September 29, 2010
Syncomâ€™s New Frontier
It was one of the biggest deals that almost didn’t happen. As part of an investment team, Syncom Venture Partners (No. 8 on the be private equity firms list with $410 million in capital under management) was negotiating with telecommunications giant Motorola Inc. to acquire its satellite subsidiary, Iridium L.L.C. As the parties hammered out the details, a technician at Iridium’s Tempe, Arizona, operations center stood ready to begin the process of bringing the $5 billion constellation of satellites–orbiting at an altitude of 483 miles–into the Earth’s atmosphere to destroy them.
Syncom honchos Herbert Wilkins Sr., Terry L. Jones, and Duane McKnight knew that a deal of this magnitude could send their private equity firm into the financial stratosphere. But to close it would require delicacy–and nerve. For one, the world’s largest commercial satellite constellation was in Chapter 11 bankruptcy. The Motorola brass wanted to pull the plug on the venture to stem its hemorrhaging of capital. But one doesn’t simply shut down a system of satellites without considering the risk of one crashing into a populated area, so deorbit software was developed that would bring down all 66 satellites and incinerate them once they re-entered the Earth’s atmosphere. Set in orbit between 1997 and 1998, these original satellites, plus seven spares for use in case of failure, allow small communication devices to operate anywhere in the world, pole to pole. They also enable airplanes and ships to connect to a grid for global communications. It was a great idea; the problem was Motorola’s flawed business model, which relied too heavily on the consumer market and on the technology’s use in mobile telephones. The company needed more consumer subscribers than its service attracted. The phones were bulky and expensive ($3,000) and didn’t work indoors. In the 12 years it took to launch the satellites, terrestrial cellular phone use had exploded. The technology had evolved rapidly, and now cellular phones were used in virtually all cities worldwide that business travelers frequented. Its business plan outdated, Iridium was forced into bankruptcy in August 1999.
Motorola failed to attract a buyer for Iridium and opted to shut it down. But Syncom, along with a group of investors the firm put together, saw something in Iridium that few others could see. Possessed with the vision to acquire this innovative satellite system, the investors did just that for a mere $25 million. They ended up with a company that later sold for $436 million and retained an interest in its successor, which went public. Reviewing the transaction reveals Syncom’s vision, audacity, and discipline to explore and conquer uncharted business frontiers.
Deal at the 11th Hour
Based in Silver Spring, Maryland, Syncom is a private equity firm founded as Syndicated Communications Inc. in February 1977 to diversify media ownership in the U.S. The firm’s investments have included Black Entertainment Television, the first black-owned cable network, started by serial entrepreneur Robert L. Johnson and now owned by media conglomerate Viacom; broadcast giant Radio One Inc. (No. 17 on the be industrial/service companies list with $272 million in revenues); and cable network TV One L.L.C. (No. 44 on the be industrial/service companies list with $89.6 million in revenues). It has five funds to date with investors or limited partners that include the state of Connecticut; CalSTRS, the California State Teachers Retirement System; the New York State Common Retirement Fund; and Fairview Capital Partners Inc. (No. 1 on the be private equity firms list with $3.1 billion in capital under management). As the face of media changed so did Syncom’s investments, which transitioned from radio and television to digital media.
The Iridium deal was part of that evolution and began with Wilkins, the founder of Syncom, and executive turned investor Dan A. Colussy. The former chairman, president, and CEO of UNC Inc., an aviation services company acquired by General Electric Co. in 1997, Colussy had been eyeing Iridium for some months but couldn’t find a partner to invest in the high-profile bankrupt subsidiary. “I was a user of the system and loved it, thought it worked beautifully,â€ Colussy says. “We were a little bit shocked when we heard they were going to destroy it.â€
Syncom, which had been following the Iridium saga for years, clearly saw the investment potential in spite of the chorus of naysayers. “It was a hard sell,â€ Wilkins says, alluding to Syncom’s efforts to find other investors.
Time was of the essence. The deorbit software was loaded and needed just the push of a button to burn up the satellites. But satellite systems aren’t just handed out, even to interested buyers. Before a deal could be reached, calls had to be made so that the new investors could get all the necessary background clearances and authorizations to operate the system. It was a race against the clock. One thing working in Syncom’s favor was Uncle Sam. The Department of Defense used the Iridium system and had a vested interest in keeping the satellites in the sky.
Even so, approval was needed from the Federal Communications Commission and other government entities. Scrutiny was intense. The Department of Defense and, eventually, the White House (through a contact of Syncom’s) encouraged Motorola to hold off on decommissioning the satellite constellation. The team closed the deal in late 2000 with no time to spare. But there was still a lot of work to be done.
Iridium had to be recapitalized–to the tune of roughly $130 million. To achieve that goal, the investment group requested a three-year contract to provide services to the Department of Defense worth some $36 million annually. To obtain the rest, they formed a truly global investment group–because no other Americans except Colussy would touch the bankrupt subsidiary: a Saudi prince based in London, a Brazilian telecommunications company, and an Australian entrepreneur. Syncom and the Saudi prince put up the most money of all the investors–$52 million each. Once the recapitalization was complete, Iridium was restructured and its business model shifted to that of a business-to-business and business-to-government communications services company. The company started offering commercial services to the public in April 2001, and within four years, Iridium would boast roughly 180,000 subscribers and generate $320 million in revenues–providing a solid return on investment.
A Stellar Return
By 2008 the investors agreed to sell Iridium to GHL Acquisitions Corp., a special purpose acquisitions company, or SPAC, for $436 million. In the deal, Iridium shareholders received $103 million in cash and 29 million shares in the new company, renamed Iridium Communications Inc.; $324 million was used to pay off Iridium’s debt. The payout also resulted in happy investors for Syncom. “They were excellent, smart, strategic thinkers, able to look out and see beyond and willing to take risks,â€ says JoAnn Price, co-founder and managing partner for Fairview Capital, the fund-of-funds that has invested in each of Syncom’s funds. “I never questioned whether or not they would be successful. I was always amazed at their vision and ability to see opportunities where others could not.â€
Iridium Communications went public in 2009 and now trades on the NASDAQ under the symbol IRDM for common stock. Syncom still owns more than 5% of the company. Iridium’s business model now focuses not only on satellite phones, but also a matchbox-size modem that’s used for tracking everything from fishing boats to containers for real-time global supply chain management. Its predecessor, about the size of a deck of cards, was used to track the Gulf Coast oil spill. “Military is about 24% of our revenue,â€ says Don L. Thoma, executive vice president of marketing for Iridium. “When we first started this, the military was a larger part of our customer base. It’s still a very important customer, but the actual contribution to revenue decreases every year because our other revenues have increased.â€
It was a deal nearly 10 years in the making that almost didn’t happen. “It’s a phenomenal system,â€ says Jones. “I think it’s one of the technological marvels of the world. And to think that African Americans led the way to save it is a great honor.â€