Motorola

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 1930s 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. firms 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
Motorolas 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 familys
  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 vendors 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, its 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.

16
(No Transcript)
17
Types of Risk

• Country-specific risk
• Defective economic infrastructure
• Corruption
• Firm-specific risk
• Business risk gt 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
Motorolas Options

• Insurance gt transfer political risk to home
  country agency (i.e. OPIC)
• Better negotiations of investment agreements
• Intensive background check
• FDI
• Hedging?

19
Questions ?