The Rise and Fall and Rise of Iridium
Iridium's constellation of 66 comsats was a technological triumph but a business disaster-until an executive and a computer geek found salvation in the Pentagon.
- By Craig Mellow
- Air & Space magazine, September 2004
(Page 3 of 4)
Before Adams could tweak his multibillion-dollar infrastructure, though, Colussy had to save it from being dumped in the Pacific. He came up with a business transaction nearly as global as Iridium itself. “The old Iridium board was a United Nations of investors who owned the gateways around the world,” Colussy recounts. “Naturally I started with them” in seeking backers for the new Iridium.
Colussy, who tells his tale over fresh tuna and watermelon served at an umbrella’ed patio table by a uniformed servant, brought a background as corporate American as they come. An engineer trained at the U.S. Coast Guard Academy in the 1950s, he added a Harvard MBA, then rose to the position of president of Pan American Airways in the 1970s. He converted the last company he ran, UNC Corporation, from a struggling builder of nuclear powerplants for submarines to a thriving aviation services provider, then sold it in 1997 to General Electric for $725 million. By 2000, he was comfortably retired. Still, he couldn’t resist the opportunity to turn Iridium around, so he started making calls to see who was willing to throw good money after bad.
In the end, he got four investors. The first was Syncom, a Washington, D.C.-based firm specializing in telecommunications investments that was eyeing Iridium for its potential in Africa and other developing regions. The second, Saudi Prince Khalid, he never met, but Colussy recalls that he “had some pretty tough negotiations with [Khalid’s] investment bankers.” The third investor was Brazilian telecom company Inepar. Colussy then added Quadrant, headed by an Australian venture capitalist.
Colussy was also working the Pentagon, with a lot of help from Mark Adams, who at the time was an engineer with the consulting firm Mitre Corporation. Although Motorola had originally rebuffed the Department of Defense (one more miscalculation), the armed forces eventually became part of the original Iridium consortium. They even built a secure system gateway in Hawaii for military use. Adams and Colussy got Department of Defense officials to commit to giving them $36 million a year in military business if their buyout came off.
With this success, Colussy went to Chase and a battery of other banks that owned Iridium’s assets in lieu of the money they had lent. In the spring of 2000, the creditors had almost gotten $600 million from Craig McCaw, America’s first great cell phone entrepreneur. Then the dot.com bubble burst, stock markets dipped, McCaw retreated, and Colussy’s motley crew, with its $25 million, was the only group left willing to back Iridium. “It wasn’t a friendly environment,” Colussy says in his unflappably modulated CEO voice. “But once they picked themselves up off the floor, they decided $25 million was better than nothing.”
Last-minute talks with Motorola, which was keeping Iridium aloft while the money men decided its fate, centered on the Earthbound topic of insurance. Motorola, already stung by lawsuits from original Iridium investors, wanted assurance it wouldn’t face any future liabilities from satellite debris plunging to Earth. “The chances of one of these hitting anyone’s house are pretty small,” says Colussy. Still, Motorola demanded full indemnity.
After meetings in London, Colussy produced a $3 billion policy from Lloyd’s. Not enough, Motorola said. Colussy, with help from his lawyers, then recalled an obscure federal law allowing the Department of Defense to indemnify civilian contractors engaged in hazardous work. He had used it in his Pan Am days so the airline could fly to Saigon during the Vietnam War. One problem: Authorization had to come from the secretary of defense. During the late fall of 2000, with Motorola past its deadline for trashing Iridium, Colussy managed to get meetings with top Pentagon officials, including then-Secretary William Cohen. By December 12 Motorola had its indemnity, and Colussy and his investors had Iridium.
Next came the task of converting the vast, gold-plated corporate Iridium into something as close to a garage start-up as Colussy and Adams could get it. Under Chapter 11 bankruptcy, the company was relieved of interest payments on about $5 billion in debt, which immediately lopped 40 percent off Iridium’s costs. Step two was to cut out Motorola, which had been charging the consortium $45 million a month in operating fees. Colussy switched to Boeing, which did the job for $3.5 million per month. Colussy closed corporate offices in favor of the Leesburg facility, rehired only 200 of the 600 employees that had been let go, returned to operational status only one of the 18 gateways (the Pentagon’s gateway in Hawaii had been excluded from closure), and ended up with eight percent of the old system’s costs. The original Iridium had needed one million customers to break even; the new version required only 60,000.