0.cached.png
By Newsweek Editors
0
Share
Newsweek is a Trust Project member
See more of our trusted coverage when you search.Prefer Newsweek on Googleto see more of our trusted coverage when you search.
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.
Read More on News
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.
View 0 Comments
Submit Correction
View Editorial & AI Guidelines