Pinkerton Essay

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MF10: Corporate Finance Pinkerton Case Due March 30, 2011 INTRODUCTION Pinkerton and CPP are security guard firms. CPP, a younger firm that is looking to grow, is considering the acquisition of Pinkerton, an older firm with an impeccable reputation. Its plan if the acquisition goes through, is to reduce Pinkerton’s revenues with a simultaneous increase in price, thus increasing profits at the expense of size. Furthermore, the merger will create synergies, mostly involving a decrease in operating costs for CPP. Your first job will be to price this acquisition using a WACC method. Once that is done, it will be useful to also find the value of CPP with and without the acquisition. The next part concerns ascertaining the prudence of the two financing methods. This will require creation of a pro forma balance sheet, which will aid in the calculation of solvency ratios. Debt servicing will need to be examined in detail to discover if one, both, or neither of these financing decisions will force the firm into bankruptcy. Finally, we shall like to look at the effect to equity holders. What are the real costs of dilution and is dilution always costly? With all of this in hand, the student will make recommendations to Wathen regarding this acquisition and the financing of it, covering all of the pertinent issues and considerations. PRELIMINARY TASKS The Preliminary portion of this case will be particularly important in that it has repercussions to the valuation of the synergy as well as to the bid process. 1. Why is Wathen interested in this acquisition? Describe briefly the line of business and the qualitative advantages of this merger. 2. Where does the synergy come from and who holds this information? ASSESSMENT AND RECOMMENDATIONS The assessment will really take on two parts: the valuation and the financing decision. 1. Valuation: (throughout this case, you may use the
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