Arch Communication

EXECUTIVE SUMMARY

Arch Communications Group Inc. (“Arch” hereinafter) is a listed US based company operating in the paging services industry.

By the end of July 1996, Arch share price has fallen to $12.50 from $22-$26 early in the year, on the wave of bad news and worries concerning the entire paging industry. Despite this, John Adam, an analyst at Wessels, Arnold & Henderson, rates Arch’s stock “Buy-Aggressive Growth”, valuing the company at $42.22 (Enterprise Value equal to approx. $1.7 bn) at the end of 1996.

This report will first review Adam’s valuation of the company, assessing the analysis’ underlying assumptions and focusing on strengths and weaknesses of the used approach. We will then present our own valuation of the company, which indicates an Enterprise Value at the end of 1996 ranging from $400 to $562 m.

ADAM’S ANALYSIS: WEAKNESSES IN THE UNDERLYING ASSUMPTIONS

Before starting to discuss Adam’s assumptions in detail, it must be noted that we tried to reconcile all the numbers presented in Exhibit 2. For example, we tried to reconcile Net Revenues with the projected average revenue per unit (ARPU) and the numbers of future subscribers, projected CAPEX with Depreciation & Amortization (D&A), Interest expense with Net long-term debt, etc. However, in many cases we did not manage to reconcile such numbers, mainly because some important pieces of information and assumptions were not provided.

Nevertheless, we noticed several weaknesses in Adam’s analysis:

Industry outlook

It is very clear from the case that the Paging industry is at a critical juncture in time. However, Adam’s approach completely ignores these vital trends and signs that indicate that current industry standard and multiples may not hold in the future. In particular, Adam ignores the threat from cellular phones. By 1995, the cellular phone industry was not in a launch phase – in fact it was growing and most analysts were predicting the demise of paging. Even though pagers...