It's been compared to the buggy whip industry at the dawn of the automotive age, and even its principals agree the industry is slowly dwindling. In a time of cellular telephones, PCS systems, and Research in Motion
When Arch Wireless was recommended as a Hidden Gems guest pick earlier this year, Tom Gardner wondered whether pagers would even exist five years from now. Guest analyst Whitney Tilson allayed those concerns by pointing to some diehard pager users around which the industry would eventually coalesce: doctors, truckers, emergency workers, and tradesmen. People with a need to be in touch -- particularly inside buildings where cell phone reception is often scratchy at best -- have come to rely upon pagers. With Arch having lost 1.45 million customers in 2003 and Metrocall managing to stay flat only because of its purchase of Weblink Wireless's 283,000 customers, a merger between the two -- both of which emerged from bankruptcy in 2002 -- that promised to save money should be welcomed by shareholders.
Yet all is not what it seems in this merger. Under the deal, Metrocall shareholders get $150 million and stock worth 27.5% of the combined company. Arch shareholders get a full share in the new company, which is scheduled to be called U.S.A. Mobility. One Metrocall shareholder, Scion Capital, has accused management of "selling out" shareholders for private gain. The president and CEO of Metrocall will retain the top spot at the new company. Another has sued to stop the merger because of the inequitable assignment of equity in the new company, even though Metrocall would account for 36% of the revenue.
There are also plenty of regulatory and shareholder hurdles to leap before the merger is completed. One such hurdle states that if more than 8% of Metrocall's shareholders elect to have their shares "appraised" under Delaware law, it would constitute a failure of one of the conditions of the merger. An appraisal has the courts determine the value of the shares. Metrocall reported late last week that a group of shareholders said to represent 8.7% of the shareholders will seek to block the merger by having their shares appraised. Both companies can vote to waive this condition and continue with the merger. Those shareholders then would only receive the appraised value of their shares and not any of the stock of the newly minted company. A vote on the merger is set for Nov. 8, where the share election price for Metrocall shares was set at $75 per stub.
The paging industry has essentially evaporated with the advent of cell phones. More than 75% of the user base has disappeared since 1998, its peak year when it sported some 45 million customers. In its heyday, Metrocall had 6.3 million users. But pager use plummeted as cell phone use rocketed. The number of people using pagers has dropped to around 11 million while cell phone use has more than doubled over the same period to 157 million.
Like an aging cash cow put out to pasture to live out its remaining years, the paging industry is still able to churn out predictable cash flows. Arch Wireless reported a 9% increase in third-quarter profits last week even as revenues fell 24%. It has 3.8 million units in service, a loss of 197,000 units from last year. Metrocall's second quarter saw a 4% drop in revenues and a loss of 222,000 units. It ended the quarter with 3 million customers.
Many analysts predict the ultimate demise of the industry to occur within five years. Some still see a place for pagers, albeit a small, darkened corner in a musty museum. Right next to the buggy whips display.
Fool contributor Rich Duprey wonders whether buggy whips really were the economic growth engine they are often portrayed to be. He does not own any of the stocks mentioned in this article.
