Pinkerton Essay

599 Words3 Pages
Executive Summary California Plant Protection (CPP), a medium sized security firm, is considering expanding their business by purchasing Pinkerton a larger firm. The first bid of $85 million was rejected, and CPP was informed by Morgan Stanley that any bids under $100 million would not be accepted. Wathen, sole owner and CEO of CPP, desperately wants to purchase Pinkerton to become one of the industry’s biggest players. He is unsure how to value Pinkerton or how to finance the $100 million bid. The analysis determined the value of Pinkerton is greater than $100 million and that financing alternative 1 generates the greatest value for CPP. I would recommend that Wathen increase his bid and utilize financing option 1 which represents 75% debt and 25% equity. Determining WAAC WAAC was calculated by using the formula below: WAAC = (D/V*R_d*(1-tax rate)) + (E/V*R-e) 13.4% Many steps were used before WAAC could be determined. Using CPP’s balance sheet I calculated D/E by dividing the debt portion $37.2 million by the equity portion of $18 million arriving at 2.07. D/V was calculated by dividing debt of $37.2 million by total liabilities and equity of $55.2 million = 0.67. E/V was calculated by deducting the D/V from 100 to give the remaining 0.33. Wackenhut capital structure consists of 92% equity and 8% debt; $10.6 million divided by $130.4 million. This structure was used in the configuring of the remaining calculations to prove WAAC. Bid Justifications Pinkerton alone is valued itself at a total of $89.7 million according to exhibits 2 and 3, consisting of a 5 year valuation as well as continuing values. Adding the expected synergies Pinkerton’s value to CPP would increase by an additional $14.6 million. Assuming an interest coverage ratio of 6.0x for Pinkerton as an A rating for a small firm. Pinkerton will receive a tax shield of 34% for a

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