Note: The authors thank three Kellogg students from Turkey-Ömer Cagirgan, Emre Sucu, and Ömer Özvardar-for their huge contribution to the writing of the case and their insights into Turkish culture. Additional information was received from the Research & Information Department of McKinsey in Istanbul. Date of original writing: December 2005.
To boost sales, major technology vendor companies have been lending money to customer companies, especially in emerging markets such as Turkey, China, and Latin America, where growth prospects seem bright. This approach is called vendor financing. In this case, the equipment vendors lent money to wireless carriers who in turn bought product from the lender and in principle were to use revenues generated by selling the equipment and minutes to pay back the loan over time.
Two of the world's leading mobile phone companies, Motorola (United States) and Nokia (Finland), have been active in vendor financing in Turkey. Nokia first entered Turkey in the 1960s, Motorola in the 1990s. Despite good experiences there, recently Nokia and Motorola have had to learn the art of negotiation and dispute resolution in a Turkish cultural setting.
This case describes Motorola and Nokia's vendor financing experience with the Turkish cellular phone operator Telsim Mobil Telekomunikasyon, from making the initial deal to provide Telsim with telecommunications equipment to fighting to limit the economic damage after Telsim used the loan for other operations and refused to pay the money back. In this case, the two rivals, Motorola and Nokia, ultimately joined forces in order to achieve the best results.
Background
The Turkish economy is prone to rapid fluctuations and high inflation. A handful of rich and powerful families control a large share of assets in Turkey, illiteracy is still an issue (13.5 percent of the seventy million people can't read1), and university students are a lucky minority. Corruption is a problem. In the Corruption Perceptions Index 2005 (in which Iceland ranks first, Finland second, and the United States seventeenth), Turkey ties for sixty-fifth, together with Ghana, Mexico, Panama, and Peru.2 Doing business in Turkey requires having connections to the right people, from leading families and businessmen to politicians and civil servants. Mediterranean culture is predominant in Turkey, and of Western companies, Italian businesses seem to be the most successful there.
At the time of the events in this case Telsim was part of a family-owned conglomerate, the Uzan Holding. The Uzan family was one of the rich and powerful families in Turkey. In addition to Telsim, the Uzan Holding comprised 219 companies, including TV stations, energy companies, various manufacturing facilities, and banks such as the Uzan-owned Imar bank.3
Also during the time of this case, the Uzan family was engaged in politics. Cem Uzan, son of Kemal Uzan, the family patriarch and head of the Uzan Holding, was the leader of the Genc party in the 2002 parliamentary elections. These elections were accelerated because of the government's then failing economic policies. Most parties' election campaigns focused on the economy, European Union membership, and the U.S.-Iraqi situation. Cem Uzan's Genc party conducted a populist and patriotic campaign and made enormous economic promises to the Turkish people. In the end the Genc party got 7.2 percent of the votes but failed to reach the 10 percent threshold needed for a party to put its candidate into the parliament. Had Cem Uzan become an MP, it would have been nearly impossible to sue him, which some speculate was his reason for going into politics in the first place.
Events of the Case
Telsim's Deals and Defaults. Motorola and Nokia each made separate deals with Telsim. Motorola lent Telsim $2 billion in 1998. Nokia followed in 2000, lending Telsim about $700 million. The money was to be used for the purchase of base stations, switching equipment, telephones, and other equipment needed for the development of a wireless network in Turkey. Backing the loans were pledges by the Uzan family of a 66 percent stake in Telsim for Motorola and a 7.5 percent stake for Nokia.
After receiving both loans, the Uzan family illegally maneuvered to dilute Motorola's and Nokia's equity stakes to 22 percent and 2.5 percent respectively by issuing new shares. Normally, stockholders would have a meeting and vote on the issuance of new shares. However, Cem Uzan announced the mandatory extraordinary shareholder meeting through small Turkish newspapers in order to prevent Nokia and Motorola from learning about the meeting. In the absence of Motorola and Nokia, the attending shareholders decided to increase the company's equity. Legally in such an equity increase, shareholders have the option of investing an additional amount of money proportional to their initial stake. Cem Uzan did so, but not knowing about the opportunity, Motorola and Nokia did not.
In June of 2000 Telsim defaulted on its debts to Motorola. Motorola first discussed the default in public in July 2001 and stated that it was considering legal action against Telsim.
The Imar Bank and Involvement of the Turkish Banking Industry. When Telsim stopped paying Motorola and Nokia, it became clear that the Uzan family had been having financial difficulties in its other businesses as well. The Uzan-owned Imar bank had played the central role in financing the majority of the family's companies. This bank attracted the savings of many individuals with dubious offerings, such as EUR and USD bank accounts with 15 percent interest rates. The bank was using these private investment funds to shore up Uzan-owned companies, among others Telsim. This was possible because similar operating procedures had been common in the Turkish banking industry over the previous decade. In 1994, macroeconomic imbalances contributed to an overreliance by Turkish banks on foreign currencies. As a result of excessive risk taking, Turkish banks were unable to meet their obligations to foreign banks. In January 2000, the interplay of a weak, risk-loving banking sector and the overreliance on inflows of money with outrageously high return expectations left the country extremely vulnerable to a swing in confidence.4
Although the Imar Bank did not go bankrupt in the 2001 banking sector crash, the Turkish government started to observe the bank's operations through the Banking Regulation and Supervision Authority (BRSA), which had been founded in 2000. From June 2001 onward, the BRSA had a representative on the Imar Bank board. However, the representative was kept unaware of the true state of the bank until the very end of 2003.
Motorola and Nokia Seek Compensation. Meanwhile Motorola and Nokia had taken legal action. In January 2002 Motorola and Nokia filed a joint lawsuit in the U.S. District Court in New York. The companies claimed that the owners of Telsim, the Uzan family, took out loans they never intended to repay. Motorola and Nokia alleged thirteen counts of wrongdoing under the U.S. Racketeer Influenced and Corrupt Organizations Act (RICO). Motorola sought more than $2 billion and Nokia more than $700 million in compensatory damages. The companies also wanted to collect punitive damages and treble damages. The suit was filed against Kemal Uzan, the head of the family, as well as several other family members, three Uzan-controlled firms, and an individual close to the family.5 Other lawsuits followed in London (by Motorola) and Zürich, Switzerland (by Nokia) in an attempt to ground further assets and cash on bank accounts of the Uzans. By the end of 2003 the U.S. District Court had ruled in favor of Motorola and Nokia, followed by the British and Swiss courts in early 2004.
The Uzan Family Refuses to Repay. The Uzans still refused to pay, questioned the courts' legitimacy, and demanded that the dispute be heard by a three-person arbitration panel in Switzerland (the agreed formula for dispute resolution stipulated in the original contract). The Uzan family also filed a series of countersuits in Turkey, but those suits were dismissed. According to the Uzan family, they were being persecuted by the government because of the increasing popularity of Cem Uzan's political party. (After losing in the 2002 elections, Cem Uzan had repeatedly attacked Prime Minister Erdogan politically and personally through the media, predominantly the TV stations that were controlled by the Uzan family.)
Although the courts had given Motorola and Nokia the legal rights to go after the money, the Uzan family assets were mostly in Turkey. The assets that were grounded outside Turkey did not come even close to the value that was claimed. Further, several members of the family, as well as board members of the Imar Bank, had gone underground and could not be reached from August 2003 onward. At this point both companies gave up any hope of collecting, as illustrated by the fact that both companies' financial statements of the year 2003 show an extraordinary expense due to uncollectable receivables from this case.
At the end of 2003, the Turkish government, now under the Prime Minister Recep Tayyip Erdogan, discovered that $6.2 billion was missing from the Imar Bank. With the world's largest bank fraud at hand, the Turkish Savings and Deposit Insurance Fund (TMSF), responsible for government backing of savings, stepped in.
The Turkish Government Steps In. In 2004 the TMSF seized the ownership of all companies owned by the Uzan family, including Telsim, plus the family's private property, because of the fraud-related collapse of the Imar Bank. The TMSF itself was unhappy with the Uzans, claiming that the family owed it $6 billion. Apparently, in addition to that owed TMSF, the Uzans owed another $600 million to $700 million to various other Turkish government agencies. The family's total liabilities amounted to more than $10 billion.
Motorola, Nokia, and TMSF sat down at the negotiating table. In August 2005 the three parties agreed to share in the proceeds of Telsim's assets, according to the following formula: Motorola, 20 percent; Nokia, 7.5 percent; TMSF, 72.5 percent. In addition, Motorola received a one-time cash payment of $500 million. Vodafone bought Telsim in December 2005 for $4.55 billion.
Discussion Questions
1. Motorola apparently had conducted no business in Turkey prior to the Telsim deal. Motorola's interests were clear: a Turkish market with a population of seventy million and double-digit growth rates for many years to come was certainly a temptation, and entering the Turkish market successfully could open future business opportunities in neighboring Georgia, Armenia, Iran, Iraq, and Syria. Yet Ericsson, the Swedish telecommunications manufacturer with the largest market share in the network equipment business worldwide, had a budget of $2 billion for all its vendor financing deals together, and Motorola shelled out this amount for one deal only. Motorola made a fundamental negotiation mistake in addition to several strategic mistakes in this investment. What were these mistakes?
2. Why did the Turkish government in the form of TMSF agree to share the funds generated by the sale of Telsim's assets with Motorola and Nokia, knowing that these companies had both already written off their losses associated with Telsim?
Chronology of Events
• 1923: The Republic of Turkey is formed under the lead of Mustafa Kemal Atatürk. The newly formed republic looks at western Europe as a model for its secular democracy.
• 1959: Turkey applies for membership in the European Economic Community (EEC).
• 1963: Turkey is granted associate membership in the EEC.
• 1963: Nokia enters the Turkish market.
• 1987: Turkey applies for full membership in the EEC.
• 1994: Turkish cellular phone operator Telsim Mobil Telekomunikasyon is formed. Nokia and Telsim enter into their first business relationship.
• 1995: A customs union between Turkey and the European Union is formed.
• 1995: Motorola enters the Turkish wireless market, which is perceived to be on the verge of explosive growth.
• 1998: Motorola lends $2 billion to Telsim to be used for the purchase of base stations, switching equipment, telephones, and other equipment needed for the development of a GSM and 2.5G wireless network in Turkey.
• 1999: Turkey becomes an official candidate for European Union membership.
• June 2000: Nokia lends about $700 million to Telsim to be used for the purchase of base stations, switching equipment, telephones, and other equipment needed for the development of a GSM and 2.5G wireless network in Turkey.
• June 2000: Telsim makes its last payment to Motorola under the agreement.
• December 2000: The Uzan family requests to reschedule loan payments.
• April 2001: The Uzan family illegally dilutes the value of stock pledged as collateral for the loans and reaffirms this action in a Telsim shareholders meeting on January 4, 2002.
• 2001: A bank crisis occurs in Turkey, resulting in the devaluation of the Turkish lira. The Turkish government begins to observe Imar bank.
• July 2001: Motorola voices concerns about the loan in public and states that it is considering legal action against Telsim.
• January 2002: The Uzans stage a meeting of the Telsim shareholders in which they eliminate the control rights of the shares pledged as collateral for the loans and take actions that would permit the transfer of Telsim's illegally obtained assets to a Turkish foundation, seemingly beyond the reach of Motorola, Nokia, and the other creditors of Telsim.
• January 2002: Motorola and Nokia file a joint lawsuit in the U.S. District Court in New York. The companies claim that the owners of Telsim, the Uzan family, took out loans they never intended to repay. Motorola and Nokia allege thirteen counts of wrongdoing, including four counts of criminal activity under the U.S. Racketeer Influenced and Corrupt Organizations Act (RICO). The suit is filed against Kemal Uzan, Telsim chairman Hakan Uzan, board member Cem Uzan, three Uzan-controlled firms, and an individual close to the family. Motorola seeks more than $2 billion and Nokia more than $700 million in compensatory damages. The companies also want to collect punitive damages, as well as treble damages in connection with the four RICO charges.
• March 2003: Recep Tayyip Erdogan becomes the prime minister of Turkey. Although Erdogan has provoked some tension in secular Turkey with a profoundly Islamist agenda, his administration carries out a wide array of economic reforms.
• July 2003: The U.S. District Court's ruling orders the members of the Uzan family and the companies they control to pay Motorola $2.13 billion in compensatory damages and another $2.13 billion in punitive damages. The Uzans deny and question the court's legitimacy, demanding that the dispute be heard by a three-person arbitration panel in Switzerland-the agreed formula for dispute resolution stipulated in the original contract.
• February 2004: The Arbitral Tribunal in Zürich approves Nokia's claim against Telsim.
• February 2004: The Turkish Savings and Deposit Insurance Fund (TMSF) seizes ownership of all companies owned by the Uzan family, including Telsim. The seizure stems from the fraud-related collapse of the Uzans' Imar Bank.
• August 2005: Nokia and Motorola reach an agreement with the TMSF to share in the proceeds of Telsim's assets. Motorola receives $500 million in cash as settlement. By the end of 2005, Telsim is expected to be sold to the highest bidder. The Turkish government has set a minimum price of $2.8 billion. Motorola is entitled to 20 percent of the sale proceeds, Nokia to 7.5 percent.
• October 2005: Turkey begins its official membership negotiations with the European Union. Leader of the negotiations on the Turkish side is the minister of finance, Ali Babacan, Kellogg graduate, class of 1992.
• 2014: This is the earliest time the European Union can admit Turkey. The reason for this is that the EU budget for 2007-2013 takes no account of the costs of Turkey's accession.
Notes
1. CIA World Factbook, available at www.cia.gov/cia/publications/factbook/index.html.
2. Transparency International, available at www.transparency.org. This organization measures corruption in countries around the world.
3. "The Uzans' Adventures in Banking," Balkanalysis.com, October 7, 2003, available at www.balkanalysis.com/modules.php?name=News&file=article&sid=151.
4. Turkish Economy, available at https://en.wikipedia.org/wiki/Turkey#Economy.
5. N. Winkler, "Leaving the Rollercoaster: Turkey, Stability and the EU," Turkish Policy Quarterly, available at www.turkishpolicy.com/default.asp?show=fall_2005_Winkler#_ftn23.
6. "Turkey: Telsim: Motorola's Pyrrhic Victory?" Balkanalysis.com, August 15, 2003, available at www.balkanalysis.com/modules.php?name=News&file=article&sid=114.