*BusWeek. Commentary: Why Motorola Should Hang Up on Iridium
When Motorola Inc. (MOT) executives dreamed up a globe-girdling satellite
communications system to connect wireless telephone users anywhere on
earth, it seemed like a grand idea. Motorola's engineers built a 66-satellite
orbital network with technology so complex that Motorola CEO Christopher
B. Galvin has called it 'the eighth wonder of the world.'
More than a decade--and a billion dollars--later, the wonder is whether the
project will fly. Since it was launched in November, Iridium (IRID) has signed
only 20,000 subscribers, far below the pace needed to nab 500,000 by
yearend. Revenues have fallen short of the $30 million promised to bankers,
putting Iridium in default on an $800 million line of credit. Now lead investor
Motorola, with its 18% stake, is under pressure to pony up more money.
That's the last thing Motorola should do. It could exit now with hardly a
blemish on its income statement. And bailing out would enable executives to
continue the turnaround in the company's core products: digital telephones and
chips.
VAIN HOPE. But Galvin is signaling support for the ill-starred project as it
comes under intense financial pressure. Chase Manhattan Corp. (CMB) wants
Motorola to put up $300 million to guarantee the $800 million loan. That's on
top of a $750 million loan Motorola has already guaranteed. And with a $90
million interest payment due on Aug. 15, bondholders are looking to Motorola,
too. Will Galvin dig into his pocket again? 'We believe in the business model,'
he says. 'We hope we will find a way to get through this.'
Galvin argues that wireless naysayers were skeptical when Motorola entered
the cellular phone business back in 1983. Critics predicted consumers
wouldn't abandon their regular phones, but the number of wireless subscribers
will hit 539 million worldwide in 2000. 'This is like deja vu all over again,'
Galvin insists.
Not necessarily. While industrial customers working in such remote places as
deserts may want Iridium, it needs a broader range of customers to be
profitable. But Iridium's birds can't handle more than 1,100 simultaneous calls
each. That means Iridium can't achieve economies of scale needed to offer
prices attractive to larger numbers of users.
What's worse, competition can only be expected to heat up. Globalstar
(GSTRF) is slated to start service in September. Teledesic, Lockheed Martin
(LMT), and Boeing (BA) want to launch services. Rivals will offer cheaper
packages than the $1,500 Iridium charges for phone gear and its $3-a-minute
calls.
All of this is making investors anxious. Though Motorola is coming off
second-quarter earnings of $273 million, up 44-fold from last year, its shares
dropped 6% in the past month as Iridium's troubles mounted. 'Investors are
worried Motorola is going to hang on,' says Mark McKechnie, a
wireless-telecommunications analyst for Bank of America Securities.
If the company doesn't, it could emerge relatively unscathed. Its financial
exposure is $1.3 billion, including bank guarantees, bonds it owns, and $400
million in vendor financing. While that shrinks Motorola's balance sheet, any
loss wouldn't count against earnings.
DISTRACTION. And Galvin established a 'profit reserve'--a cubbyhole to
stash $700 million in earnings from providing services and hardware to
Iridium--rather than letting the profits flow to the bottom line. The net effect:
Motorola's exposure is whittled down to roughly $600 million. That's easily
offset by cash Motorola is likely to record from recent sales of other
businesses, such as its semiconductor-components group. Better still, if other
investors rescue Iridium or buy the assets, Motorola could still rake in cash
from selling the new venture service hardware and operating its satellites.
The most disturbing downside to hanging on: As long as Iridium ties down
Motorola, the company could be distracted from its core businesses. With its
new focus on embedding chips in automobiles and appliances, Motorola's
semiconductor operation last quarter eked out a profit for the first time in
years. And after initially missing the transition from cellular to digital wireless
telephones, Galvin has made huge strides by introducing an impressive lineup
of digital handsets. Motorola also could focus on making new satellites for the
Teledesic system.
Galvin already has his hands full keeping the critical lines of business in good
shape. He's begun a credible turnaround. Dumping Iridium will allow it to
continue.
By Roger O. Crockett
With Catherine Yang in Washington
Copyright 1999, by The McGraw-Hill Companies Inc. All rights reserved. |
