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IRRIDIUM LLC

Strategic Financial Management

Submitted to:

Submitted by:

Dr. Sudershan Kuntluru

Group 2
Nishant Dey Purkayastha
(PGP/18/153)
Amritanshu Roy (PGP/18/180)
Angara Saxena (PGP/18/181)
Sulekh Jain (PGP/18/224)
Aniruddha Ghosh (PGP/18/284)

Contribution of each Member


Roll no.
PGP/18/153
PGP/18/180
PGP/18/181
PGP/18/224
PGP/18/284

Name
Nishant Dey Purkayastha
Amritanshu Roy
Angara Saxena
Sulekh Jain
Aniruddha Ghosh

Contribution %
20%
20%
20%
20%
20%

1. Assuming the market was rational at the time (i.e. market prices reflect
fundamental values), how much was Iridium worth on a per share basis
at the end of 1998 according to the projections in Exhibit 5? What are

the important determinants of value? How confident are you in your


answer? (Please assume the market risk premium equals 7.5%.).
Risk Premium: 7.50, Risk Free Rate: 5.09%
Expected Asset Return (Ra): Risk Free Rate + Asset Beta*Risk Premium
Expected Asset Return (Ra): 5.09 +1.28*7.50 = 14.69%

TerminalValue2007
PresentValueofTV

NPVvalueofIridium'sEquity

FirmValue
NPVDebt

$28,212.7
7
$8,217.05
$12,788.0
2
$15,035.2
7
$2,247.26

Iridiums first foray into the public markets occurred in June 1997.Iridium World
Communications Ltd. (IWCL), a Bermuda corporation sold 12 million shares at
$20.00 a piecethese shares represented 8.5% of Iridiums total outstanding
shares
Total Outstanding Shares=141.1765 Million
Iridiums Worth Per Share Basis= $90.58 (I.e. After Debt NPV/ Total Shares
outstanding)

Determinants of the Value

Interest Rate
Cost of Equity
Capital Cash Flows

2. Conduct sensitivity analysis on the valuation. Why is Iridium potentially


worth so much?
Enterprise Value
Terminal Perpetuity Growth Rate
Disco
unt
Rate

0.5%

10.7%

$22,910.6

12.7%

$17,723.5

14.7%

$14,058.6

16.7%

$11,348.5

18.7%

$9,275.4

2.0%

2.5%

$25,549.
0
$19,277.
1
$15,035.
3
$11,992.
4

$26,643.
2
$19,896.
6
$15,414.
2
$12,237.
4

$9,715.8

$9,880.7

3.5%
$29,288.
2
$21,337.
8
$16,273.
8
$12,782.
9
$10,243.
1

4.5%
$32,787.
8
$23,131.
0
$17,302.
0
$13,417.
9
$10,656.
6

Equity Value
Terminal Perpetuity Growth Rate
Disco
unt
Rate
10.7%
12.7%
14.7%
16.7%
18.7%

0.5%
$20,663.3

2.0%

2.5%

$9,101.2

$23,301.
7
$17,029.
8
$12,788.
0
$9,745.2

$24,395.
9
$17,649.
3
$13,167.
0
$9,990.1

$7,028.1

$7,468.5

$7,633.4

$15,476.3
$11,811.3

3.5%
$27,040.
9
$19,090.
6
$14,026.
5
$10,535.
6
$7,995.8

4.5%
$30,540.
6
$20,883.
8
$15,054.
8
$11,170.
6
$8,409.3

Value Per Share


Terminal Perpetuity Growth Rate
Disco
unt
Rate

0.5%

2.0%

2.5%

3.5%

4.5%

$146.37
$109.62
$83.66
$64.47
$49.78

10.7%
12.7%
14.7%
16.7%
18.7%

$165.05
$120.63
$90.58
$69.03
$52.90

$172.80
$125.02
$93.27
$70.76
$54.07

$191.54
$135.22
$99.35
$74.63
$56.64

$216.33
$147.93
$106.64
$79.13
$59.57

As per a report by McKinsey (Exhibit 2), the MSS market is expected to grow at a
CAGR of 60.3% from 2003-04. Analyst projections are also very upbeat about
Iridium and revenue are projected to grow at 100% or more from 1999-2000 and
it saturates only after 2004. The market is factoring in all this positive news that
is being reflected in the stock price.

3. What caused Iridium to fail: was it a bad strategy, bad execution, or


bad luck?
The reasons for failure can be attributed to both bad strategy and bad execution.
Bad Strategy

Marketing and Sales mistakes: Size too big and phones not available in
stores when advertising campaign was run
Overpriced phones: $ 3,000
Prices too high: $3.00 - $7.50 per call
Mixed predictions regarding the mobile satellite market
Leslie Taylor Associates predicted a user base of 7 mill. subscribers and
revenues of $8 20 bill. by 2003
Forrester Research predicted that the global satellite market would be as
much as $36 bill. by 2005.

Very ambitious project


Iridium had signed 256 operating agreements with local providers in over
100 countries by July 1999. The company still had to negotiate
agreements with another 140 countries and territories

Project Financing
Iridium LLC was a spin-off from Motorola. It was assumed that once the
project is complete, would resemble a utility company with high margins
and steady cash flows. There was no proper planning for the entire project
and no contingency plan either.

Bad Execution

4.

It failed to answer over 1 mill. sales inquires due to internal confusion and
experienced logistical problems trying to distribute phones
In March 1999, it was unable to fill 15,000 orders for satellite phones
because the manufacturer could not ramp up production fast enough.
Erroneous target estimation in terms subscribers and thus revenues as
well. Iridium announced that it had only 7,188 satellite subscribers,
10,294 total service subscribers and cumulative cash revenues of
$195,000 as of March 31 [Expected: 27,000 subscribers, 52,000 total
service subscribers and $4 mill. of cash revenues]
The Brick Size Phone (Battery Recharging Issue)
Advertising: Spent $180 mill. campaign

With regard to Iridiums financial strategy, did it have the


wrong target capital structure, issue the wrong kinds of capital, or
issue capital in the wrong sequence? Examine its target capital
structure of debt-to-total book capitalization ratio of 60%?
Target D/V ratio of 60%:

Cannot be explained by trade off theory since tax rate is 15% only.
Although Pecking order theory and Signaling theory support preference of
debt over equity but do not explain the high D/V ratio.
According to one source Iridium could have sold shares worth 1 billion US
dollars in comparison to 240 Million US dollars only.

Financing Sequencing

5.

Started with equity during the riskiest stage (research) since debt would be
mispriced due to asymmetric information and risk.
In development, brought in more equity, convertible debt and high yield debt.
This portfolio matches the risk profile then.
For commercial launch, got bank loans: agency motivations emerge.
Iridium major debt finance was short term debt with the maturity with in few
years
Low marketing campaign-Iridium fails to launch proper marketing campaign
and loses its major share in the market.

What lessons regarding the financing of large, greenfield


projects do you draw from this case study?
Financial Viability
Parameters like IRR, sensitivity analysis, payback period should be used to
determine financial viability
Such projects can be evaluated as a Real Option

Short maturity dates on loans did not provide sufficient time to gather
enough subscriber revenues to service the debt
Provide stock options to managers to align personal interests with the
projects success
Be conservative with estimations and projections, especially for untested
markets

Commercial Viability
Test market; Limited roll-out; Focus group
Better understanding of the competition; over-estimation of the practicality of
the device and usage;
More time in analyzing Target Market (wrong target market; should have
targeted Dept. of Defense)
Thorough Market Analysis, study gap in the market, Optimistic vs Pessimistic
predictions, contingency plans
Stakeholders and departments need to be in sync with the project objectives