arch communication

Topics: Revenue, Earnings before interest, taxes, depreciation and amortization, Net profit Pages: 34 (1274 words) Published: October 12, 2013
Arch Communications
Analysis of a Security Valuation
Derek Webb, Darryl Kraemer

Agenda









Background
Strategy Analysis
Accounting Review
Ratio Analysis
Cash Flow Analysis
Forecasting Review
Valuation
Post Script

Background

Background
• Arch Communications Group Inc. founded in
1986
• 3rd largest paging company in USA in 1996
• 3 million subscribers in 1996
• Local, regional and nationwide basis
• 180 of 200 major metro cities

Background
• Current competitive positioning:
• Low cost provider
• Economies of scale for ops, size of subscriber base

• Standard, reliable technology
• Fast follower, proven and somewhat dated tech

• Prompt and efficient delivery
• Resellers, retailers and direct sales
• Invested in expanded networks, and capacity

• Integrate acquisitions successfully

Strategy

Strategy
• Return on Capital  Business Strategy +
Corporate Strategy
• Business Strategy  Industry Choice +
Competitive Position

Corporate Strategy
• Goals
• To become dominate player in wireless paging
segment
• Aggressive growth through strategic acquisitions
and internal additions
• Strengthen distribution channels and increase
capacity
• Invest in select technologies
• Geographic expansion

Competitive Positioning
• Product Market Focus





Local, regional and nationwide
Major metro areas
Every pager type - 87% digital
Direct, retailer and resellers for distribution
channels

Competitive Positioning
• Core Activities







Build networks
Distribute through reseller and retailers
Sell via direct channel
Support and service
Backend billing operations
Marketing through direct channels

Competitive Positioning
• Value Proposition





Proven, reliable service at a low cost
Fast delivery of messages
Limited to no network downtime
Large geographical coverage

Industry Choice
• Degree of Rivalry – HIGH






Limited product differentiation
Oligopoly market structure
Rapid consolidation
Fragmented markets
Low switching costs

Industry Choice
• Ease of Entry - MED
• Capital intense
• Can acquire license, or company
• No strong barriers to entry other than capital
expenditure

Industry Choice
• Threat of Substitute Products – HIGH






Cellular technology improving
Battery life extending
Improved feature set
Advancements in voice networks (PCS)
Mobile satellite communications

Industry Choice
• Power of Suppliers – MED
• Manufacturers are supplying same product to all
competitors
• Duopoly market structure (Motorola, NEC)
• Strong brand equity

Industry Choice
• Power of Customers – HIGH





Low switching costs
Growth driven by consumers, not business
Fickle group
Price sensitive

Class Discussion

Class Discussion
• What are the implications of our strategy
analysis on the forecasting and valuation of
Arch over the next 5yrs?

Implications of Strategy Analysis
• Industry unlikely to have abnormal growth and
profits in long range
• High cap expenditures required:
• To continue growth through expanded coverage and
acquisitions
• To upgrade existing networks
• Debt or equity?

• Product is commoditizing with consumers
• High threat of cellular and competitive tech
replacing the paging market

Accounting Analysis

Accounting Analysis
• No unusual accounting measurement issues
are evident

Ratio Analysis

DuPont Analysis
Net Profit
Margin

Asset
Turnover

Financial
Leverage

ROE (NI/SE)

(NI/Rev)

(Rev/Assets)

(Assets/SE)

1995

-0.246

0.207

3.18

-0.162%

1994

-0.075

0.571

12.58

-0.539%

1993

-0.126

N/A

N/A

N/A

DuPont Conclusions
• ROE improving because of reduced financial
leverage
• Net profit margin declining
• Asset utilization declining because of large
investment in plants, higher inventories and
higher AR...
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