Against All Odds, a Telecom Rebirth
By STEPHEN LABATON and RIVA D. ATLAS
By the time Theodore B. Olson walked into a Washington courtroom on a cloudy morning in March, it would have taken close to a miracle to save his client, NextWave Telecom, from ruin.
Founded by a former top executive at Qualcomm (news/quote), Allen B. Salmasi, and financed by a group of veterans of Drexel Burnham Lambert, the defunct investment banking firm, and a coterie of hedge funds, NextWave had been stuck in bankruptcy since 1998; the United States Court of Appeals for the District of Columbia was its last hope.
The company had incurred the wrath of regulators, faced a formidable lobbying campaign by the wireless telephone industry and suffered two devastating setbacks in the Court of Appeals for the Second Circuit, in Manhattan. Unable to pay its debts, it had been stripped of its most vital asset, radio spectrum licenses it won in two auctions five years ago. Over the company's protests, they were resold in January, in the largest government auction ever, to some of the nation's most powerful telecommunications companies.
But three weeks ago, Mr. Olson won his biggest appeal since the Supreme Court agreed with his argument that George W. Bush was entitled to become president. Ruling that the government had confiscated NextWave's licenses improperly, the appellate court in Washington sent regulators and the rest of the industry reeling. The company says it is now poised to return from the brink with some prized assets — the licenses that it won with bids of $4.74 billion in 1996 but that were valued at this year's auction at nearly $16 billion.
Regulators and rivals still stand in the way, though, as do some federal policy makers, who fear that NextWave's victory could blow a hole in the budget that would force Congress and the White House to violate their pledge not to dip into Medicare and Social Security. The company must also find new backers on Wall Street, no small task at a time when telecommunications investors are suffering large losses.
The outcome of the tortured battle involving NextWave, the rest of the industry and the regulators is impossible to call. Already, it has prompted charges and countercharges of greed and duplicity and limitless finger-pointing. And it shows the consequences of mixing the worlds of government and finance, a combination that resulted from a well-intentioned attempt by Congress and regulators to award cellular licenses to small entrepreneurs.
With that policy, the government essentially socialized the financial risks and privatized potential gains. When NextWave could not, as it had planned, raise more money by going public — because the financial markets had grown wary — it could not pay the Treasury. The government, in turn, reclaimed the licenses and tried to reissue them to better-financed companies. Now that policy appears in tatters.
And despite bitter differences, all sides agree that the main victims have been consumers. Clamoring for better cell phone service as the airwaves have become more crowded, they increasingly find calls dropped or not completed, a problem that could have been greatly alleviated years ago had the licenses at stake here been put to use by now.
A Vision and a 5-Year Fight
Mr. Salmasi, 47, the central figure at NextWave, is an Iranian émigré and a former NASA engineer who with his family once owned nearly half of Qualcomm. Hailed by his Wall Street backers as a visionary and pilloried by rivals and regulators as a reckless speculator, he has come to embody both the promises and perils of entrepreneurship in one of the economy's hottest sectors.
After helping Qualcomm develop a powerful code for cell phone transmissions, Mr. Salmasi started NextWave in 1995 to fulfill his vision of a nationwide network that would sell airwave space to wireless carriers.
Through his salesmanship and an unusual federal program meant to encourage small entrepreneurs to enter telecommunications, NextWave attracted hundreds of millions of dollars in financing. Ultimately, it pledged to buy 63 licenses for $4.74 billion, paying just 10 percent up front, with the government financing the remainder.
Mr. Salmasi then began what has turned into a five-year battle with the Federal Communications Commission. Waging a bare-knuckles lobbying and legal campaign, he and his allies on Wall Street, many of whom have held on for more than five years, have spent millions of dollars to counter what they contend is an attempt by regulators and larger wireless companies to restrict competition by confiscating their licenses.
NextWave's moves included an audacious effort to use the bankruptcy proceeding to blunt the F.C.C.'s authority, as well as personal pleas by executives and investors to President Bill Clinton to intervene on the company's behalf.
So rancorous are the relations between NextWave and the F.C.C. that some current and former government officials say they have been told that the company hired private investigators to delve into their lives, an accusation that Mr. Salmasi denies.
The commission has battled accusations by NextWave's supporters and legal experts that it flouted federal bankruptcy law and tried to use its regulatory role to improve its standing in the bankruptcy proceedings. Agreeing with those critics, the appeals court in Washington admonished the commission last month.
"Applying the fundamental principle that federal agencies must obey all federal laws, not just those they administer, we conclude that the commission violated the provision of the bankruptcy code that prohibits governmental entities from revoking debtors' licenses solely for failure to pay debts dischargeable in bankruptcy," the court wrote.
The bitterness over the appeals court decision was palpable, and could be felt in the unusual statement issued by William E. Kennard, who stepped down as F.C.C. chairman earlier this year. One of the strongest critics of the company, Mr. Kennard called for a litigation cease-fire in light of the appeals court decision, but added, "The tragedy here is that by welshing on its promise to pay the U.S. government, NextWave could walk away with billions."
NextWave's executives and investors bristled at that. "In the United States, trying to settle your debt through the bankruptcy process does not make you a welsher," said Douglas P. Teitelbaum, one of NextWave's largest investors and a managing principal of Bay Harbour Management, an investment firm specializing in distressed securities.
Elbow Room in the Airwaves
The licenses at issue have become the holy grail of the information age. Seeking to expand to new domestic markets, wireless companies want to roll out the promising technology that they say lets consumers browse the Internet and retrieve e-mail at high speeds from cell phones or hand-held computers.
But the carriers came up against Mr. Salmasi's vision, which was financed by a group of speculative investors. The Drexel veterans in the investor group had gone this route before. In the 1980's, they had bankrolled entrepreneurs like Ted Turner in the entertainment industry and Craig McCaw, the cellular telephone innovator.
Bankers at the Canadian Imperial Bank of Commerce (news/quote), known as CIBC, where several Drexel veterans worked, teamed up with ING Barings to raise around $370 million for NextWave in 1996.
"I was just captivated by Allen," said Leon Wagner, then a top executive at the high-yield bond department at CIBC and now chairman of GoldenTree Asset Management, an investment firm.
Mr. Wagner and his colleagues at CIBC attracted a group of speculators to back NextWave. Amazingly, five years later, most of them have stuck with it, and some have even added to their stakes. The investors included Cerberus Capital Management, a New York firm that is one of the largest investors in troubled companies in the United States. Another investor was the Loews Corporation (news/quote), the hotel, insurance and tobacco conglomerate controlled by the Tisch family.
In the auction six months ago, the licenses NextWave had won attracted many big bidders. The biggest winner was Verizon Wireless, which bid nearly $9 billion; other victors included VoiceStream Wireless (news/quote) and business partners of AT&T (news/quote) and Cingular Wireless (the joint venture of SBC Communications (news/quote) and BellSouth (news/quote)). All that stood in the way of getting those licenses was the resolution of the lawsuit filed by Mr. Olson.
He was part of a large team of lawyers and lobbyists hired by NextWave and its creditors to counter the even larger team assembled by its rivals. The largest of those was AT&T, which has had a long tradition of influence in Washington.
The company has become the nation's largest corporate political donor in recent years, and its lobbying operations are headed by James Cicconi, a former top aide to the first President Bush. It employs a huge group of inside lobbyists, outside lobbying firms and lawyers. Others opposing NextWave, like Verizon, Cingular, VoiceStream and Nextel Communications (news/quote), have soaked up much of the remaining legal and lobbying talent in Washington.
Industry lobbyists include a firm run by Anthony Podesta, brother of John D. Podesta, the former chief of staff for Mr. Clinton, and the firm formerly headed by Nicholas E. Calio, President Bush's top assistant for legislative affairs. A large number of former government officials now work for NextWave's competitors.
Strength Against Strength
NextWave and its allies also flexed political muscle. Their team includes Haley Barbour, a former chairman of the Republican National Committee, and Robert L. Livingston, the Congressman who was elected House speaker but resigned before taking the post when it was revealed that he had had an extramarital affair. The company and its allies, prodigious political fund-raisers, persuaded two Democratic Senators, Robert G. Torricelli of New Jersey and Charles E. Schumer of New York, to join three House members in filing a brief in the Washington appeal supporting the company.
Its Washington effort has been helped greatly by Mr. Teitelbaum. After investing $20 million in the company over the years, he has spent around $2 million of his firm's money in legal and lobbying efforts.
Ultimately, the recruit to NextWave's legal team who made the difference was Mr. Olson. At the outset, though, he ran into trouble. He was blocked from appearing on the company's behalf at its appeals court argument in Manhattan after two appeals judges suggested that he had been retained to create a conflict of interest that would have prevented a former law partner who had been elevated to the bench from hearing the case. NextWave has denied the suggestion.
The F.C.C. had successfully argued before the appeals court in Manhattan that under the Telecommunications Act of 1996, it had virtually unlimited power to award and rescind licenses. But Mr. Olson argued that under a provision of the bankruptcy code that appeared to be in conflict with that act, the government could not rescind any licenses of a debtor in the midst of Chapter 11 proceedings.
Last month, when the panel unanimously agreed with Mr. Olson and issued its order, breathing new life into NextWave and delivering a stunning blow to the F.C.C., Mr. Salmasi said he shrieked for joy.
For Mr. Olson's current client, the ruling was decidedly less opportune. He went on to become the United States solicitor general, the administration's top lawyer, and his victory now threatens to cut into the federal budget just as the government is being forced to acknowledge a sharp decline in the projected surplus.
For F.C.C. officials and the large wireless companies, the case is not over. They have begun to consider how to retain the licenses.
Reed E. Hundt, the former F.C.C. chairman who oversaw the NextWave auction in 1996, now describes the legal and political battle in Dickensian terms.
"The courts have tied up valuable licenses in litigation that is the telecom equivalent of Jarndyce v. Jarndyce," he said in a recent interview, referring to the interminably foggy legal fight in the novel "Bleak House," in which the estate is consumed by decades of court wrangling.
Mr. Hundt and some current F.C.C. officials blame the courts, saying they have tied up spectrum and caused a delay that could cost the economy many billions of dollars as the licenses lie fallow.
The recent appeals court decision instead criticizes the regulators as ignoring bankruptcy rules and creating a poorly structured auction. Other critics who blame the regulators point out that two other companies have gone into bankruptcy after winning licenses in 1996.
NextWave's rivals accuse Mr. Salmasi and his backers of being spectrum speculators who want only to flip the licenses to some other company, reaping huge profits. To many in Washington, the company is seen not as a telecommunications business but as a lobbying and litigation machine.
Mr. Salmasi responds that he is genuine in his commitment to a nationwide wireless company. "Our intentions have always been to build out the network," Mr. Salmasi said. By February 1997, he said, the company had 700 employees and 22 offices around the country and had put in place close to half the infrastructure needed to begin its operations.
From Tehran to Qualcomm
Mr. Salmasi is no stranger to adversity.
He was raised in comfortable circumstances in Tehran. His father and uncle owned a construction company that built many military projects and refineries. The company was nationalized after the Iranian revolution in 1979. "They came to this country with whatever liquid assets they had offshore," Mr. Salmasi said, describing how his family fled from Iran. That money was enough to help finance his early entrepreneurial efforts.
Arriving in 1971, a few years ahead of the rest of his family, Mr. Salmasi obtained a bachelor's degree, with two majors, one in electrical engineering and the other in management economics, from Purdue University in 1977. (He later earned a master's in electrical engineering.)
He spent the late 1970's and early 1980's developing satellite communications for NASA's Jet Propulsion Laboratory. After the government urged that some agency technology be privatized, Mr. Salmasi used $5 million of his family's wealth to start Omninet, a satellite system he marketed to companies eager to monitor the locations of their trucks. After struggling for four years to expand, Mr. Salmasi merged his business with another small telecommunications start-up into a new venture that ultimately became Qualcomm.
Mr. Salmasi and his family, along with some other Omninet investors, received nearly half of Qualcomm's stock, a stake that was reduced to 30 percent after Qualcomm's initial public offering in 1991. The fortune that Mr. Salmasi made on Qualcomm provided him with the financial cushion, his allies say, that has enabled him to be patient in his battle with the government. While at Qualcomm, Mr. Salmasi began developing a new technology for transmitting cell phone signals known as C.D.M.A., for code division multiple access.
Brainstorming with friends, he decided in 1995 to enter the auction and start a new business. His original investors included Qualcomm, Sony (news/quote), PECO Energy (news/quote) and Pohang Iron and Steel of South Korea, which contributed to the down payment in the 1996 auctions.
Dividing the Spectrum
The groundwork for the 1996 auctions was laid three years earlier, when Congress gave the F.C.C. authority to conduct bidding for spectrum licenses. The agency was ordered to reserve portions of the spectrum for small companies.
Over the objections of some senior F.C.C. officials, the agency under Mr. Hundt adopted rules that enabled small companies to pay for their winning bids by putting down 10 percent and then paying the remainder over 10 years.
The conflict began shortly after NextWave won its licenses. It faced a complaint from some losing bidders, accusing it of violating the law by having too many foreign investors. NextWave protested mightily and was finally awarded the licenses in January 1997. But by then, bad blood had already developed with the F.C.C.
At the same time, the company was also stymied on Wall Street. Regulators said NextWave had difficulty finding new financing because it had overbid for the licenses. The company blames regulators for its problems, saying its licenses were devalued by additional auctions, making it difficult for Mr. Salmasi to raise additional money.
In March 1997, the commission suspended interest payments as it debated whether to restructure the obligations. The F.C.C. requested public comment, prompting many of NextWave's rivals to challenge the company.
It was at this point, some NextWave executives say, that government bias developed against the company. "It became a situation that was very politically charged," recalled Frank A. Cassou, NextWave's general counsel.
Agency officials deny that they were biased in favor of the established wireless companies and say they had only two goals: preserving the integrity of the auction process by getting payments on schedule, and moving the licenses into the market as quickly as possible.
The Plunge Into Bankruptcy
In October, the commission issued an order giving NextWave and the other financially distressed winning bidders a variety of options that let them surrender some or all of their licenses for full or partial forgiveness of their debts. None of the options permitted the companies to keep any of their licenses for less than their full bid price.
The commission concluded that it would be against the public interest to forgive a portion of the obligations, as the companies had sought, because such a deal would have permitted the bidders to keep their licenses at a significantly reduced price, which would have been unfair to the auction losers. The fear, officials said, was that a price reduction would set a dreadful precedent and that no bidders would take the rules of auctions seriously in the future.
In June 1998, after it failed to raise new capital, and appeals to overturn the order were unsuccessful, NextWave filed for protection in Federal Bankruptcy Court in Manhattan. Despite a series of legal setbacks, by the end of the next year it managed to line up investors willing to commit $1.6 billion for new equity. The group included Global Crossing, a telecommunications company, and the Pacific Capital Group, a Los Angeles firm founded by Gary Winnick, one of Global Crossing's original backers. Mr. Winnick, a billionaire, had been a Drexel junk-bond salesman. The investor group also included Liberty Media, the cable television concern, and the Texas Pacific Group, a private equity firm.
In January 2000, NextWave proposed emerging from bankruptcy by immediately paying the equivalent of the present value of the notes held by the government. The agency responded the next day by announcing its intention to re-auction the licenses. When the appellate court in Manhattan granted the F.C.C.'s request to exert exclusive control over the licenses, NextWave's reorganization plan collapsed.
A Battle Renewed
With little time to savor NextWave's recent resurrection, Mr. Salmasi is courting Wall Street investors anew to raise more financing. While he says his company is ripe for profitability, the market has again turned sour and his timing may again be against him. So far this year, the prices of junk bonds issued by telecommunications companies are down 24 percent, according to an index published by Banc of America Securities. Investors are skittish.
"This happens to be NextWave's cross to bear," Mr. Wagner said. "Every time we had the spectrum, it's been impossible to raise financing. And whenever we've been stuck in litigation, the market has been skyrocketing."
Still, Mr. Wagner, Mr. Salmasi and the rest of the NextWave team believe that they can raise the money. "We've got $16 billion in collateral," Mr. Salmasi said.
Some investors are clearly hopeful. NextWave's privately held shares, which traded as low as 20 cents in 1998, have risen from $3 just before the court ruling to $8.63.
For their part, government officials continue to consider whether to bring further legal appeals. Officials said last week that the agency's new chairman, Michael K. Powell, had not decided how to proceed, although he met recently with a NextWave representative. Regulatory challenges remain that may still block the company from obtaining the licenses, and many on the agency's staff are still deeply distrustful of Mr. Salmasi.
The rest of the industry continues to press the government to award the licenses to the companies that won this year's auction. A few months ago, Verizon Wireless put a $1 billion deposit in a government account that is not earning any interest. The company will suffer a humiliating business setback and lose a considerable amount of money if it fails to get the licenses.
But Mr. Salmasi says the new leadership in Washington presents his best chances of prevailing.
"This is a good time and opportunity for the new regime to put all this behind us," he said. "They are an independent agency, and at the end of the day should be able to make independent decisions, especially since we are all in a fishbowl."
nytimes.com |
