Advertisement

A Warning in High Flier’s Fall

Share via

Backed by big money, cutting-edge technology and a good deal of Wall Street hype, Iridium, the space-based telecommunications system, was the darling of investors until it actually went to work last November. On Friday, after defaulting on some enormous loans, the company filed for bankruptcy. A lot of new technology stocks attract people willing to invest on little more than high expectations. As the Iridium case shows, disappointment can be part of the deal.

The $5-billion project was started 10 years ago with the brilliant idea of Motorola engineers to put several dozen satellites into low orbit and use the network to connect people anywhere on Earth by mobile telephone. When the company went public in June 1997, Iridium shares sold for about $18. The following May, they hit their high at more than $72, even though the company had yet to earn a cent. When trading was suspended Friday, the shares fetched $3.

What propelled Iridium to the stratosphere was the anticipation of huge profits, an outlook generated in equal parts by old-fashioned hype and Americans’ faith in new technology. It was Iridium’s abysmal business performance that sent the company on its slide.

Advertisement

The first company to enter the space-based global telephone market, Iridium might have poisoned the well for the handful of other companies--including Globalstar, ICO, Ellipso, Constellation and Teledesic--that are following in its path, spending a combined $25 billion on global communications systems.

Investor confidence in other technology ventures, especially Internet companies, remains unshaken. More than 60 new Net companies started selling shares to the public from last November through May, 38 of which doubled in price on the first day of trading. Like Iridium, they have no track record.

Three years ago Federal Reserve Chairman Alan Greenspan warned about investors’ “irrational exuberance.” Since then, the Dow industrials have gained more than 4,000 points. But Iridium’s trouble serves to remind that there is a downside to every upside.

Advertisement