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While Arch™s subscriber numbers seemed to attest to reliable and timely message de-
livery, some of Arch™s clients did not agree. In August 1996, Arch had a 21„ 2 hour service
Arch Communications Group

outage in Portland, Maine. Further, due to a computer glitch, many serviceless subscrib-
ers failed to receive noti¬cation from Arch that their pagers were down. Portland Police
Chief Michael Chitwood, whose department used eighteen Arch pagers for emergency
pagers, said, “To be down for two and a half hours without being noti¬ed is crazy. We
are talking about public safety here.”13

Arch™s growth strategy combined internal growth (developing markets and extending
out into adjacent or existing markets) and a series of acquisitions. The acquired compa-
nies were all characterized by what were considered sound operating performance track
records. By 1996 Arch had the second highest absolute subscriber growth rate in the in-
dustry and had felt few growing pains.
Internal growth, which was over 40 percent in 1995 (higher than industry growth),
was driven by market development and penetration, and expanding marketing activities
and sales. Arch had traditionally entered small and medium sized markets with lower
rates of pager penetration because of the greater growth opportunities these markets of-
fered. Increasingly, however, Arch also concentrated on strengthening its nationwide
presence, entering and establishing itself in major metropolitan areas and larger markets
by both using service agreements with other paging carriers and extending its national
footprint through acquisitions (bypassing buying a nationwide license).
Arch™s acquisitions were made to expand subscriber base, geographic operations, and
spectrum without deploying new networks. Most of Arch™s acquisitions fell into one of
three groups: (1) acquisitions that primarily expanded geographic reach and were likely
to be in adjoining markets, (2) acquisitions that operated in Arch™s markets and would
be folded into Arch, and (3) acquisitions, mostly in nonadjacent markets, made for stra-
tegic purposes that extended Arch™s physical reach and added new markets. The com-
pany had experienced few of the acquisition integration dif¬culties that had plagued its
competitors and the industry. Arch CEO Baker tried to explain their success:
We™ve certainly learned a great deal as we™ve done thirty-two acquisi-
tions. . . We™ve put in place a program called the SOAP [Standard Operating and
Accounting Practices] package, so that every time we make an acquisition, we put
a team together that very rapidly and ef¬ciently implements this package at all of
our acquired targets. It™s really a proven methodology for quickly and ef¬ciently
integrating these acquired properties. Arch was very fortunate with our latest and
12. Audrey Choi, “Arch Builds Strong Paging Business Slowly But Surely,” Wall Street Journal, August 22, 1996.

13. Ibid.
532 Equity Security Analysis

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largest acquisitions, because the most dif¬cult thing that you encounter when you
integrate companies is integrating the backroom operations”your accounting,
your customer support, and your operating systems. We were fortunate enough in
those two most recent acquisitions to have bought companies who were using the
same billing, customer support, and operating packages that we were.14

Arch Communications Group
Arch also actively attempted to increase the capacity of its existing infrastructure and
network by upgrading to faster protocols. Protocol upgrades allowed messages to travel
the network faster, increasing the network™s subscriber carrying capacity. Faster proto-
cols eliminated the need to purchase additional spectrum or invest in dispatching new
networks. One past example was the company™s upgrade to a protocol called FLEX. The
upgrade doubled capacity without the substantial capital outlay acquiring new spectrum
would entail. Future upgrade plans included acquiring a protocol called ReFLEX25, a
two-way messaging protocol being developed by Motorola.

Competitive Position
Arch faced competition from at least one other paging company in every market it oper-
ated in. Although no single company competed with Arch in all its markets, some
competitors held nationwide licenses so that they could potentially enter all of Arch™s
Arch believed that competition for subscribers rested on quality of service, geo-
graphic coverage, and price, and felt itself competitive on these dimensions. In response
to the competitive threat of cellular technology, Arch CEO Baker had this to say:
Broadband PCS [cellular] is not going to affect our growth. . . We have people on
the street utilizing APC™s [a cellular/PCS ¬rm operating in Arch markets] BPCS
network for messaging, and it doesn™t work well. . . And there is absolutely no
way, in our view, that it is going to affect the growth of messaging. It doesn™t per-
form well; you™ve got coverage problems; there are penetration problems; you™ve
got battery life issues. All the things that we™ve talked about, and others have writ-
ten about, are proving themselves to be true with respect to how messaging will
perform over broadband PCS networks. . . Metrocall [a paging provider in APC™s
market] posted record growth and has not experienced a single customer loss to

Arch invested in new wireless technologies such as wireless data delivery, two-way
messaging, voice paging, and narrowband PCS by acquiring shares in a consortium of
companies that owned ¬ve regional NPCS licenses. In this way Arch would have a stake
in emerging technologies with comparatively small capital investments and risk. Despite
such forays into emanating technologies, Arch remained loyal to its proven technology
14. Sarah E. Reynolds, “Staying True to the Company™s Vision,” Worcester Business Journal, April 29, 1996.
15. Lehman Brothers, Analysts Report, Arch Communications, August 6, 1996.
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13-31 Part 2 Business Analysis and Valuation Tools

To maintain a competitive edge, Arch intended to pursue several future strategic initia-
tives, including strengthening distribution channels, increasing the capacity to serve
more customers through expansion of its two national paging channels, building more
ef¬cient support infrastructure by expanding the national sales and customer service op-
Arch Communications Group

erations, and continued investment into select technologies.16 Arch also planned to use
the extra capacity it would acquire from its protocol upgrades to build up its alphanu-
meric subscriber base.
Arch™s acquisitions to date had been free of the troubles that had traditionally accrued
to acquiring companies. Arch intended to continue its acquisitions, but there was no
guarantee that the pattern of smooth integration would be sustainable. Future acquisi-
tions could be dif¬cult to identify, troublesome to integrate, and demand excessive ¬nan-
cial resources and managerial focus. Factors outside the company™s control also
threatened to affect growth strategies, and included prevailing economic conditions and
interest rates, competitive and regulatory environments, technological advances, and the
ability to attract and retain professionals.
Despite Arch™s stock price of $12.50 per share in July 1996”a drop of more than 100
percent from its trading range at the year™s start”analysts remained bullish about the
stock (see Exhibit 1 for stock movements). John Adams, an analyst at Wessels, Arnold
& Henderson, explained how analysts valued paging companies and might arrive at val-
uations different from the market™s in a report on the paging industry:
When valuing paging companies, analysts do not use P/E multiples on current
earnings because there is usually no positive earnings stream from which a mul-
tiple can be derived, at least not near-term. Therefore, analysts typically value
stock with either a discounted cash ¬‚ow analysis and/or with an unlevered valua-
tion approach which adjusts the market value of comparative companies for var-
ious capital structures (debt and cash in particular) thus permitting an apples-to-
apples multiples comparison to operating cash ¬‚ow or EBITDA.17
In his August 1996 report, Adams presented a detailed valuation of Arch using the
discounted cash ¬‚ow analysis (Exhibit 2). For comparison, Exhibit 3 shows Adams™s
valuation of other paging industry stocks. Based on his analysis, Adams was optimistic
about Arch™s future:
We continue to rate Arch™s stock Buy-Aggressive Growth. Arch reported an im-
pressive second quarter. . . As far as we can tell the company has not been
plagued with any operating problems in 1996. . . We believe Arch continues to do
an excellent job of managing its business. . . The company continues to show tre-
mendous momentum in its subscriber base and operating cash. . . There are ab-
solutely no fundamental problems that we can detect in Arch™s operating model.18
16. Arch 1995 Annual Report.
17. John Adam™s Wireless Communications Industry Report, Wessels, Arnold & Henderson, Vol. I, Sept. 1995.
18. John Adams, Wireless Communications, Wessels, Arnold & Henderson, August, 1, 1996.

Arch Communications Stock Price vs. S&P 500, November 13, 1995“July 26, 1996
(Both Rebased to 1.00 at 11/13/95)
Equity Security Analysis



S&P 500



Arch Communications





Beta”July 1996 1.447
Treasury Note”10-year as of July 1996 6.8%
Treasury Bill”30-day as of July 1996 4.8%
S&P 500 value as of November 13, 1995 592.3
Arch stock price as of November 13, 1995 $29.63
Equity Security Analysis

Source: Adapted from Datastream International by case writer.

Arch Communications Group
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13-33 Part 2 Business Analysis and Valuation Tools


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