Iridium Is Looking A Little Star Crossed

The satellite-phone startup and parent Motorola are bickering

Motorola Inc. has been both mother and father to the satellite-phone system called Iridium. Motorola engineers hatched the idea for Iridium in 1987. The Schaumburg (Ill.)-based company provided the original funding for the 66-satellite system. It led the establishment of Iridium LLC as a separate company, supplied it with a chief executive, and pulled in other companies to finance what it estimates will be the project's $5 billion startup price tag.

But now Iridium and Motorola are engaged in a family feud that could delay the satellite system's pending $186 million initial public offering. They're fighting over when the much-ballyhooed Iridium will be up and running, allowing people to make voice calls or use pagers any place on earth. It was scheduled to start operating in September of next year. But according to financial documents, Motorola says there is an "excusable" delay in the launch because of problems with the McDonnell Douglas Corp. rocket that will carry the Iridium satellites into orbit.

No way, says Iridium. A McDonnell Douglas Delta II rocket launched by the U.S. Air Force did blow up on Jan. 17--and McDonnell has postponed launches pending an Air Force probe. But Motorola missed four scheduled launch dates before the explosion. Therefore, Iridium argues, there is no legitimate excuse for a delay, say sources close to the situation.

What's significant about the dispute is the effect it could have on the IPO, tentatively scheduled for later this spring. That probably can't happen until Iridium and Motorola resolve their differences.

Motorola executives play down the squabble. "It is an issue that needs to be resolved by McDonnell Douglas, Motorola, and Iridium," says Durrell Hillis, senior vice-president and general manager of Motorola's Space and Systems Technology Group. "In the grand scheme of things, it's not a big issue."

Still, Iridium can't afford any lengthy delays, since competitors are moving quickly to market. Most potent is Globalstar, a $2.5 billion satellite-phone system backed by Loral Space & Communications Ltd. that expects to start operations late next year. (Globalstar says it, too, has been delayed by problems with the Delta II rocket.) Whoever is first to market could seize the lead in what analysts estimate could be a $15 billion industry by 2005. "This is a very lucrative market opportunity," says Wolfgang Demisch, managing director at Bankers Trust.

TOUGH TALK. One person who wants to make sure Iridium doesn't miss that oportunity is Edward F. Staiano, who took a big pay cut last December to leave Motorola and become chief executive at the satellite system. Staiano is counting on his payoff from options on Iridium shares--once they trade publicly. Despite a 23-year career at Motorola, Staiano is talking tough. He's insisting that Motorola meet its supply agreement--or pay the penalties.

Staiano's hard line has to be popular with Iridium's other investors such as Sprint Corp. and the parent companies of Bell Canada and Telecom Italia. Their role is overshadowed by that of Motorola, which is Iridium's principal investor, holding about 25% of its stock, as well as the lead contractor for construction and operations.

McDonnell Douglas says it will charge Motorola tens of millions of dollars extra to compress its schedule and get all the satellites launched by the original deadline of June, 1998, according to sources. Motorola wants Iridium to pick up the additional costs, but the hard-nosed Staiano is having none of it, the sources say. McDonnell, Motorola, and Iridium won't comment.

It's in everybody's interest to get the satellite-phone system up and running by next September, so there's little doubt Motorola and Iridium will patch things up and agree on how to pay for meeting the launch deadline. "Our plan continues to be to launch the entire system on schedule," says Motorola's Hillis. But the cost may be big bucks and family strife.

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