The Ball And Chain. Should Motorola Shed Iridium?
From the June 21, 1999, issue of Wireless Week
By Monica Alleven
Iridium LLC can lower its prices to lure subscribers, but its failure to successfully market its satellite phone service has created
an embarrassing situation for progenitor Motorola Inc.
Though Iridium is expected to unveil new pricing this week, it has left a cloud of uncertainty many Motorola investors would
rather see vanish. That unease has not yet been reflected in Motorola's steadily rising stock price. Some Motorola investors,
however, early on envisioned Iridium's demise. They see Iridium as a ball and chain and already entertain the possibility of
Motorola shedding the satellite company.
The equipment vendor hasn't yet said how much more financial support it will throw toward the $5 billion satellite venture, but
many investors would like to see Motorola shed its losses and climb on, unencumbered.
If that means Iridium files for bankruptcy protection, so be it, these investors say. While such a filing would not be considered
good business, it would likely lead to a one-time charge on Motorola's balance sheet, which the market tends to receive better
than, say, longer-term operational problems. A bankruptcy would let investors know the extent of the damage, and the Iridium
constellation would no longer be a drag on Motorola's performance.
Motorola's stock closed the middle of last week at $89.69 and has climbed to a 52-week high of $90.75.
"There's a lot of things going right for Motorola right now," said Legg Mason analyst Brad Williams. "Iridium is not one of
them."
Motorola's financial exposure with Iridium could reach $1.6 billion, but Motorola said any future commitments depend on what
the other partners in the 19-member operating consortium decide. Among the members are Lockheed Martin Corp. and
Raytheon Co.
Lockheed, for one, isn't keen on Iridium. A spokesman last week said Lockheed's relationship with Iridium is strictly as a
supplier, although it owns 1.5 million shares of Iridium stock. "We don't plan on increasing that investment, and we have very
low expectations toward its performance," said spokesman Jim Fetig.
At Motorola, where the idea for Iridium was hatched years ago, executives have not been nearly as harsh, saying only they will
wait to see how Iridium's new business plan shapes up and what the banks decide. In fact, the company's stock was up last
week after reports that a Motorola executive said the vendor would know in July whether it will invest more in Iridium. Some
investors took that as a positive sign for Iridium, whose stock bumped up to close at $7.31 Wednesday, up from $5.38 last
Monday.
Motorola, an 18 percent owner in Iridium, could walk away and cut its losses, the scenario many vendor analysts would like to
see. Or it could commit more to the project contingent on a timeline. In the least likely scenario, it could dig in deeper,
essentially saying, "We're committed no matter what." While the first option is the most appealing, an additional, limited,
investment in
a revamped Iridium might be palatable to investors, given that the 66-satellite system is up and running, Williams said.
Even if Iridium follows through with plans to lower handset and service prices and target vertical markets--as some analysts
have advised for some time--it won't be enough, skeptics say. The target market is too small, and the prices the company must
charge to gain an adequate return on its investment are too high for those niche markets to dole out, said Mark Roberts, analyst
at Everen Securities.
For Motorola, the Iridium venture has given it time to hone its expertise in satellite technology, and it can use that knowledge in
future endeavors. For now, the company's progress in code division multiple access technology, growing demand in
infrastructure equipment worldwide and a promising semiconductor market are working in its favor. It does not hurt that the
company has undergone a massive restructuring and cost-cutting program.
"We're still very much upbeat on Motorola," said Alex Cena of Salomon Smith Barney Inc., whose recommendation is a "buy."
With so much going for it, Motorola just might be able to rise above the Iridium fiasco and refocus its attention on more
promising ventures.
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