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ICO Global, Teledesic scrap merger

The communications-satellite companies say the current economic climate compelled them to call off the deal for now, but they leave the door open for joining forces in the future.

Communications-satellite companies ICO Global and Teledesic are calling off merger plans, the companies announced Monday.

The companies said the current economic climate compelled them to call off the deal for now, but they left the door open for joining forces in the future. ICO and Teledesic had been working to create a satellite-based telephone system that can work worldwide.

"To maintain maximum flexibility in this market, it is prudent to keep ICO and Teledesic independent as the needs for satellite services continue to evolve in the changing international landscape," Craig McCaw, the chairman and co-CEO of Teledesic, said in a press release.

The merger plans have been in the works for more than a year. McCaw led a group of investors in bailing out ICO after it filed for bankruptcy in August 1999, just weeks after fellow satellite-communications provider Iridium went into bankruptcy. ICO, which received a $1.2 billion infusion from the investors, reemerged as a company called New ICO.

McCaw formed a holding company, ICO Global Limited, and arranged to have New ICO and Teledesic become wholly owned subsidiaries. McCaw gained voting control of the two companies through stock ownership and agreements with other investors.

While Monday's announcement effectively ends plans to wrap Teledesic into ICO Global Limited, McCaw said he still plans to merge New ICO into the holding company, a deal that must win ICO Global shareholder approval.

Other investors in Teledesic include Motorola, Microsoft Chairman Bill Gates and Saudi Prince Alwaleed Bin Talal. But analysts question if the investors will keep funding a venture that may take years to pay off, if ever.

"At every turn Teledesic has hit a stone wall, and it makes you wonder at what point will the plug be pulled," said Michael Goodman, a senior analyst at The Yankee Group.

ICO spokesman Roger Nyhus said the decision was also affected by the companies' different needs, including their different technologies, timetables and funding requirements: "The two companies must succeed on their own merits," he said Monday.

The development comes during tough times for communications-satellite providers. Financial troubles at Globalstar Telecommunications and Iridium over the past few years have driven many investors from funding expensive satellite networks.

"There's not a lot of appetite for risk in these markets right now," said satellite analyst David Kestenbaum of ABN AMRO. "The markets are definitely still suffering from the Iridium-Globalstar fallout, and also from the fact that the capital markets have not performed in over a year."

ICO is working on providing medium-speed voice and data service through a satellite network that users can access through mobile devices like cell phones or handheld computers. Teledesic aims to install a high-speed broadband satellite service that must be accessed with stationary equipment.

ICO already has most of its satellites built and plans to have its network operating in 2003, while Teledesic is still in talks to build its satellites and aims to launch its service in 2005.

Gartner Dataquest estimates that by 2005, 50 percent of U.S. households will have a high-speed broadband connection, which will compete with the kind of service Teledesic plans to offer.

Satellite providers are "going to have to be very targeted," said Gartner analyst Patti Reali. "In markets where there's a lot of wire-line infrastructure, satellite is at best a niche market that will fill in the blanks where cable and DSL do not reach, at least in residential markets."

Reali also points out that the companies will face plenty of competition from providers like CyberStar, StarBand Communications, and Spaceway. However, satellite companies may find room for growth in markets like Asia, which have less wire-line infrastructure than North America but a healthy demand for telecommunications services.