[A-List] The Stupid Loan Bubble/Turkish connection

[Sabri Oncu <soncu@xxxxxxxxxxx>]

The Stupid Loan Bubble

The story of how Motorola and Nokia lost nearly $3 billion
inTurkey opens a window on excesses that still threaten big
telecoms

By Karen Lowry Miller
NEWSWEEK INTERNATIONAL

Oct. 28 issue ? In the walnut-paneled meeting room of a
futuristic building outside Istanbul, Murat Hakan Uzan ponders
the charges that put his powerful Turkish business clan at the
center of one of the most sensationally unraveling deals of the
Internet age. Some scandals involve more money, some bigger
names, but none decayed into racketeering charges quite as lurid
as those leveled against the Uzans in a New York court.


MOTOROLA AND NOKIA accuse the Turkish family of pocketing nearly
$3 billion in loans extended at the height of the tech bubble to
Telsim, an Uzan-family holding and the second largest wireless
operator in Turkey. Seated in Levi?s and cowboy boots under a
portrait of Turkish World War I Gen. Enver Pasha, Uzan dismisses
the lawsuit, which names him and his brother, father, sister and
mother in a conspiracy allegedly hatched in part over their
Sunday family dinners, and includes allegations of intimidation,
extortion, money laundering and computer hacking. ?Motorola
overextended, and now they?re trying to cover their error,? says
Uzan, who denies all the charges and has filed countercharges in
Turkey against Motorola and Nokia executives for allegedly
threatening his family with kidnap and murder.

The case of Motorola and Nokia vs. the Uzans may read like a
gangster novel. But it also opens a window onto an unexamined
chapter of Internet mania, one with urgent relevance for the
ongoing crisis in the telecom industry. Motorola and Nokia agree
with the Uzans on only one thing: that the loans looked sensible
from the dizzying heights of the bubble, when dozens of telecom
start-ups vied to rule the coming Internet world. Many of the
world?s most famous banks are now in trouble because of bad loans
they extended to telecom start-ups. But at least JPMorgan and
Commerzbank have some expertise in the business of lending money.
The two biggest mobile-phone makers in the world could hardly
make the same claim. And it was not only Motorola and Nokia but
Lucent, Cisco, Nortel and others that started acting as reckless
creditors, vying with one another in a race to extend millions,
even billions, in financing to?telecom-bubble start-ups, often
after those companies were refused loans by real banks.

Swept up in the free-money spirit of the time, they were
financing not only the customers? purchase of their wares?the
switches, routers and other nuts and bolts of the Internet?but
the growth of the customers? businesses, too. The standard
practice of vendor financing thus became another wretched bubble
excess: as if Ford were loaning customers money to buy cars?and
boats, jewels and houses, too. ?Vendor financing was the sickest
sign of how things spun out of control,? says Tero Kuittinen,
technology adviser to Finnish investment bank Opstock in
Helsinki.

The extent of the damage is now becoming apparent.
Vendor-financing deals account for a relatively small fraction of
the total $1 trillion in debt held by telecom carriers worldwide.
But even after the market collapse of March 2000 wiped out the
silliest ideas for pet, toy and trinket Web sites, the big
telecom manufacturers continued to loan aggressively to telecom
start-ups. The mantra was that dot-coms might be dead, but the
Internet itself would thrive. The peak year for vendor financing
came in 2000, with $25 billion to $30 billion in loans, many of
them offered to the fourth or fifth largest carrier in a market.

Now these start-ups are collapsing in heaps. Of the 37 publicly
listed telecom service providers founded in the United States
since 1996, 18 are bankrupt, including Adelphia and Winstar.
Since vendor loans peaked after the market crash in March 2000,
the makers of Internet hardware effectively helped to expand and
extend the life of the bubble, making its collapse all the more
painful. ?It bought them one more year,? says Kuittinen, ?but now
we?re finding out the cost of that was high.? When banks began
abandoning the fledgling telecom operators, vendors believed they
had to keep lending because their own stock price was now tied to
the fate of these customers. Bill Frezza, general partner at
Adams Capital Management, suggests that vendor financing became
?a drug.?

The size of this loan bubble has come to light slowly. Companies
are not required to report loans to customers. But when investors
started asking questions, the companies began to reveal more,
says Cecilia Wagner Ricci, finance professor at Montclair State
University in New Jersey. She calculates from SEC filings that
Motorola?s bad loans went from 6.7 percent of total loans at the
end of 2000 to 57 percent at the end of 2001; Lucent went from
2.6 to 60 percent, and Nortel from 25.5 to 80 percent (chart).
?It?s a house of cards that?s falling apart,? says Ricci.

The Uzan tale is an extreme case, but it shows how quickly things
could go wrong. Led by patriarch Kemal Uzan, who began to build
the family fortune in the 1950s, the Uzan empire grew from
construction, steel and cement to include banks, newspapers, a
television station and, in 1994, the Telsim mobile network. After
Telsim got a license to expand, Motorola won an equipment-supply
contract in April 1998 and financed the $360 million purchase,
plus an additional $200 million in cash to help pay the license
fee. As collateral, Telsim pledged 51 percent of its stock, and
later raised that figure to 66 percent. In October 1998, it
agreed to buy switches for the network from Nokia, which
guaranteed a $78 million bank loan to pay for the order. One key
condition: Telsim was to seek a big partner, to gain expertise
and deeper pockets.

By then, what had been an American Internet mania was swelling
into a global craze. Dozens of start-ups began building new data
networks from Houston to Hong Kong. Manufacturers were so eager
to lock in new business, they began financing equipment purchases
by ever less credible customers. The insanity may have peaked
during the wild European auctions starting in 1999, when telecom
operators spent $120 billion on bids for third-generation
wireless licenses, and expected to spend twice as much to build
this high-speed mobile Internet system. Generous financing offers
from vendors vying to dominate sales of so-called 3G hardware
reportedly reached as high as 200 percent of the value of the
equipment for sale. Soon the competition had spilled over into
Eastern Europe and the Middle East. ?Motorola was begging at our
door,? recalls Uzan. ?It was a very aggressive and dynamic time.
That made the appetite of these people rise.?

Turkey looked like a gold mine at the edge of Europe. The number
of mobile subscribers soared from 1.5 million in 1997 to 8.2
million in 1999. In many countries in Europe, more than half the
population owned a mobile phone, while fewer than one in 10 Turks
did. Unusually for a market that size, there were still just two
mobile carriers. That made the privately held Telsim look like a
very attractive target for a foreign buyer?and a big outside bid
would drive up its value. To Motorola, Telsim started to look
less like a customer and more like a very smart investment bet.

The promise of a big payday, with some multinational swooping in
to drop billions on Telsim, would lure Motorola and Nokia into an
increasingly tangled relationship with the Uzans. When Telsim
went back in September 1999 for more money, Motorola executives
bit. They agreed to an additional $215 million loan for equipment
and marketing, on condition that Telsim repay swiftly with new
financing guaranteed by a British export-import bank. But when
bankers came to review the company finances, a Telsim employee
accused one of stealing documents. According to Motorola
executives, an irate Hakan Uzan showed up at an Istanbul
restaurant where they were dining and refused further access to
the company books.

The British financing never materialized, for reasons that are
unclear. Motorola was thus left with loans to Telsim totaling
$775 million, a figure that violates its normal limit on credit
exposure to any one customer, company executives admit. But even
that rocky episode didn?t end the relationship. These were the
halcyon days of the giant telecom deal. MCI was bidding for
Sprint, and Vodafone was making a hostile move on Mannesmann.
Rivals feared they had to deal in multibillions, too, or die.

When Uzan again approached Motorola for more financing just two
months later, he found a receptive ear. Arguing that Telsim
needed to fill holes in its coverage and sign more subscribers to
make itself more attractive to a buyer, Uzan said he had already
received a multibillion-dollar offer. He also noted that he could
always take his business to Nokia. By February 2000, Motorola
agreed to loan an additional $450 million, on the condition that
Telsim repay that plus an additional $300 million by September.
?It passed the common-sense test at the time,? says Ed Hughes,
finance director at Motorola. After all, he says, Motorola still
held as collateral a majority stake in Telsim. How could it lose?

Meanwhile, Uzan was making a similar pitch to Nokia: he had big
bidders in the wings, and if Nokia did not fork over more loans,
he could always turn to a rival, like Siemens. In March 2000,
Nokia guaranteed an additional $322 million in bank loans, with
$100 million of that in cash for marketing Telsim?s business.
Nokia got 5 percent of Telsim shares as collateral. The very next
month Telsim was back, Nokia officials say, dangling the prospect
of bids from the likes of Vodafone and Deutsche Telekom (on which
both declined to comment). Thinking a big sale was imminent,
Nokia doubled the financing to $800 million in May, with $450
million of that in cash. Its collateral stake rose to 7.5
percent.

At this point Nokia and Motorola had no idea they were being
played against one another. Telsim had obtained more than $2
billion, including $1 billion in cash, from the two companies,
which were still confident they?d be repaid. The number of
wireless customers in Turkey doubled in 2000 to nearly 16
million, and one third of those were Telsim subscribers. ?The
telecom majors were fighting each other to get involved in the
Turkish market,? says a Western banker in Istanbul, and finance
deals were ?so attractive they were open to abuse.?

Motorola admits to some doubts: it asked international banks why
they were not lending to Telsim, but found only vague concerns
about the company?s secretive ways. At this point, the companies
were unaware of lawsuits filed by angry business partners against
the Uzans in Turkey?in part, the companies say, because the
embarrassed plaintiffs avoided publicity. Nokia thought it knew
more about Telsim?s operations than banks would, because it had
technicians inside the company who could see its subscriber
traffic growing. Moreover, says Ernst Kramer, a Nokia finance
executive, it had contract protections, including a requirement
for early repayment if Telsim had not found a strategic partner
by October.

The collapse of the dot-com bubble in March 2000 didn?t slow the
deal at all. Mutual funds would take in more money that year than
ever before, as investors switched from dot-bombs to the apparent
safety of telecoms. In July, Telsim?s only wireless rival went
public in an offering that valued the company, Turkcell, at more
than $17 billion. Under the logic of the times, Telsim, with half
of Turkcell?s market share, should have been worth at least half
as much, or $9 billion. Motorola and Nokia figured it was worth
more, in part, they say, because the Uzans led them to believe
that Deutsche Telekom had offered more than $10 billion. Uzan
insists there were talks with big bidders, including Deutsche
Telekom, but shrugs, ?Sometimes deals just don?t happen.?

The stakes were now huge. And the end was in sight. In August,
Telsim asked for more money, and Motorola forked over an
additional $700 million in equipment and cash. But when Telsim
missed its first payment, due to Nokia Oct. 1, Nokia executives
started to worry. They suspected Motorola might be in the same
boat, but a search of its rival?s Web site didn?t reveal
anything. Finally, in late January 2001 a Nokia manager in
Istanbul raised the subject with a Motorola manager he had met on
a scuba-diving course. They quickly came to fear they had been
taking the same bait about the big buyer, and that Telsim owed
more money than either had realized. They concluded, says an
executive for one of the plaintiffs, that ?it looked like a big
scam.?

There would be no payday. By early 2001 the Turkish economy was
plunging into a financial crisis. In the United States, the
telecom boom was finally being exposed as a bubble. The excesses
of vendor financing first became public in the case of Lucent
Technologies, which had hyped its $2 billion financing for
onetime market darling Winstar Communications as not just a loan,
but a ?longterm strategic relationship.? In April 2001, when
Winstar went bust, analysts estimate it owed Lucent more than
$800 million.

The Turkish connection began to disintegrate the same month.
Telsim owners, mainly Uzan-family companies, voted to triple the
number of outstanding shares, diluting the value of Nokia and
Motorola?s collateral by two thirds. A week later the company
missed its first payment to Motorola. After refusing to
renegotiate the loans, the vendors then hired Kroll Associates,
the private investigators, to learn more about the Uzans. Kroll
turned up what they see as similar acts of alleged fraud, now
cited in the company lawsuit to establish a pattern of
?racketeering.? Hakan Uzan says he has been the target of
negative ?stories planted in the Turkish press, death threats and
drive-by shootings, all orchestrated by Kroll. (Kroll declined to
comment.) The Uzans have filed one criminal complaint against
employees of Motorola and Nokia for ?conditional threats,? which
has been dismissed by an Istanbul district court. A second
complaint against top Nokia and Motorola executives for alleged
harassment is pending before the same judge. ?I think they are
using terrorists,? says Uzan. In January this year, Telsim
shareholders voted to strip Nokia and Motorola shares of voting
rights.

That same month, Motorola and Nokia returned fire from New York.
They filed suit under a 1970s racketeering law passed to combat
the Mafia. The 122-page filing charges five Uzan-family members,
an associate and three companies they control with fraudulently
engaging in business with no intent to ever repay the loans. It
accuses them of siphoning millions of dollars every month out of
Telsim, laundering it via family companies to buy apartments and
rent office space in Manhattan, and persuading a Motorola Turkey
employee to hack into the parent company?s confidential network.
It also accuses the Uzans of extortion and intimidation for
threatening the plaintiffs? executives with criminal charges
unless they renegotiated the loans. The Uzans deny all charges in
the suit, which names Hakan?s mother and sister as
co-conspirators because they are directors and owners of
family-controlled companies, and suggests their Sunday dinners
were used for plotting. ?The only thing my mother has ever done
is be a good cook,? says Hakan Uzan, jabbing his finger in the
air to make the point.

Uzan did appear in New York to confront the charges in April, but
now rejects the jurisdiction of the court. The U.S. judge has
frozen the family?s U.S. assets, and has fined them each $1,000
per month (doubling each month) for ignoring an order to deposit
the collateral in a New York bank. Last week the judge ruled that
the fine will jump to $100 million per month in November. Hakan?s
brother Cem has taken over a political party in Turkey and is set
to do well in the November elections; the plaintiffs are well
aware that membership in Parliament will give him immunity from
prosecution in Turkey. He invites citizens to rallies by sending
text messages over Motorola phones.

Motorola has even turned to the Bush administration to apply
political pressure, to no avail. ?Motorola is using its political
influence in the U.S. to make something where there is nothing,?
Hakan Uzan claims. ?I don?t call borrowing $2 billion and not
paying it back ?nothing?,? counters Hughes, the finance director
at Motorola. Uzan insists it is a simple business dispute, and
his lawyers say they made sure the contracts provide for
arbitration in Switzerland because Swiss law allows debtors to
cite force majeure ?events beyond their control?as a reason for
not repaying loans. In this case, they are citing the collapse of
the Turkish economy.

The racketeering suit goes to trial next February. Nokia and
Motorola insist this case is about fraud. But it nevertheless
illustrates how, at the height of the bubble, even the world?s
most respected tech companies lost sight of what they do best.
Consider this: JPMorgan is getting global bad press because the
share of bad loans in its technology portfolio has risen by about
half to 12 percent, for a total of $752 million. By this past
June, Motorola?s share of bad loans had risen more than tenfold
to 78 percent, or a total of $2.3 billion, including the $2
billion it gave the Uzans.

And this is only the most spectacular case of how the equipment
makers got swept up in a bubble that is still collapsing. ?There
will be a shakeout,? warns Per Lindberg, telecom analyst with
Dresdner Kleinwort Wasserstein in London. Surely, beyond the
charges of fraud, this is a cautionary tale about handing out
loans to shaky ventures in unfamiliar locales, and a lesson that
will resonate across all industries, if only till the next
bubble.