Industry calls Arch one of strongest, most stable paging carriers, and securities analysts rate the company’s stock “buy.” But unlike other leading players talking up new voice and messaging services, there’s no hoopla in Westborough, Mass., where Arch’s management ambitiously but discreetly forms plans for future growth and entry into two-way.
The spirit of Arch Communications Group Inc. is business as usual, which for this company-the nation’s third largest paging carrier-says quite a bit.
Arch’s Chairman and Chief Executive Officer Ed Baker in a recent interview said the company’s current and past growth successes are the result of a “low-cost provider tactic,” consistent execution of its business plan and focus on customers.
“If (low-cost provider) is your chosen tactic … you cannot be on the cutting edge of technology development,” or spend much capital developing new markets, said Baker. Instead, “Arch has to be a fast follower on technology, a low-cost competitor.” This means “we will beta test the technologies ourselves.”
Arch doesn’t own any narrowband personal communications services licenses, but plans to resell Conxus Communications’ InFLEXion-based voice paging services and support acknowledgement messaging on regional narrowband PCS networks held by Benbow PCS Ventures.
“Voice paging as well as alphanumeric with acknowledgement are going to be two services with strong and significant demand in the marketplace,” commented Baker. Arch holds just under 11 percent interest in Conxus. Benbow was formed as a joint venture owned 51 percent by June Walsh, chairman and chief executive officer of Cal Autofone, and 49 percent by Westlink Paging Inc., which Arch acquired last year.
“Arch is continuing to investigate other opportunities in narrowband PCS, be they acquisitions or strategic alliances,” added Baker.
Since he joined Arch nine years ago, the company has concentrated activity in mid- to small-sized markets, cities with populations between 250,000 and 1 million. But to become a substantial industry player, Arch also needed a presence in large cities, added Baker. Today, the company offers service in 40 states, including 180 of the country’s 200 largest cities.
Over the last few years, Arch is remembered best for its aggressive acquisition streak. In all, 34 paging companies have been folded into the carrier’s repertoire. Arch’s two largest purchases, Westlink Paging and USA Mobile Communications Inc., expanded Arch’s footprint through central and western regions of the country. The USA acquisition added eight states and the Westlink buy added 16 states to Arch’s footprint.
Industry analyst Iain Gillott of IDC/Link Resources in Austin, and Michael Elling, securities analyst for Prudential Securities, New York, and other analysts forecast further consolidation in paging, down to perhaps three to five major players. Who will lead acquisitions or strategic mergers? Arch is often the first name to come up.
“In a sector like ours, you’re definitely going to see further consolidation,” said Baker. “The only point of debate is over what time period that will happen.” He believes consolidation will likely happen through strategic mergers, rather than big companies buying little companies at a premium. Companies may choose to ally as to “emerge with a stronger balance sheet and a broader, stronger set of strategic assets.”
“I believe that Arch has done its fair share to consolidate the industry. We’ve done more than our share to consolidate, but you can never rule out any future activity.”
The company ended 1996 with 3.3 million units in service, including 815,000 subscribers added through internal growth.
“With respect to growth, I think the most important measure of the success of a company’s strategy as well as its management’s ability to execute it, is how fast they grow internally.” Unit growth means little without profitability, added Baker. “We have been focused since the outset on profitability.
“Arch has historically grown its (internal) units in service in excess of 40 percent per year” and increased “cash flow in excess of 30 percent per year … We have as good a track record as anyone.”
Of its total subscriber base, 12 percent is alphanumeric and that share is growing.
Despite Arch’s growth and profitability, the company’s stock continues to lag, currently trading around $7, about half its share price a year ago. All public paging companies have suffered stock price declines over the last year or so.
“I believe that while there are specific company events we could talk about, throughout the industry, that have had a negative impact on the sector, without question the single biggest effect (on stocks) is the perceived threat of broadband PCS or digital cellular on paging’s future growth,” said Baker.
“What started the decline is the fear that the Swiss army knife of wireless communications would have a negative impact on paging. When you have a large issue like that rear its head, it’s so fundamental to the industry’s growth, the capital markets recoil.” After that, “any company’s event that’s negative-major or minor-is blown out of proportion.”
Digital cellular or PCS is in 20 percent of Arch’s markets and there has been “absolutely no negative impact on our service,” said Baker.
“Wall Street tends to be event focused. There are all sorts of possibilities, catalytic events that would jump start paging stock prices,” added Baker.