Corporate Finance FIN 246A Assignment #8 – Arch Communications & LOLWA ALBOHAMAD Arch Communications Group Inc. Evaluate Arch’s industry and its strategic position vis-avis its major competitors. What does your analysis imply for Arch’s future investment requirements and the company’s ability to earn profits greater than its cost of capital? Arch Communications became the 3rd largest paging company in the US, with 3 million subscribers in 1996. The core activities included; building networks, distribution through resellers and retailers, sales and marketing through direct channels, backend billing operations and support services.
The rivalry among players within the industry is relatively high. There is limited product differentiation and low switching costs as well as weak barriers to entry. Threat of substitute products was also high, new products that could enter the market included mobile satellite communications, advancements in voice networks and cellular technology improvements. Bargaining power of customers was high, as they were sensitive to prices and the existence of low switching costs within the industry. Manufacturers were supplying the same products to all other competitors, which made the bargaining power of suppliers medium/high.
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Nevertheless, Arch Communications gained a competitive edge over its major competitors in the industry due to various factors, such as: * Arch became a low cost provider * Standard, reliable technology- fast delivery of messages * Efficient service delivery * Strategic acquisitions * Large geographical coverage The company’s corporate strategy comprised of a number of goals that contributed to its growth and sustainability. Arch aimed to become a dominant player in the wireless paging industry through implementing a trategy of aggressive growth by acquisitions and internal additions, strong distribution channels and geographic expansion. Arch Communication’s products were distributed on a local, regional and nationwide level in the major metro areas. Offering nationwide services helped the company gain a competitive edge, as in 1995 only 3 companied offered nationwide services. Since the industry is not likely to have enhanced growth rates in the future, Arch Communication’s future investments require high levels of capital expenditures in order to sustain growth through acquisitions and upgrading of existing networks.
Sealed Air Corporation Why did Sealed Air undertake a leveraged Recapitalization? How much value was created? Where did it come from? Sealed Air Corp. has undergone a program to improve its production efficiency and product quality through elevated borrowing. The company undertook the leveraged recapitalization for a number of reasons: * Payout the special cash dividends ($40/share) * Provide working capital * Refinance existing debt The company decided to undertake this step mainly because of increased competition within the industry in the mid 1980’s.
The company achieved that through introducing the WCM-World Class Manufacturing, which eventually increased the company’s cash. Sealed Air had substantial amounts of cash and limited opportunities for investments and mergers and acquisitions, therefore, the company faced difficulties in managing the extensive amounts of cash available on hand. Management believed that the recapitalization was a good idea since increased competition compelled the company to undergo such a step because competitors started exploiting the patents that were previously given to Sealed Air through offering cheaper prices for those products.
Total market cap. of Sealed Air was $370 million and stock price was hovering around $45. Value was created by the recapitalization and through repaying the loans and certain restrictions that were placed in the company. A lot of value was created for those who were holding the stock of the company at the time of the payout (87% ROI). Large part of the value created because the market was valuing the price and the advantage of the tax shield from the high levels of debt that the company has undertaken for the recapitalization.