Motorola & Telsim of Turkey

1. Motorola & Telsim of Turkey Group #8: Jeff Chi Jeffrey Chu Alyona Dzumak Jennifer Ting Lu Mike Yoon

2. Motorola Company Overview • Gained Success in the 1930’s by commercializing car radios • # 2 manufacturer of wireless handsets, 40% of sales comes from personal communication • Leading supplier of wireless infrastructure equipment such as cellular transmission base stations and amplifiers. • Semiconductor unit top producer of chips used in wireless and networking. • Largest customers are Nextel and KDDI • 50% of its sales comes from overseas mainly in China and South America

3. TelSim • Company founded in 1994 as a GSM provider • In 1995 signed 25 year agreement with Turkish government to provide GSM service • Provides service in 81 cities within Turkey using their network of 4,400 radio base stations. • One of the first providers to offer GPRS for faster data transfer. • Claims they are the only GSM provider in Turkey that is financed with 100% domestic capital

4. Motorola & Telsim • Telsim originally wished to partner with Motorola to bring 2.5 generation wireless technology to Turkey • Motorola provided Telsim with a financing contract from Motorola Credit Corp allowing Telsim to buy and deploy the U.S. firm’s GSM equipment • The 25 year license obtained from the Turkish government was funded using a loan from Motorola

5. Turkish Turmoil • In early 2000, Motorola provided nearly $2 billion of equipment and financing to TelSim of Turkey. • The loan appeared to carry very little risk given the potential of the Turkish market. • However, in 2000, the Turkish economy, long plagued by high inflation, low levels of economic growth, and political instability, was collapsing.

6. Economic Collapse • In February 2001, the fixed exchange rate in Turkey collapsed. • Trade and fiscal deficits • Foreign exchange reserve depletion • The purchasing power of the Turkish population was severely reduced and there was great capital outflow • In May 2001, TelSim failed to repay $728 million to Motorola, after failing to make over $240 million in vendor financing payments to Nokia. • In response, Motorola accelerated the required repayment schedule on the debt.

7. Motorola’s Exposure • Motorola had a call option on TelSim equal to 66% of the share ownership of TelSim. • In August 2001, Motorola hired Kroll and Associates to investigate the Uzan family’s financial status. • Motorola secured a worldwide asset freezing and disclosure orders against Kemal Uzan and his children. • Cem Uzan and his sister have been found to be in contempt of court because of their alleged non-compliance. • Motorola has requested that the court impose jail terms of up to 24 months.

8. On The Surface • The money loaned was intended to be used for buying base stations, switching equipment, telephones and other equipment needed to develop a GSM and 2.5G wireless network in Turkey. • “The commercial success of the next generation networks is related directly to their accessibility -- determined by the communications infrastructure,” said Gene Delaney, Motorola Senior VP • Adrian Nemcek, Motorola Corporate VP, “Turkey is a market with huge opportunity, and we will ensure that Motorola supports Telsim in this exciting market.”

9. On The Surface • Motorola estimated that the potential value of the agreement would have surpassed $2 billion US dollars. • Motorola would provide infrastructure, handsets and associated services for TelSim in a $1.5 billion contract to expand the carrier's nationwide GSM network. • The expansion would enable service for more than 5 million subscribers by the end of the year. • Contract to supply TelSim with Motorola's handsets with Wireless Application Protocol

10. Beneath The Surface • Vendor Financing — where vendors loan service providers money to buy their own equipment. • Usually, service providers requiring vendor financing have weak credit profiles and don't have enough cash to buy the equipment they need to fulfill their business plans. • Some analysts view the aggressive financing tactics of vendors as an act of desperation to win contracts and to push their way into new markets. • After a vendor finances a sale, it counts the sale as part of its revenues, and the financed equipment shows up as an asset on its balance sheet.

11. Beneath The Surface • Problem if the customer runs into cash flow problems. Previously recorded revenue will never be realized • If vendors don't offer to finance, the customer could default on its loans and cause the vendor to have reduced earnings or write-offs. If they do finance, it may prolong a dying business, which will create bigger problems down the road. • Vendor financing agreements are typically over 6-7 years, with 75% of capital repayment occurring after five years. • Past Exposure to a customer is often a way to keep them and vendor’s balance sheets afloat

12. Vendor Benefits • Vendor gets a multiyear customer contract. • If a service provider succeeds in building a network and then making revenues off the services it offers, the equipment vendor stands to win big by making money back on its financing, but also in new equipment sales to an established customer • In a race to gain market share, vendors may be able to deploy their new equipment first

13. Why Lend & Finance? • Expanding industry • High risk offset by potential growth and return • Low cost of capital • Easiness of borrowing cash • Competition • Overcoming the norms and customs barrier

14. Facts about Motorola • Past Exposure: Motorola had sold equipment to TelSim since the company started building out its 900 MHz network in 1994 • Total Exposure: Motorola disclosed that about $2 billion of the $2.9 billion in gross long-term finance receivables was related to TelSim • The funding was offered in incremental amounts going back to 1998 • According to Motorola TelSim named Motorola its exclusive regional GSM supplier for three years

15. Vendor Financing • “In moderation, vendor financing is a sound selling technique; abused, it’s a dangerous way to do business.” –Business Week May 2001 • By the end of 2000, many telecom-equipment suppliers were collectively owed as much as $15 billion by customers, a 25% increase in a single year. • In a February 2000 press release Motorola announced a $1.5 billion order from Telsim. Since the original announcement of the Telsim order, Motorola stock has fallen 69%, losing about $75 billion of its market value.

17. Types of Risk • Country-specific risk • Defective economic infrastructure • Corruption • Firm-specific risk • Business risk => 30-40% of $25 billion vendor financing worldwide was at risk of not being paid. • Motorola should not have extended so much credit to TelSim in an emerging market economy

18. Motorola’s Options • Insurance => transfer political risk to home country agency (i.e. OPIC) • Better negotiations of investment agreements • Intensive background check • FDI • Hedging?

19. Questions ?