HUGO SATELLITE NETWORKS Shravan Chopra Tanya Dorhout Yashmin Fernandes Angela Ho Ben Lyons March 1, 2001 Professor Campbell R. Harvey BA 456 Emerging Market Corporate Finance

Agenda Background Case Introduction VSAT Technology & Market Project Details & Risks Country Risks & Discount Rates Case Solution Summary

Background Modeled after an actual strategic decision at a satellite network company Reconstructed story –Fictional project details –Fictional scenario Lack of company disclosure

Case Introduction Strategic planning decision in 1995 Evaluate project and market factors Analyze and mitigate risks Use appropriate discount rate Identify and quantify real options

VSAT Technology

VSAT Market Market size: –Globally: 135,000 units currently installed –Growing local market Oligopoly: Hugo and Gomex Customers: –Corporate networks declining –Growth in rural telephony segment Alternative technologies

Project Details & Risks New VSAT manufacturing facility to be constructed in an emerging market –Low cost structure objective –Capitalize on large, unfulfilled local demand –Establish relationship with local telecommunications agencies –Governmental financial incentives Build capacity to serve local and global markets

Project Details & Risks Construction risk Operational risks –Labor –Production costs and delays VSAT price risk Threat of alternative technologies

Country Risks & Discount Rates Brazil, China and India site candidates Qualitative and quantitative analysis Risks: political, expropriation, economic, legal, war/violence, infrastructure

Case Solution Assumptions across all three scenarios –Local government participation and incentives (amount of subsidy varies across countries) –Currency and inflation risk mitigated by working in U.S. dollars –Revenue and cost assumptions given –Total VSAT market growth rates given

Case Solution Frequency Chart: China Mean NPV and Standard Deviation

Case Solution Build manufacturing facility in China –Largest local market demand and population –Most favorable governmental incentives –Best opportunity to mitigate project and country risks –Fewest competitors –Lowest discount rate and highest NPV –Most valuable real options

Real Options –Intensity & expansion option –Shutdown option –Export option If local demand declines, the company can ship VSAT units abroad. It may be possible to export at a higher price and take advantage of the low cost manufacturing facility. –Portfolio option Build three smaller plants in each location. Reduce overall portfolio risk.

Summary What really happened to Hugo? What really happened to the VSAT industry? Questions and Answers