The company, a $5.5 billion venture backed by Motorola, offered global phone, fax, and paging services via satellite, but had been having trouble attracting customers ever since it began commercial service in November 1998. Some questions for the case are:
1. Critique the financing choices of Iridium up to January 1999. Pay special attention to the theoretical motivation for the use of either debt or equity. 2. Value Iridium’s shares as of January 1999 and as of May 1999. 3. Propose a reorganization plan for Iridium based on your value estimates and the outstanding claims as of July 1999 4. Based on your value estimates and the reorganization plan, estimate the magnitude of the costs of financial distress for Iridium as a fraction of firm value in January 1999.
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 long-term market risk premium equals 7.5%) 2. What caused Iridium to fail: was it a bad strategy, bad execution, or bad luck? Was Iridium’s financial structure to blame for its ultimate failure? Why, or why not? 3. With regard to Iridium’s financial strategy, did it have the wrong target capital structure, issue the wrong kinds of capital, or issue capital in the wrong sequence? Which capital structure theory justifies its target debt-to-total book capitalization ratio of 60%? 4. Why did Motorola finance Iridium with project debt instead of corporate debt? 5. What lessons regarding the financing of large, Greenfield projects do you draw from this case study?