Pinkerton(a) Case

Pinkerton

Executive Summary

After conducting both strategic and financial level analyses, we consider the acquisition a good opportunity for CCP to become the largest player in the industry. In this case, our main focus is on deal pricing and structure choice.

Assumptions

* Wackenhut as comparable company to Pinkerton.

* The long-run equity market risk premium is 7%.

* The combined firm has the same target D/E ratio as Wackenhut (15.10%).

* The combined firm could borrow at 9.99% as A-rated firm.

* Constant WACC is used.

* A probability of 20% is assigned to pessimistic scenario.

* Maximum acceptable bid price is 105% the Expected Merger Value.

Methods

* Discounted cash flow method | * Comparable multiples method |

Conclusions

* Deal Structure: we recommend debt-equity financing method.

* The US$25 million for 45% equity in the new company is fair.

* With all-debt financing, CCP may face liquidity problem from 1992.

* Deal Pricing: maximum acceptable bid price is $103.47 million.

In US$ Million | Expected Scenario (Prob.=80%) | Pessimistic Scenario (Prob.=20%) |

Merger Value | DCF | Multiples | DCF | Multiples |

| 109.52 | 101.20 | 70.19 | 72.41 |

AverageMerger Value | 105.36 | 71.30 |

ExpectedMerger Value | 95.88 |

Max. Acceptable Bid Price (5% premium) | 103.47 |

Case Background

The case of CPP acquiring Pinkerton was a horizontal integration. It was like a snake tries to swallow an elephant since the acquirer CPP is inferior in scale, brand value and some other aspects. However, the ambitious owner, harbouring the dream of becoming the largest in the industry, saw many rationales. Exhibit 1 shows the strategic level analyses of the two parties involved. Clearly, we see many rationales, especially in such a mature and segmented industry. We will further focus own analyses on financial level, which is the fair pricing of the deal.

Valuation of the Acquisition...