Dec. 10 (Bloomberg) -- Nortel Networks Corp., North America’s largest maker of phone equipment, is working with Lazard Ltd. and law firm Cleary Gottlieb Steen & Hamilton on options, including a possible bankruptcy filing, according to people familiar with the situation.

Nortel said today it engaged advisers to plot strategy and is striving to improve its financial footing. Lazard, the investment firm led by Bruce Wasserstein, and James Bromley, a lawyer at Cleary, will help decide whether bankruptcy is the best option, according to the people, who declined to be identified.

Nortel, whose predecessor was founded more than a century ago, has lost 97 percent of its market value this year as customers reined in spending and switched to newer technology from Cisco Systems Inc. and other rivals. Nortel has posted almost $7 billion in losses since Chief Executive Officer Mike Zafirovski took over in 2005, fueling speculation of a bankruptcy.

“They may be able to avoid it if it turns out they have customers with large orders or they can get relief from bondholders,” said Robert McWhirter, who helps oversee about $140 million at Selective Asset Management in Toronto. He hasn’t owned Nortel shares for two years. “The bondholders also might prefer bankruptcy because then they are first in line for assets.”

Nortel fell 12 cents, or 23 percent, to 40 cents at 4 p.m. in New York Stock Exchange composite trading.

Nortel’s Debt

Lazard would be expected to offer guidance on an out-of- court debt deal or a refinancing, while Cleary would provide legal advice on any agreement or dispute. Nortel spokesman Mohammed Nakhooda said today that no bankruptcy filing is imminent and that Nortel is focused on reorganizing itself.

Monica Orbe, a spokeswoman at Lazard, declined to comment. Bromley didn’t respond to phone messages seeking comment. Jay Barta, a Nortel representative, declined to comment. The Wall Street Journal reported that Nortel was exploring a potential bankruptcy filing last night.

As of Sept. 30, Nortel’s debt amounted to $6.3 billion, including adjustments for operating leases, pension deficits and other items. It had $2.3 billion in cash as of that date. The company has about $1 billion in bonds that come due in 2011.

Zafirovski, 55, had sought to revive Nortel’s fortunes by cleaning up the balance sheet and reducing the workforce by 18 percent since he started. Demand for Nortel’s gear, mainly based on older code division multiple access technology, has waned as customers move to faster systems.

Unit Sale?

Money markets in the U.S. seized up following the Sept. 15 failure of the securities firm Lehman Brothers Holdings Inc. Banks stopped lending as they hoarded cash, pushing the country into a deeper recession. That’s making it more difficult, and more expensive, for companies like Nortel to find new financing.

“If Nortel is to go into formal bankruptcy, the question then is will they be given the time to effectively restructure, cut costs or sell divisions,” McWhirter said.

In September, Nortel said it was auctioning off its Metro Ethernet business, which makes products that let phone companies offer television and Internet services. The unit may fetch $500 million, not the $1 billion Nortel initially anticipated, Nikos Theodosopoulos, a UBS AG analyst, wrote last month.

Nortel could sell the CDMA unit to raise money, RBC analyst Mark Sue said in a report last month. The challenge is that too many asset sales may conflict with its debt covenants, said Sue, who cut his target on the stock price to $0.

Nortel began as Northern Electric and Manufacturing in 1895, supplying equipment for Canada’s start-up telephone system. The company was the first to produce dial equipment in the country, for a brewery in Montreal, and its switches were used in the first Trans-Canada telephone toll system in 1932, according to Nortel’s Web site.

To contact the reporters on this story: Jeffrey St.Onge in London at jstonge@bloomberg.net; Vivek Shankar in San Francisco at vshankar3@bloomberg.net

Last Updated: December 10, 2008 16:03 EST