GeoEye merger brings company’s rocky trajectory to an end

GeoEye seemed to have finally overcome years of setbacks in 2010 when the Herndon-based company won a hefty portion of a $7.3 billion contract to provide the federal government with satellite imagery.

But shortly after ink dried on the 10-year deal, government funding for the EnhancedView program began to erode. Just last month, GeoEye learned that money allotted for the coming fiscal year would be delayed at best, and significantly cut at worst.

“GeoEye was the scrappy survivor within the industry,” said Chris Quilty, senior vice president at Raymond James. Then “they secured a contract that ensured the company’s long-term solvency and growth opportunities, so it was devastating for them to lose this contract.”

Uncertainty about the contract’s future was the impetus for the announcement last week that GeoEye agreed to be acquired by longtime competitor DigitalGlobe. For a company with a story line of perseverance, the deal marked an anticlimactic end.

“It certainly appears from where we sit today, knowing what we know about the fiscal environment coming at us, that this was really a prudent move,” said Keith Masback, president of the U.S. Geospatial Intelligence Foundation, a trade group. “And really the only option that made a lot of sense for the investors and stockholders of these companies, and probably for the nation, moving forward.”

Today, GeoEye employs nearly 750 people, including about 430 in the Washington area. In addition to providing satellite images of Earth to government and corporate clients, the firm has a sizable team of analysts who help decipher them.

But the trajectory that brought the company to its current state has been punctuated by ups and downs.

Once called Orbimage, the company encountered a significant defeat in September 2001 when a rocket propelling one of its satellites into space didn’t have enough power to complete the task. The spacecraft plummeted to Earth and was lost somewhere in the Indian Ocean.

Orbimage then filed for Chapter 11 bankruptcy in 2003 and the reorganization allowed the company to cut ties with its majority owner at the time, Dulles-based Orbital Sciences.

The following year, Orbimage was awarded a National Geospatial-Intelligence Agency contract worth as much as $500 million to provide high-resolution satellite images for defense and national security purposes.

“The satellite business is a risky business in and of itself,” Gary Adkins, then Orbimage’s vice president of federal and national security programs, told The Washington Post in a 2004 interview. He left the firm four years later.

“If you’re thinking about the expense and the investment it takes to accomplish a construction and a launch and getting a satellite in orbit, you know, it’s quite risky. Just the general nature of the business itself has risk built into it.”

Spending time in the ‘bankruptcy penalty box’

Indeed, businesses that rely on satellites are no stranger to financial hardship. Building a satellite requires massive capital costs and years of work. They are then hurled through the atmosphere as executives watch with fingers crossed, hoping that no hiccups undo all that effort in a matter of minutes.

“The oldest and most mature segment of the satellite industry — the fixed satellite operators [and] fixed satellite services — the companies in that segment of the industry have been tremendously successful and generally speaking have been afforded a high valuation,” Quilty said.

Other segments of the satellite industry, such as firms that distribute telecommunications and data services via satellite, have struggled, at times, to keep their balance sheets in the black, he said.

“If you look at other parts of the satellite communications industry, Iridium, Globalstar, Orbcomm and a dozen other start-up companies have all spent time in the bankruptcy penalty box, and some of them, like Iridium, have come back strong,” Quilty added.

The EnhancedView contract seemed to put GeoEye on stable footing, though overreliance on any one contract or customer can make a company inherently vulnerable. GeoEye has diversified to clients beyond the federal government, including businesses and foreign governments, but they still accounted for a minority of its revenue.

GeoEye attempted to acquire DigitalGlobe in May for $792 million, but that offer was rebuffed after a weekend of negotiations because the Longmont, Colo.-based company said it was positioned better to endure a slowdown in government spending.

That proved to be true. DigitalGlobe received full funding for its portion of the EnhancedView contract for the coming fiscal year.

“We originally started out by bidding for them, but both sides saw the merit in this kind of combination,” GeoEye chief executive Matt O’Connell said in an interview last week. “Contract renewals ... certainly guided the thinking of both boards as we looked at which company should lead the way into the future.”

The future now is a combined company that retains the DigitalGlobe name and executive leadership. DigitalGlobe shareholders will also own 64 percent of the conjoined firm and its directors will hold six of 10 board seats.

Observers say a combined company will be more resilient than the two companies were apart, and thus may have a smoother course as it aims to grow.

“I would argue they are in a critical stage of their individual maturation, that if managed properly, bringing together their complimentary strengths makes them truly internationally competitive,” Masback said.

Steven Overly covers the business of technology, biotechnology and venture capital in the Washington region for The Washington Post and its weekly Capital Business publication. In that capacity, he has written about start-up struggles, investment trends and major drug discoveries.
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