two stages. In the court-approved process, you go through what's called creating a stalking horse. We had several conversations, starting in the fall of 2008, with a number of parties to create a stalking horse. Ultimately, Nokia Siemens Networks prevailed, on June 19, to become that stalking horse. That defined the scope, the terms, and the arrangements for this asset sale. That then created an auction process, which concluded, as you know, two weeks ago with Ericsson and the winning bid.
In terms of the actual negotiations between the different parties, we've been talking to Ericsson since June of last year, on and off, about opportunities to do something together. In earnest, they picked up pace and intensity in the May timeframe of this year, and then concluded with the auction process just recently.
:
Perhaps I can help in some of that.
The Canadian court has been very sensitive to employee and pension issues. In fact, there are things we can do and things that are out of our hands. What the law says as to distribution, who gets what and what priorities, is the law.
The court has retained, at the company's cost, representative counsel for all ex-employees, and it has retained representative counsel for continuing employees so that for all these issues, to the extent that there are issues that impact employees, the employees have legal representation at no cost to them. These people are overseeing the process—the sales process and the court process.
Also, the court has instituted just recently, in the last couple of weeks, a hardship program so that those employees who really are in a hardship situation have some recourse to get an advance on the money they would ultimately get as a claimant in the process.
Thank you for coming out this morning.
One thing this whole thing has brought to my attention is the number of pensioners of Nortel who live in my riding . There's quite a number, and I'm surprised at how many called and were concerned. When I heard this, I looked around and I called one of my colleagues, David McGuinty, who is the MP here in the area. I thought if there's anybody who has an understanding of this, it would be him, because he does have quite a number of employees as well as pensioners in his riding.
Issues came up, such as long-term disability, the people who are on this. There are 400 people who are again uncertain, and I guess that's where my question is leading. When we look at what's going on, I'm not clear on where we're going or what the end game is. I understand that Nortel is selling a large part of the patents; 2,000. That leaves about 3,000, and I'm not clear about where they'll go or what's going to be done with them. Is Nortel going to continue to exist after this exercise is over? Does it remain as a research company that only sells its technology? Does it patent and then resell technology for use? Is it a shell company? Will it remain in Canada?
These are all questions that are coming to me from people who really aren't sure what's going to happen. Will it remain as simply an R and D company that will maintain what it has done and maintain its excellence? So the questions I have are very simple. After this is over, will Nortel continue to exist in any way?
There's an income strain from royalties, whether through sales or leases. Where will that go? Who will use them? Who will benefit from them? Is it shareholders? Is it pensioners? Is it a third party that will take over a shell company? Will it be a one-time expenditure; boom, it's done, it's over with, Nortel disappears?
If you can clarify any of those questions, I think there are a lot of people out there who would appreciate it.
:
Let me take it in three pieces.
The principal businesses of Nortel will be sold. We are in the process of having stalking horse bids for the remaining principal businesses by the end of Q3, and therefore, depending on transaction closing, it could be Q4 2009 or Q1 2010, but the principal businesses will be sold.
With regard to the question about remaining patents, no process has been put forward yet to deal with those. We basically had to sell the assets first, because every time you sell those assets you create a complicated equation about what patents need to go, what field-of-use licence needs to exist and the like, so the goal is to sell the assets first and then turn to maximizing value for the remaining patents. At this stage we're reviewing a number of options, but no process has been put forward yet for the remaining patents.
We will, as required by law, have to get the monitor, the courts, and the creditors to approve whatever process we go forward with. I understand the uncertainty question and its timing as to when we can give you a more fulsome answer as to what will be the ultimate disposition of those patents.
The transaction involves the CDMA business. CDMA is a particular type of technology for cellphone usage. It's predominantly used in North America. It was actually originally developed by Qualcomm in the United States and adopted by a number of the major operators in North America—in Canada that included Bell Canada and Telus, and in the United States Verizon, Sprint, U.S. Cellular, and a number of others. So that technology is what you use on your cellphone. The actual business we're selling is a combination of the assets, the employees—about 2,500 employees—and the customer contracts that go with those customers we have predominantly in North America. That business is pretty much the whole thing that will go with that transaction.
When we talk about LTE, it is really not a business, because there are no contracts going with the transaction. They are assets associated with development of next generation technology. So with any of these technologies as your CDMA—if any of you have a BlackBerry, you're using it for voice and for data transmission—the next generation technology, called LTE, will offer much broader bandwidth on those same devices, and over time it will replace the capabilities of the CDMA networks and people will overlay them.
So in layman's terms, that's what we're dealing with here.
:
Well, I have a number of questions with time.
I would like to touch on the pension issue before I slip over to another point. Regrettably, our provincial government, which bears the responsibility for the pension liability, is underfunded. I think we all recognize that. We as a government are going to have to take a very, very serious look into prospective legislation as we move forward. In the past, we lived under the impression that the companies were too big to fail, whether it was U.S. steel, auto companies, or Nortel. Well, that reality and bubble has been burst. As such, we definitely have to look not just at what is there now but also at where we're going to go in the future.
I say that personally because I have over 3,000 retirees in my riding alone, and the impact has been very, very, very severe.
However, what I'm really concerned about right now, given that we have other witnesses coming in today—obviously RIM included—is that I'm somewhat confused by some of the statements made by both of the other parties. Following the stalking horse offer put in by Siemens, how many Canadian bidders were actually there at that particular time for Nortel assets?
Mr. Chair, honourable members, deputy minister, colleagues, and friends, thank you for inviting me to join you today. I am president and co-CEO of Research in Motion Limited. I founded RIM with my friend Doug Fregin while we were still students. This year we are celebrating the 25th anniversary of RIM and the 10th anniversary of our flagship product, BlackBerry.
After 25 years of building a global technology company, I know the wireless telecommunications industry extremely well. This includes the suppliers of wireless network infrastructure. It is not widely known, but in addition to building great smart phones, RIM owns and operates one of the world's largest Internet protocol networks connecting to more than 400 networks globally. As a result, Nortel is well known to me and at one point was even a strategic investor in our company, so I was especially saddened by Nortel's demise. What was once Canada's crown jewel in technology failed as a business and is now being chopped up and sold off like so much cordwood.
As in most failures of large companies, the mistakes that led to Nortel's insolvency were made many years ago. Only recently did the company run out of business momentum, but by the time there was serious talk of saving Nortel last year, it was far too late to save it in its current form. A global financial crisis and its huge debt load were the final straws.
None of this is meant to suggest that Nortel was not then or is not now of value. To be sure, Nortel has a few operating divisions with good business prospects and, more importantly to Canada, a collection of intellectual property and teams of great researchers who produced it. The teams and intellectual property were built up over many years, and much of that occurred right here in the Ottawa area.
Some of the IP is associated with Nortel's legacy businesses and will be of little value over time. However, Nortel's intellectual property and workforce devoted to next-generation wireless research known in the industry as LTE, or long-term evolution, is nothing short of a national treasure that Canada must not lose.
Let me tell you why LTE is so important. LTE is by far the most widely supported architecture for the next generation of wireless networks. LTE will provide faster data speeds and better customer experiences than current networks today. This will enable governments and the private sector to deliver more and better services over wireless networks, including those required in times of national emergency and crisis.
LTE will also be a very big commercial opportunity for the entire industry, including infrastructure suppliers, handset manufacturers, and application developers. Bell, Telus, and Rogers have all announced plans to deploy LTE when it becomes available. So too have Verizon wireless, AT&T, Vodafone, and many others internationally.
There has been a lot of speculation that RIM's primary interest in Nortel's assets is its LTE research workforce and intellectual property. I can confirm that this is true. In fact, we were engaged in intense negotiations with Nortel over a number of months to acquire a number of LTE assets and associated research staff. These discussions started before Nortel filed for bankruptcy protection in January, and it continued with an expanded scope afterwards.
We at RIM want to continue the legacy of Nortel's great LTE research personnel by combining their next-generation wireless work with our own and integrating them with our R and D division. If we are able to do this, the ability to commercialize LTE products in the future will remain in Canada with a Canadian global leader.
As experience shows, in our industry and others the most important research programs are performed in close proximity to headquarters of global leaders, and the overall impact of such research is greatest in countries whose companies retain the rights to commercialize the resulting discoveries. That impact is measured not only in jobs, exports, and earnings, but also in spinoffs, community investments, and philanthropic support of education, health, social services, and the arts.
How our discussions with Nortel failed to produce a good outcome for RIM and for Canada is another sorry story in the debacle that is Nortel. Suffice it to say that Nortel failed to bargain in good faith and failed to honour promises made to RIM on many occasions. Without regard for these promises, Nortel made deals with Nokia Siemens Networks and then with Ericsson that render Nortel's assets in LTE of limited value to RIM or to any other firm.
When we later tried to enter the auction for the entire wireless division in an effort to preserve the value of these assets, Nortel delayed and demanded a condition that would have prevented RIM from offering to acquire the important LTE assets. This condition was irrelevant to the other bidders but not to RIM. I simply could not agree to it.
Those of you who have visited me in Waterloo will remember the model Avro Arrow that always sits on my desk. By sheer coincidence, this year is the 50th anniversary of the cancellation of the Arrow program. Whatever anyone may think, good or bad, about the decision to cancel, one fact is clear. The failure to salvage the valuable intellectual property and to maintain the workforce from the abandoned project was a strategic error. By discarding the intellectual property and dismissing the workforce, Canada threw away a significant beachhead in the future of aviation that could have benefited our citizens for many generations to come.
Fifty years later, we consider the disposition of another beachhead built by Canadian ingenuity. Let us learn from our history and not make the same mistake again.
The current government fully understands what happened. In May 2008, speaking on its behalf, the then minister of industry stated, and I quote:
When it comes to decisions on whether foreign purchases represent a net benefit to Canada, my bottom line is this: Canada must retain jurisdiction and control over technologies that are vital to the future of our industry and the pursuit of our public policy objectives. We will not accept loss of jurisdictional control to another party.
Mr. Chair, in my view, the Nortel transaction as currently structured is not in Canada's best interest, and I believe it is incumbent upon the government to examine it thoroughly with every resource at its disposal, but we also should try to find a solution that can work for the parties and for Canada, because a win-win solution may be possible.
To this end, I believe that the Minister of Industry should initiate a four-way discussion among the government, Nortel, Ericsson, and RIM. Minister Clement's stature is such that he may well be able to fashion, over the next few weeks, an outcome that serves the interests of all parties and of Canadians. Given such an opportunity, I can assure you that RIM would engage with the other parties in a most constructive fashion.
Thank you. I look forward to your questions.
:
Thank you very much for that question.
We don't currently have offices in Quebec. We do support university research there.
What I can tell you is that as RIM started to grow very, very quickly, we were surprised that we outgrew the ability of our local population and institutions to supply us with high-quality personnel. We started to grow, and you could see how our offices grew into Toronto and into Ottawa, and our offices will continue to grow as we seek personnel. So it's very possible that we will have offices in areas of great technology, and certainly Quebec has a great history and tradition in technology.
What I think is very, very important that we understand is that being a leader in a technology, especially at the R and D stage, being involved in a global standard, has allowed Nortel to have a seat at the table of the standards body and in the standards process. That is very, very critical, because they have shaped the technology; they have contributed to and helped shape the technology we're all going to rely on in the future. I think it's critically important that Canada continues to have that position and to have that seat at the table. It's not just one company and one city, but this is important for all of Canada, because the whole world will be going to the 4G technology; and when it does, the last thing I want is to be excluded from the seat at the table.
:
Well, the first thing that happens when you have the kind of growth that we've been blessed with—I mean, you're talking about more than a decade where your average growth is 80% a year—of course, is that it really helps the local economy, and then it starts generating taxes to help the entire country. I think that's important.
The second thing that happens is that all the local businesses and suppliers and then all the suppliers in that country find themselves in a position to be supporting and supplying. Remember, we also manufacture a large number of our BlackBerrys here in Canada, which is quite unique in this business, in this industry, and it helps that environment. But we've also had lots of spinoff technologies. You know, there have been companies, there have been individuals, just like at Nortel, who have left the company and started their own. We've witnessed a number of those. We're also witnessing a lot of other companies who have found that building on top of the BlackBerry platform has been very, very successful for them.
And then, of course, you know—I think this is something we forget—the cellular pioneers in this country, who bet on BlackBerry ten years ago or more, have had great success in the wireless digital age that we find ourselves in today. I mean, a lot of other countries and a lot of other carriers would be envious of the kind of success they've had.
So it has definitely supported the widespread industry in Canada.
I want to close, as chair, with one final point before we suspend.
You've indicated that RIM was precluded, as part of the auction process, from bidding on both assets, what you call the LTE assets and other certain LTE assets, at the same time, in the same auction process, but the courts have decided to separate these two assets into two separate auctions. They did this to maximize the money raised from the disposition of Nortel's assets so that Nortel creditors and pensioners could get as much money as possible for their bonds and for their pensions.
To me, there seems to be a bit of an inconsistency here, because your colleague Mr. Balsillie has argued that under one court-supervised bankruptcy proceeding in the southwestern United States, at Phoenix, the auction be awarded to the highest-dollar bidder, that the successful bidder be allowed to be a foreign buyer, and that the successful bidder be allowed to move the business outside the country. Yet on the other hand, at another court-supervised auction proceeding in the northeastern United States and here, you and your colleagues believe the auction should be split up, that the auction be awarded not to the highest-dollar bidder, that the successful bidder not be a foreign buyer, and that the successful bidder not be allowed to move the business outside the country.
You've put our government in a very difficult position, because foreign direct investment is a very important part of the Canadian economy, and we as governments need to be consistent about FDI rules and about the applications of those rules. As chair, that's a point I want to make.
I thank you both for spending the time, on very short notice, to appear before our committee.
I will suspend this meeting for 30 minutes.
:
Good afternoon. It's 12:15 and we are coming out of suspension.
[Translation]
Good afternoon, everyone.
Pursuant to Standing Order 108(2) and the motion adopted by the committee on Friday, August 7, 2009, we are studying the proposed sale of certain Nortel Networks assets.
[English]
Good afternoon to everyone. We are here today pursuant to Standing Order 108(2) and the motion adopted by this committee on Friday, August 7, to study the proposed sale of certain Nortel Networks assets.
We have in front of us four representatives from Ericsson Canada Inc.: Mr. Mark Henderson, president and chief executive officer; Monsieur Michel Peladeau, director of finance; and Monsieur Paul Schabas and Monsieur Richard Corley, legal counsel for the firm.
Welcome to you all.
We will begin with a ten-minute opening statement.
[Translation]
Good afternoon.
Mr. Chairman, my thanks to you and your fellow committee members for this opportunity to appear before you today.
[English]
We're here to discuss Ericsson's acquisition of the assets from Nortel and how we believe it will benefit Canada. I and my colleagues have already been introduced, so we can go on from here. I'd like to take the first few minutes to talk about Ericsson's presence in Canada.
Ericsson in Canada began operations in 1953 and has gone on to become one of the top innovation companies in this country. In fact, over the past decade we have invested more than $2 billion towards R and D in this country.
We currently employ 1,900 people across the country, including 1,500 at our Montreal facility, which is one of Ericsson's largest R and D centres outside of Sweden. The remainder of our employees are based in Mississauga, Ontario, and in Vancouver, British Columbia. Once the acquisition is complete, we will employ approximately 800 more people in Canada, and our investment in R and D in this country will grow accordingly.
Our Canadian employees have contributed over 330 patents to Ericsson over the past quarter century, and we are confident that with the addition of Nortel's competence in Ottawa as a result of this acquisition, this level of innovation will continue.
Throughout its history in Canada, Ericsson has built much of the vital telecommunications infrastructure in this country. We have been the exclusive supplier of wireless technology to Rogers for the past 25 years. We also supply telecommunications solutions to Bell, Telus, and other Canadian operators, and to utilities in Quebec and New Brunswick, and have been the trusted supplier to the Government of Canada and the Department of National Defence.
As well, we are currently working with a number of Canada's new entrants into the wireless market. In fact, just this week we announced a major contract with DAVE Wireless, in which Ericsson will be supplying a wireless network in key markets across Canada.
Ericsson's history in Canada has shown that we have worked hard over decades to build a significant customer base, with a focus on growing innovation, job creation, and telecom leadership. We are committed to continuing this dedicated effort towards innovation and in providing leading-edge solutions to our customer base, both existing and new. In short, our commitment to Canada is strong and long-lasting.
As you know, Ericsson has entered into a purchase agreement to acquire substantially all of Nortel's North American CDMA business and certain LTE assets for $1.3 billion U.S. on a cash and debt-free basis. The deal is a result of an auction initiated by Nortel, which was closely supervised by the bankruptcy courts in both Canada and the U.S. The auction was open to all qualified investors, including Canadian investors, and was designed to maximize value for Nortel and its stakeholders. The auction was for a specific group of assets and number of employees predetermined by the court process. The auction process was determined by the presiding judges to be fair to all.
The Nortel CDMA business covered by the agreement is successful from both technological and profit perspectives, and it is our intention that this will continue. It will operate largely as a separate unit within Ericsson, led by its current management, headed by Nortel's president of Carrier Networks, Canadian Richard Lowe, who I believe appeared here earlier today.
While the CDMA business unit is a leading provider of network equipment to wireless carriers in this market, CDMA technology is experiencing a gradual decline as it's replaced by the next generation of wireless technologies, including LTE, or long-term evolution. These next-generation technologies provide faster data speeds, enable new broadband services, and enhance the consumer experience overall on mobile devices.
As it's these LTE assets that seem to have generated the greatest interest in the acquisition, I would like to clarify the nature of the agreement with respect to LTE technology.
There are two components. First, we will employ approximately 800 Canadian Nortel employees, of which approximately 400 are directly involved with LTE development. Second, we are licensing certain LTE patents on a non-exclusive basis. To be clear on the latter point, we are not purchasing any LTE patents from Nortel; we are simply licensing them on a non-exclusive basis. Nortel will remain the owner of its LTE patents and will be free to license or sell them to other companies, should they choose to do so. Therefore, these patents remain in the ownership of Nortel. These assets and rights being acquired are extremely complementary to Ericsson and upon completion of the acquisition they will make Ericsson one of the leading wireless technology and service providers in North America.
In response to comments in the press about national security, I note that CDMA networks, as we heard earlier today, are based upon common international standards, which means that the technology is widely shared in the industry. Consequently, we don't see national security concerns applying to this acquisition.
The approximately 800 Canadian Nortel employees who work in these areas, both CDMA and LTE, will be employed with substantively the same pay and benefits and based in the same locations. We do not anticipate any layoffs or major changes in the day-to-day work of these employees.
We see this acquisition as an opportunity to continue the tradition of excellence in innovation, with Canadian technology jobs being preserved and ultimately more being created, to continue Ericsson's significant investment in Canadian R and D, and to sell made-in-Canada technology solutions to our customer base around the world.
While the book value of the acquired assets is below the threshold under part IV of the Investment Canada Act, it is nevertheless the case that the proposed investment will benefit Canada. For example, the proposed investment affords an opportunity for Nortel's research to join Ericsson's global research force and to share knowledge and best practices with Ericsson Canada's researchers. It will assist Ericsson to keep Canada at the forefront of technological development with respect to next-generation wireless technologies such as LTE.
The benefit of this transaction will help fulfill the government's goal of attracting foreign direct investment in order to increase Canada's productivity. Ericsson will employ the approximately 800 Nortel employees in Canada defined by the court-approved auction. Ericsson's R and D facility in Montreal is one of its largest worldwide and is one of the top R and D firms in the country.
Ericsson has been a trusted supplier to this market for almost 60 years and will continue a high level of customer service to its existing and new customers. Ericsson has every intention to continue its presence in Canada, and the proposed investment will help ensure that Canada remains a very important part of Ericsson's global strategy.
Finally, Ericsson's history in Canada demonstrates a sustained commitment to carrying out not only sales but also high-level R and D that contributes to Canada's long-term prosperity and productivity. As a result, we believe this is a good opportunity for Nortel, for Ericsson, and certainly for Canada.
Merci beaucoup. Thank you again for this opportunity to speak to you. We'd be happy to answer any questions you may have at this time.
:
The quick answer to that is no. As a matter of fact, we feel that this will actually enhance our base in Montreal.
I think I need to say a few words about Ericsson globally. It's a very old company, developed in 1876. You can tie a lot of parallels between Nortel and Ericsson from that perspective. The company has been in Russia since the time of the czar, in China since the turn of the century, and in many countries for many decades.
The one fact about Ericsson is that it has never, ever left a market. We operate in 170 countries today and we are the world's leading telecommunications provider. Even in the worst times in telecom--and I'm thinking about the earlier part of this decade when a lot of the equipment vendors, including Ericsson, were cutting their staff by almost 50%--the research and development centre in Montreal was maintained as it was, static, and even growing with assignments because of the competence and the products that we develop in Montreal and the importance of the ecosystem we have here in North America.
I think this acquisition and the fact that we basically will be increasing our R and D spending in Canada by up to 50% make this an even more important facility for Ericsson, part of Ericsson's global strategy for development, and should, I would say confidently, allow us to bring more assignments into Montreal.
Thank you for your comments about its importance in Quebec.
:
You know, when I said in my opening statement that Ericsson started in 1953, obviously that wasn't with Rogers. I mean, in the sixties and seventies the company was involved in a number of businesses, including telephony switches that carried toll traffic internationally; it put in power cables below the sea to link P.E.I. to the mainland; it installed horizon-based radar systems on the frigates for the Canadian navy.
But in 1984, when the first wireless licences were handed out in Canada, that's when we struck this partnership with Cantel, at that time, to deploy that network 100% coast to coast. That has been a fantastic story for Ericsson. That's a relationship that exists to this day, 25 years later. We know that the innovation and the technology that comes to market through that network makes it one of the leading telecom providers in this country, and we are its sole partner when it comes to the wireless network equipment.
If I could tie that together even more, there are a couple of things I think I have to say.
In 1989 there was another network put in coast to coast for Rogers. It was called Mobitex. It was a very early mobile data technology. It was totally developed by Ericsson, it was sold to Rogers, and we put it in coast to coast. And there was also a coast-to-coast network put in the U.S. That Mobitex network, that technology, is the one that the very first RIM pagers were built upon. The first little chicklet, I mean, was completely Mobitex technology. So there's quite a technological tie between not only Rogers but Research In Motion and some of the things that have happened in this country.
In 1984, when the licences were handed out, it was also decided to put in an innovation cell in Montreal. It really started with about 45 to 50 people, and really, on the start of that partnership, it has become one of the top research and development companies in the country.
So we're very proud of what has been accomplished here and we're quite proud of our relationship with Rogers over these 25 years.
:
First of all, in terms of the employees and your constituents, I understand. The employees who will be joining Ericsson will, I think we've said, be certainly offered substantially the same pay and benefits. Of course, after operating in Canada for so many years, we feel that the compensation and benefits within our company are feature-rich and obviously competitive in the industry. I think there will be no question about that.
Our statement earlier, I think, says that this is all about employing those 800 people, that we will employ those 800 people. They will be managed in general by the management that's there today, headed by Richard Lowe. Their activities will remain exactly where their locations are today. I would think, particularly in Ottawa, as I said, there's something around the ecosystem when it comes to an innovation cell, when it comes to universities, when it comes to facilities, when it comes to lifestyle. There are a lot of intrinsic things that make us maintain a facility in a certain place, so I believe that's our commitment.
If you think about the employees across the rest of the country, for the most part, as I said, they're there to support and drive the sales of the existing CDMA business. Then you might think, in the future, if that's maturing, what will happen to these people four or five years down the road? I think it's our commitment to do everything we can to make sure that those jobs are maintained, that growth is here, and that if we bring new technological solutions, who better to sell our technology solutions to this new customer base than the people who have had those deep relationships with those customers for the last so many years? That's our hope.
:
So whenever Nortel becomes profitable again, they can apply for the SR and ED tax credit. Thanks. That's very helpful, because it was new to the whole spectrum of things.
Here's the quandary that's evolving to a certain degree. I've never heard anything negative about Ericsson not living up to its agreements, but I've been around here long enough to hear companies promise they're not going to do this and that. In fact, we even have agreements through the Investment Canada Act that are supposed to be binding. Then we have to go to court when companies don't live up to their expectations, and so forth. I'm not suggesting that's the case for you, but we have to believe that in this case.
We're really coming to the conclusion that, if this goes through, you will have an advantage on breakthrough technology that's quite significant--and good for you for getting into the competition, seeing that, and taking advantage of the situation. But the problem is that the other competition will have to buy the old stuff from Nortel.
One could argue that licensing it out as opposed to selling it outright would actually lower the book value, because if somebody else wanted to get the patents they would be able to do so, but they would get an empty shell. They wouldn't get the workers, the infrastructure, and all those things. They would have just the patent itself. Alternatively, if you made a breakthrough on top of the current patent right now and patented that, they would have to go to you to get licensing for that.
Am I correct on how this is playing out?
:
Bon après-midi à tous. Good afternoon to everyone.
[Translation]
We are here pursuant to Standing Order 108(2) and the motion adopted by the committee on Friday, August 7, 2009 to study the proposed sales of certain Nortel Networks assets.
[English]
We're here today pursuant to Standing Order 108(2) and the motion adopted by this committee on Friday, August 7, 2009, to study the proposed sale of certain Nortel Networks assets.
We have in front of us three representatives from Industry Canada: Mr. Richard Dicerni, the deputy minister; Madame Marie-Josée Thivierge, assistant deputy minister of small business and marketplace services; and Madam Helen McDonald, assistant deputy minister of spectrum, information technologies and telecommunications. Welcome to all three.
We will begin with a 10-minute opening statement and then go to 50 minutes of questions and comments on the part of members, so that we can go in camera at 2:45 for a discussion of where this committee will go.
Without further ado, Mr. Dicerni.
Further to your remarks that you would have us for only 60 minutes, I think my opening remarks will be 60 seconds, so there will be more time.
I would like to thank the committee for the opportunity to appear today in my capacity as deputy minister of Industry Canada and also as director of investment under the Investment Canada Act. I am here with my colleague Helen McDonald, who is the ADM of the spectrum, information technologies and telecommunications sector; and Marie-Josée Thivierge, the ADM of small business and marketplace services, but more importantly, the ADM responsible for the administration of the Investment Canada Act.
I would note we are constrained, including Madame Thivierge, in regard to what we can say about any particular case under the Investment Canada Act.
[Translation]
This confidentiality issue was previously addressed last year, when Mr. Prentice appeared before the committee to discuss another transaction. Despite the minister's interest in addressing the issue in detail, he unfortunately could not do so. Those same rules apply today to the case you discussed earlier this morning.
[English]
With that caveat about confidentiality pertaining to the Investment Canada Act, my colleagues and I are open to your questions.