OPIM 5894 ADVANCED PROJECT MANAGEMENTIRIDIUM LLC CASE

Team 1

http://users.business.uconn.edu/snair/opim5894.html

What caused Iridium to fail?

Prof. Suresh Nair, University of Connecticut

2

Over Estimating Demand and Difficulty Attracting Subscribers

Expected Demand did not materialize (2.25M subscribers were expected by 1998 - $2.3B Revenue)

The correct target market was not identified Competition from traditional cell phones much

higher than anticipated Cellular Providers expanded roaming

agreements High Handset Cost

What caused Iridium to fail?

Prof. Suresh Nair, University of Connecticut

3

Unable to fulfill orders Manufacturer issues slowed production Distribution problems prevented early

orders to be unfulfilled Prospective customers were confused

about ordering process and did not know who to buy from

Early ordering process disorganized

What caused Iridium to fail?

Prof. Suresh Nair, University of Connecticut

4

Financing Structure 83% Debt to Equity Ratio Much of the debt was short term financing Fulfilling debt obligations hinged on Iridium’s

ability to sign up subscribers very quickly High initial number of subscribers needed to

break even (approximately 1,000,000 needed) Iridium was essentially operating on

temporary debt extensions, which eventually caught up to them

Why did Motorola finance Iridium with project debt rather than corporate debt?5

Prof. Suresh Nair, University of Connecticut

Using project debt allowed Motorola to protect itself from the high risks related to the project

Motorola would have been able to enjoy the rewards, but were protected from failure

Putting the project on its own balance sheet could potentially adversely affect stock price

In 2008, “A judge has finally ruled that Motorola has nothing to pay over the bankruptcy of its Iridium satellite venture in 1999”

http://www.zdnet.co.uk/news/networking/2008/05/23/nine-year-iridium-bankruptcy-saga-over-for-motorola-39422962/

Lessons Learned?6

Prof. Suresh Nair, University of Connecticut

Spend more effort identifying target market Currently, government, military, “machine to machine” and

marine customers make up the bulk of customers (475,000 commercial, 48,000 government)

Assume a longer adoption rate, especially for such an unproven market

Maturity dates on loans were very aggressive, and thus did not allow Iridium to gain necessary subscribers to pay debt service

In high risk projects such as this, project financing can protect the project sponsors from failure due to “non-recourse”