Pinkerton A Case Solution

Case Solution

A California based security guard firm sights purchasing another security guard company. The requirement for the mark firm as well as the financing in the acquisition will be the key factors.

Excel Calculations

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

Why is Wathen acquiring Pinkerton’s Inc.?  How specifically will he create value?  What should his bid strategy be? 

What is the proper cost of capital for evaluating this acquisition?  Consider this from the standpoint of WACC and APV.

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 25-75 equity-debt split.

How will we make our decision on financing choice / capital structure?  Consider the issue of meeting debt service requirements.

What is the value of the equity Wathen must give up if he chooses the 25 percent equity alternative?

What are the costs and benefits of the all-debt choice?  The debt-equity choice?  Which would you recommend and why?

How should Wathen respond to Morgan Stanley?