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Category: Business and Industry
Date Submitted: 12/01/2014 09:26 PM
http://www.casetutors.com/6358/Pinkerton-A.html
Pinkerton A
Case ID - 291051 Solution ID - 6358 1455 Words
Abstract
California Plant Protection (CPP) is a very successful security guard firm. Tom Wathen is the CEO and sole owner of CPP. Pinkerton in 1987 was a competitor of the firm with a good brand image. Wathen wanted to buy Pinkerton when it was available for sale. Morgan Stanley represented American Brands in the sale and the bidding. They would not accept a bid of lower than $100 million. He has to decide whether the acquisition of Pinkerton was profitable enough to buy it at that price. He has two financing options. He can raise money by either a $75 million at 11.5% interest or a $100 million debt at 13.5% interest. Wathen has to decide whether to acquire Pinkerton and if so how to finance the bid. The free cash flow technique coupled with the continuing value and incremental improvements are used to analyze the decision.
Excel Sheet
Sensitivity Analysis
A. All-equity Cost of Capital Based on Wackenhut's Numbers.
B. Projected Pinkerton Free Cash Flows Through 1992
Assumptions
Free cash flowFree cash flow
PV Free cash flow at All-Equity Cost of Capital
Estimated pessimistic value of Pinkerton
Expected Cashflow
Value of 45% of CPP Equity -Expected Cash Flows
Equity premium
Financing the Acquisition
75% Debt100% debt
Debt service requirements,75% debt
Excess Cashflow
Debt service requirements,100% debt
Principal remaining
Total FCF - total debt service burdenCumulative excess cash flow
Questions Covered
1. Why is Wathen acquiring Pinkerton’s Inc.? How specifically will he create value? What should his bid strategy be?
2. What is the proper cost of capital for evaluating this acquisition? Consider this from the standpoint of WACC and APV.
3. Develop and find the present values of the free cash flows from Pinkerton’s Inc., and also from the CPP margin improvements. Calculate this only on the assumption of a...