The following post has two assignments namely;
On Friday August 13, 1999 Iridium LLC filed for bankruptcy in the United States
Bankruptcy Court in Delaware. 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 since it began commercial service in November
1998. Despite almost $6 billion of investment, the assets appear to be worth less
than $50 million. Your team of experts has been brought in to do a post-mortem
on the Iridium experience and provide an analysis of the things that went wrong.
1. Based on DCF analysis and using the forecast in Exhibit 5, determine Iridium’s
enterprise value, equity value and per share value. [HINT: when estimating
per share value, make sure to make adjustments for non-equity claims and nonoperating
assets, such as the proceeds from the warrant issue, preferred equity,
and the off-balance sheet loan from Motorola.]
2. What are the important determinants of value in your DCF valuation of Iridium?
How confident are you in your valuation? Compare your estimate to
Iridium’s stock price at the end of 1998.
3. Why is APV a better general approach to valuation than WACC in this case?
4. Assess Iridium’s financial strategy. In your view, did it have the wrong target
capital structure or issue the wrong kind of capital? How did Iridium justify its
target debt-to-total book capitalization ratio of 60%?
5. What caused Iridium to fail: was it a bad strategy, bad execution or bad luck?
If there are several factors, list them and evaluate their relative importance.