California Plant Protection (CPP) is an extremely effective security officer firm. Tom Wathen may be the CEO and sole who owns CPP. Pinkerton, later, would be a competitor from the firm with a decent brand image. Wathen wished to buy Pinkerton if this was available available. Morgan Stanley symbolized American Brands within the purchase and also the putting in a bid. They'd not pay a bid of less than $100 million. He needs to decide if the purchase of Pinkerton was lucrative enough to purchase it at this cost. He's two financing options. He is able to raise money by whether $75 million at 11.5% interest or perhaps a $100 million debt at 13.5% interest. Wathen needs to decide whether or not to acquire Pinkerton and when so, how you can finance the bid. The disposable income technique combined using the ongoing value and incremental enhancements are utilized to evaluate the choice.
A. All-equity Cost of Capital Based on Wackenhut's Numbers.
B. Projected Pinkerton Free Cash Flows Through 1992
Free cash flowFree cash flow
PV Free cash flow at All-Equity Cost of Capital
Estimated pessimistic value of Pinkerton
Value of 45% of CPP Equity -Expected Cash Flows
Financing the Acquisition
75% Debt100% debt
Debt service requirements,75% debt
Debt service requirements,100% debt
Total FCF - total debt service burdenCumulative excess cash flow
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?