Growth in the paging industry exploded this year, led by public companies that have pushed boldly across market borders, stepped confidently into marriages of convenience and reaped tremendous opportunities from serving a new consumer-oriented market.
The result is a 38 percent industry growth rate at the end of 1994, according to Economic & Management Consultants International Inc.-a 9 percent increase when compared with 29 percent growth at year-end 1993.
Industry leaders say that as paging companies grow, they tend to attract more investors. With narrowband personal communications services networks gearing up to offer advanced messaging services, traditional one-way paging companies must have their feet firmly in place-or at least firmly in offering their own type of PCS.
Consolidation has played an important role in the changing paging industry, with the largest acquisition to date taking place less than two months ago when Arch Communications Group Inc. and USA Mobile Communications Holdings Inc. signed definitive agreements to merge. Some industry executives say if a paging operation is not large-with an economy of scale and access to capital-it could struggle to survive in this new paging world. But a small, family-owned Vermont paging company thinks it has created a niche that promises the company a future.
The numbers
Washington, D.C.-based EMCI counted 27.3 million U.S. subscribers last December, up from the 19.8 million subscribers recorded in December 1993. Part of the growth is attributed to consumer use, said Dorothy Salmon, an EMCI paging analyst.
Businesspeople with pagers always have used the device for some personal communications. But the availability of easy-to-use, colorful pagers “for the whole family” at discount stores has opened up a new market in paging-the user who isn’t relying on the pager for business.
“Consumer targeting has taken off in the last year or two, using retail distribution,” Salmon explained. Consumer use accounts for about 34 percent of today’s users, EMCI noted.
External company expansions in the last year have become even more prolific. Westborough, Mass.-based Arch led the acquisition charge, conducting more than 30 transactions since September 1986, adding by acquisition more than 270,000 subscriber units to the company’s now 700,000-subscriber base.
USA Mobile made five recent purchases, including a merger with Premiere Page Inc. that added about 190,000 pagers. Even the nation’s largest paging company, Paging Network Inc., made a couple of low-key purchases of paging assets.
“Year after year, PageNet has grown internally,” Salmon said. “It’s a tremendous amount of work because to add, say, a million subscribers net a year, you actually have to add more. So even PageNet has made some acquisitions.”
ProNet Inc. of Plano, Texas, completed two acquisitions about a year ago, and recently signed a $9.5 million deal to purchase the paging assets of four privately owned companies.
U.S. Paging Corp. announced this time last year it was celebrating 23 consecutive quarters of subscriber growth. Within six months, Mobile Telecommunication Technologies Corp. made a deal to buy U.S. Paging in a stock-for-stock transaction.
All the while, paging companies continue to expand their current markets, in part by slipping slowly into adjacent markets.
Why acquire?
The push to grow boils down to money, several companies said. The larger the customer base, the more money coming in, the less costly the system. With more money coming in and a greater economy of scale, the company can be worth more and shareholder value increases. When the value goes up, the company is more attractive to investors, which is a driving force behind consolidation, said William A. Wilson, chief financial officer of Arch.
Arch is executing what it calls the largest transaction in the history of the paging industry, the purchase of USA Mobile. USA Mobile has more than 800,000 subscribers in the Northeast, upper Midwest and Southeast markets. That means that Arch’s subscriber count will grow to 1.5 million after acquiring USA Mobile. But subscriber base isn’t all that grows. The USA Mobile acquisition will increase Arch’s $200 million market capitalization rate to $400 million, Wilson said. “More investors are interested in the mid-cap companies. My investment horizon opens. My multiple is higher,” Wilson said.
Stan Sech, president and chief operating officer of USA Mobile, said he expects small and mid-size companies to continue to pool their resources. “I remember in 1991 there were only one or two public (paging) companies,” Sech said. “But in recent times, this industry has been going public to have access to capital markets. It’s hard to keep pace with the capital needed in this industry if you’re a small guy. I’ve received calls from at least 10 small companies with offers to buy them.”
Sech said all of USA Mobile’s previous acquisitions were done to further the company’s goal of maximizing shareholder value, not to attract a buyer such as Arch.
How one strategy works
Wilson outlined Arch’s successful three-part growth strategy-buy, grow after buying and expand into adjacent markets. The tasks don’t have to be done in that order, but all three are important. “When you buy, you’ve got infrastructure in place, like accounting, billing and engineers. From that beachhead, you do market expansion,” Wilson said.
Arch also expands by going into adjacent markets, perhaps 30 miles away from its established market. Because the adjacent market is so close, new infrastructure isn’t necessary nor must Arch keep that company’s sales force or engineers, Wilson explained.
“You want to acquire with no expenses because it increases the cash flow. We just bring the customers over, unplug them from their switch and plug them into ours. It’s what we call a fold-in, a no brainer,” Wilson said.
Arch looks at purchase candidates in terms of four primary considerations, Wilson said:
The selling company’s five-year discounted cash flow; not what the company is worth today, but what it will be worth to Arch in the future. Wilson said Arch disregards cash flow multiples and dollars per pager figures; Arch prefers to develop its own model from which to negotiate the price.
Quality of the selling company’s assets. Are the transmitters 20 years old or 2 years old? Are the pagers, if company owned and rented, old and in need of replacement?
Quality of the spectrum. Arch won’t consider a company with spectrum in the 30-40 MHz band; companies with the premium bands of 150, 450 or 900 MHz are preferred.
What is the nature of competition in the selling company’s market? “The worst competition is the mom-and-pop that has been charging too much for a long time. When competing, they behave irrationally and take their prices down too low until they go out of business and sell to us,” Wilson said.
Why sell?
USA Mobile’s Sech said the company sold because it had the chance to be part of a larger operation. USA Mobile will become a division of Arch, maintaining its own market presence in the 10 states it serves.
“It was just a good fit, business-wise and geographically. It was a win-win and Wall Street likes it too. All our strategies complement each other,” Sech said.
Competition from PCS
There are two ways that paging operators are positioning for the introduction of narrowband PCS into their markets. Some companies like Arch are concentrating on traditional one-way paging, leaving PCS to do what is new, such as two-way paging and elaborate voice messaging.
Other companies, like PageNet, have opted to enter the narrowband PCS market. The company paid $160 million at last fall’s narrowband spectrum auction for two 50/50-kHz paired nationwide licenses, and $37 million for a 50-kHz unpaired nationwide permit.
Arch, USA Mobile and A+ Communications Inc. will resell PCS through PCS Development Corp., a joint
venture investment by the companies, led by minority businessman Maceo Sloan. The group won five designated-entity licenses in the regional narrowband PCS auction, and since each license allocates the same frequency, it effectively allows for nationwide service, said Harry Latham, senior vice president of sales and marketing for PCS Development.
“PCS won’t be detrimental, it will grow the industry,” Latham said. “With PCS, a portion of the paging market will move from the traditional to new technology, but our research shows it will increase the overall pie for everybody.”
Can small companies survive?
And in the middle of it all-between aggressive market expansions and the construction of narrowband PCS networks-is the small, family-owned paging company.
John St. George, owner and president of Rutland, Vt.-based JPS Paging, said they think they can make it. The five-year-old company is positioned to provide statewide coverage. It took a dozen to 15 transmitters, but they’ve conquered the two mountain ranges that run the length of the state.
“It’s not as hard for us to compete with the larger companies in Burlington. They may have nationwide service but they have gaps in Vermont. We market to the Vermont area only, although we also cover part of Massachusetts, western and northern New Hampshire and eastern New York,” St. George said. JPS has about 2,000 subscribers; most customers are service industries or medical professionals, all for which the company provides personal-type customer service.
“They know that if they have a problem, they can just walk in the front door. We fix pagers in-house and do direct pager replacement,” St. George said.
And for the small percentage of their customers that travel beyond Vermont, JPS resells New England paging as an added service. Keeping a few other communications businesses going helps the company as well; JPS provides sales and service for Motorola Inc. two-way products and operates a telephone answering service.
Some industry executives say if a paging operation is not large-with an economy of scale and access to capital-it could struggle to survive in this new paging world.
The larger the customer base, the more money coming in, the less costly the system. With more money coming in and a greater economy of scale, the company can be worth more and shareholder value increases.
paired nationwide licenses, and $37 million for a 50-kHz unpaired nationwide permit.
Arch, USA Mobile and A+ Communications Inc. will resell PCS through PCS Development Corp., a joint venture investment by the companies, led by minority businessman Maceo Sloan. The group won five designated-entity licenses in the regional narrowband PCS auction, and since each license allocates the same frequency, it effectively allows for nationwide service, said Harry Latham, senior vice president of sales and marketing for PCS Development.
“PCS won’t be detrimental, it will grow the industry,” Latham said. “With PCS, a portion of the paging market will move from the traditional to new technology, but our research shows it will increase the overall pie for everybody.”
Can small companies survive?
And in the middle of it all-between aggressive market expansions and the construction of narrowband PCS networks-is the small, family-owned paging company.
John St. George, owner and president of Rutland, Vt.-based JPS Paging, said they think they can make it. The five-year-old company is positioned to provide statewide coverage. It took a dozen to 15 transmitters, but they’ve conquered the two mountain ranges that run the length of the state.
“It’s not as hard for us to compete with the larger companies in Burlington. They may have nationwide service but they have gaps in Vermont. We market to the Vermont area only, although we also cover part of Massachusetts, western and northern New Hampshire and eastern New York,” St. George said. JPS has about 2,000 subscribers; most customers are service industries or medical professionals, all for which the company provides personal-type customer service.
“They know that if they have a problem, they can just walk in the front door. We fix pagers in-house and do direct pager replacement,” St. George said.
And for the small percentage of their customers that travel beyond Vermont, JPS resells New England paging as an added service. Keeping a few other communications businesses going helps the company as well; JPS provides sales and service for Motorola Inc. two-way products and operates a telephone answering service.
Some industry executives say if a paging operation is not large-with an economy of scale and access to capital-it could struggle to survive in this new paging world. The larger the customer base, the more money coming in, the less costly the system. With more money coming in and a greater economy of scale, the company can be worth more and shareholder value increases.
