The security guard services industry consisted of two segments: proprietary guards and contract guards. The historical growth was driven by companies realizing, that contracting guards allowed them gain operating flexibility instead of managing their own security personnel. In 1987 security guard services was a $10 billion industry growing at 6% a year. Due to the industry being very mature, fragmented, and price competitive there was an ongoing consolidation trend.
In the late 1987, Tom Wathen owner and CEO of California Plant Protection (CPP), was faced with a decision whether to aggressively pursue an acquisition, of its competitor Pinkerton by increasing a bid to $100 million. CPP’s investment bank has identified three main synergies from the CPP’s acquisition of Pinkerton.
1. Consolidation of operations, by eliminating common overhead expenses 2. Improvement in management of Pinkerton’s net working capital 3. Pinkerton brand
Obstacles with the acquisition included factors such as CPP’s board of directors as well as the high-leverage position in the company, financing of this deal would create. Two financing alternatives were presented to CPP for a $100 million bid:
1. Alternative I - $75 million debt with seven year maturity and 11.5% interest rate & $25 million equity in exchange for 45% of the equity in the new combined firm 2. Alternative II - $100 million debt with 13.5% interest rate
The case analysis is to provide clear direction, whether if the synergies created by the acquisition of Pinkerton justify the $100 million bid.
The case analysis will entail a valuation of Pinkerton, analyzing two different scenarios “expected” and “pessimistic.” Year 1987, will be considered as year zero therefore forecasts will begin at year 1988 and go through 1992. As of 1992, terminal value will be calculated to capture CFA beyond 1992....