Samuel Lowenberg - Independent Journalist biography articles articles

Motorola's $2 billion turkish bath

FORTUNE  October 14, 2002

 

When Motorola executives looked at Turkey in 1998, they saw riches: a country of 65 million people on the edge of Europe with fewer than two million cellphone subscribers. Only two companies had been granted wireless licenses by the Turkish government, and one of them, Telsim, needed suppliers. Motorola quickly cut a deal. Says Ed Hughes, the company's finance director: "Motorola and other competitors saw Turkey as an enormous opportunity, and we went for it."

Four years later the Schaumburg, Ill., company's visions of Turkish riches have dissolved into allegations of betrayal, fraud- even of murder threats. Not that you'll see any of this in Motorola's latest quarterly re port.

"During the 'telecom boom' that peaked in late 2000," it reads, "numerous wireless equipment makers, including the company, made loans to customers, some of which were very large." Very large indeed. Try $2 billion in cash and equipment to a company Motorola never fully vetted. And it wasn't alone in its folly. The Finnish wireless maker Nokia kicked in another $700 million to Telsim. Now neither one can get its money back.

The case is playing out in federal court in Manhattan, where Motorola and Nokia are accusing members of the family that controls Telsim, the Uzans, of hoodwinking them in an elaborate racketeering scheme. A trial is expected early next year. "Every preliminary indication is that the defendants, behind a facade of legitimacy, engaged in repeated acts of fraud and chicanery, and thereby perpetrated, and continue to perpetrate, a rather massive swindle," wrote U.S. District Judge Jed Rakoff after six days of pretrial hearings this spring.

Murat Hakan Uzan, the CEO of Telsim, denies the allegations of fraud and says he wants to repay the loans. Telsim defaulted, he says, because the Turkish economy crashed after a catastrophic earthquake in 1999, followed by a fi nancial crisis in early 2001. "In my conscience, before God, I don't think that this case can be ever against us," Hakan told FORTUNE. Motorola and Nokia "took substantial risk with billions of dollars" in an emerging market, he says. "But rather than portray the truth of the picture, they want to cover up their own decisions." The Uzans are one of Turkey's richest, most powerful clans. Family patriarch Kemal, 70, started with a construction business in the 1950s, which he expanded into a banking and media empire, now run by his sons, Cem Cengiz, 42, and Murat Hakan, 34. The family fortune is estimated at $1.3 billion, with more than 130 businesses in nine countries. But the Uzans have a history of deals gone sour-including disputes with Siemens and Saatchi & Saatchi- and scores of lawsuits pending against their companies.

In their eagerness to do deals at the height of the telecom boom, Motorola and Nokia gave Telsim loan on top of loan, hoping for a big payoff. They weren't the only companies playing at being banks. A 2001 report by McKinsey & Co. found that the nine largest telecoms had $26 billion in vendorfinancing loans outstanding, much of it to troubled startups.

How Motorola and Nokia ended up giving $2.7 billion to the Uzans is a story that anyone who has kissed a stranger at a bar after having had too much to drink will understand. The deal cut in London in 1998 made Motorola the exclusive supplier to Telsim in exchange for $360 million in equipment financing and $200 million to purchase Telsim's wireless license. As collateral, Motorola was pledged a 51% stake in the company. Hakan Uzan assured Motorola executives they had a hot property.

"Let's not kid ourselves by thinking that there is a financial exposure on your part," Hakan wrote in a Feb. 24, 1999, e-mail to Hughes that is part of the court record. Telsim, he said, had just received a written offer for $3.5 billion from a major European telecom company.

In February 2000, Motorola loaned Telsim another $450 million and increased its collateral to a 66% stake. By that spring Nokia was also deeply involved, eventually receiving 7.5% of Telsim's stock as collateral for $700 million.

But neither Motorola nor Nokia ever conducted a proper review of Telsim's fi- nances. Motorola spokesman Scott Wyman says the company did "considerable due diligence." But Motorola did not get Telsim's audited 1999 reports until April 2000, by which time it had loaned the company $1.3 billion. Even then, many questions were unanswered. "We had asked a couple times if we could send in auditors," says Hughes, in the first interview a Motorola executive has given on the debacle. "[Hakan] refused. We asked if we could talk to his auditors. He refused on that." The wireless makers allege that the Uzans went to great lengths to keep their finances secret. Once, in 1999, Hakan burst in on Hughes as he was dining at an Istanbul restaurant with auditors from Deutsche Bank, who were reviewing Telsim for a European export bank. Hakan claimed the auditors had taken internal documents without permission and barred them from Telsim's offices. Motorola also alleges the Uzans never intended to find a buyer for Telsim. In September 2000, Merle Gilmore, then chief of Motorola's wireless division, flew to Istanbul to meet Hakan. According to the complaint, Gilmore told Hakan, "in substance, CEO to CEO, eyeball to eyeball, 'I need your commitment that you will do everything in your power to sell the company or raise capital from alternative sources.'" Hakan said yes, and Motorola loaned Telsim another $700 million.

In all this time, Motorola and Nokia had never talked to each other about Telsim. When they finally did in early 2001, says Ernst Kramer, the Nokia executive who helped negotiate the company's financing, "it became totally clear what was happening. We went through the events, and their story is practically identical to our story." In hindsight, both companies suspect the Uzans used part of the loans to expand Telsim and the rest to prop up their banks. Motorola and Nokia also discovered that the Uzans held a secret shareholders meeting in Switzerland at which they tripled the number of Telsim shares. That watered down Motorola's collateral to 22% and Nokia's to 2.5%. The Uzans say that the money sent to the banks went to repay loans, and that the new shares were issued to guard against a hostile takeover.

When the two companies threatened the Uzans with legal action in the summer of 2001, the Uzans filed a criminal complaint in Turkey, charging senior executives of Motorola and Nokia with threats of kidnapping and murder. The Uzans claimed that after the cellphone companies hired investigative firm Kroll, family members received threatening phone calls and were followed. The complaint, which resulted in an indictment, accuses the executives of an "armed threat to kill." Motorola and Nokia dismiss the charges as absurd and are fighting them in Turkish court.

In January, Motorola and Nokia filed a RICO suit in the Southern District of New York accusing the Uzans of conspiracy to commit fraud. In April, Judge Rakoff issued an injunction freezing $30 million of real estate owned by the Uzans in New York and ordering them to turn over the disputed shares, valued at $1.5 billion, to the stewardship of the court. The Uzans refused.

Lawsuits in Turkey filed by three of their suppliers prevented them from turning over a controlling share of a Turkish company to foreigners, they said. But Rakoff found the Turkish suits were in "substantial measure the product of collusion" between Telsim and the suppliers, which did all their business with Telsim. One supplier was run by an Uzan first cousin.

In August, Rakoff found the Uzans in criminal and civil contempt for refusing to turn the disputed shares over to the court. Hakan in particular, he noted, had played an "obstructionist and deceptive role." The judge ordered the defendants to pay an escalating fine, doubling each month, until they complied. Meanwhile, a court in England granted Motorola a worldwide hold on $200 million of the Uzans' assets. Motorola and Nokia have been seeking diplomatic solutions as well. They hired Mark Paris, a former U.S. ambassador to Turkey, to push their case and asked the Bush administration to press the Turkish government on the issue. Even that may not help. Turkey's government is in danger of collapse, and Hakan's brother, Cem, is running for Prime Minister.

Motorola and Nokia were right about one thing: Turkey's cellphone market is taking off. Despite financial problems, Telsim has grown from 500,000 subscribers in 1998 to 6.5 million today. But even if Motorola and Nokia prevail in court, they might not benefit. "I doubt they are going to recover any meaningful amount of money," says Woytek Uzdelewicz, a telecom analyst at Bear Stearns. Indeed, both companies have already written off the full amount of the loans. Maybe there should be an entry in the accounts: tuition for lessons learned.

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