Pinkerton’s Detective Agenc Essay

Pinkerton (A)Late one afternoon in November 1987, turkey cock Wa past, sole avoucher and CEO of California form Protection (CPP), sit in his office staring at devil financing plans. Wathen was laborious to decide whether or non he should increase his $85 meg beseech to purchase Pinkertonsthe legendary protective c everywhereing harbor besottedfrom its current owner, American Brands.On the previous day, Wathen had been told by Morgan Stanley, American Brands enthronement banker, that his bid of $85 one billion million had been rejected and that no thing less than $ light speed million would be accepted. While Wathen was elated at still organism in the deal, he had a problem. CPPs board of directors had reluctantly sanction the earlier $85 million bid and were sure to balk at a $100 million bid. Wathen desperately wanted to buy Pinkertons, scarce was not sure how ofttimes it was worth or how to finance it. Wathen k natural he had to act now or throw this unprecedented growth prospect and probably his last chance to be one of the manufactures biggest players.The Security Guard IndustryThe security caution assiduity had two segments (1) trademarked safe-conducts and (2) contract safetys. While some(prenominal) types of guards performed similar services, a proprietary guard was an employee on the payroll of a nonsecurity squiffy. Contract guards were rented from specialist suppliers give care Pinkertons, CPP, Wackenhut, and Baker Industries. The historical growth of the contract guard segment of the pains was due in part to companies concluding that they gained operating(a) flexibility by contracting out their security needs as opposed to managing their own security operations. By late 1987, security guard services was a $10 billion industry growing at 6% a social class. further the industry was also mature, fragmented, and price-competitive. As a result in that location was an ongoing trend toward consolidation at the expense of smal ler, local guard companies whose employees were often imperfectly screened andpoorly trained.PinkertonsThe security guard industry began in 1850 when Allan Pinkerton founded the Pinkertons Detective Agency. The firm gained fame in the nineteenth ampere-second with its pursuit of such outlaws as Butch Cassidy and the Sundance Kid. In the film enactment of that pair, Paul Newman repeatedly asks Robert Redford, Who are those guys? Those guys were Pinkertons men and women. Pinkerton ran his firm until he died in 1884. The company was then headed by four generations of Pinkertons until the familys govern ended in 1967 with the death of Robert Pinkerton. Adam S. Berger (MBA 91), prepared this case below the supervision of Professor Scott P. Mason as the basis for class discussion rather than to illustrate all effective or ineffective use of an administrative situation.American Brands, the $5 billion consumer goods companywith brand name such as Lucky Strike cigarettes, Jim Beam bo urbon, Master locks, and Titleist golf game ballspurchased Pinkertons for $162 million in 1982. American Brands made the acquisition in order to expand the service side of its business and because it saw the Pinkertons brand name as a nifty addition to a companyof great brand names. The Pinkerton family sold the company to American Brands because they mat the industry was becoming extremely price-competitive and therefore the company needed a strong parent to compete and grow. In 1987 Pinkertons was among the largest security guard firms in the United States, with barters over $400 million, 150 offices in the United States, Canada, and the United Kingdom, and a particular strength in the easterly United States. Exhibit 1 gives selected pecuniary data for Pinkertons.California Plant ProtectionWhen Wathen bought CPP in 1963, the firm had 18 employees and revenues of $163,000. By 1987, Wathen had built CPP into a $250 million security guard company with 20,000 employees and 125 o ffices in 38 states and Canada. Exhibit 2 gives selected financial data for CPP. Wathen built CPP with his consummate merchandise skills and the outline of differentiating the firm with employee screening and continual training. CPPs expansion was aid by the explosive growth of Californias economy and because the bigger, more than established East Coast security guard firms had ignored the west roughly Coast.While Wathen was the sole owner of CPP, he had a board of directors that he used as advisors. The board had three members Albert Berger, James Hall, and Gerald Murphy. Berger was an entrepreneur, COO of an electric connector firm and a CPP director since 1975. Hall was an attorney, a causation vice president of MCA, the former California Secretary of Health, Education and Welfare, and a CPP director since 1976. Murphy was president of ERLY Industries, a director of several companies, and a CPP director since 1975.CPPs Acquisition of PinkertonsWathen wanted to buy Pinkerton s for several reasons. First, he had always had the goal of creating the largest firm in the security guard industry, and the acquisition of Pinkertons would put him in a practical(prenominal) tie with Baker Industriesa subsidiary of Borg Warner and the largest provider of contract guard services. Secondly, Wathen had been convinced for some sentence that American Brands was mismanaging Pinkertons and destroying a great brand name with its pricing strategy. In October 1987, American Brands announcedit had contumacious to sell Pinkertons because the security guard firm no weeklong fit into Brandss long-range business strategy.Upon thisannouncement, Jerry Brown, CPPs secretary and ecumenic counsel, recalls, Tom Wathen called me in and from that moment I k smart he was going to do whatever it took to buy Pinkertons. Tom was always hung up on world the largest, and on Pinkertons name. Morgan Stanley, an investment bank, was to represent American Brands in the sale and the bidding promised to be hotly contested. A labor movement array of ranking(prenominal) managers was quickly formed to prepare CPPs bid which they knew, given the time pressures of the sale, would not fork out the benefit of adequate preparation.The labor military capability believed there were three ways CPP could create value by acquiring Pinkertons. The most obvious source of value would come from consolidating the operations of CPP and Pinkertons by eliminating common overhead expenses such as corporate headquarters, support staff, and excess offices. Second, the undertaking force believed that significant expediencys could be made in the precaution of Pinkertons net work capital. The third source of value, and possibly a unique insight by Wathen and the CPP task force, was the Pinkertons name. They believed that, while the industry was steeply price-competitive, the services of both Pinkertons and CPP could be boffoly groceryed beneath the Pinkertons name at a premium pri ce. Specifically, the task force felt that even though higher prices could lead to reduced revenue, the resulting improvement in gross profit margins, due to the marketability of the Pinkertons name, would be decent to result in greater gross profits.For example, thetask force believed that a premium price strategy would definitely reduce Pinkertons revenues since that firm had acquired a significant amount of business since 1985 using a low-price/high market-share strategy. The new pricing strategy would result in Pinkertons revenues shrinking, in a smooth fashion, to 70% of their 1987 level by the end of 1990 and then growing at 5% a year thereafter. But the task force was uncertain in its estimate of the impact of the new strategy on profitability. They expect that the new pricing strategy would improve Pinkertons gross profit margins from 8.5% in 1988 to 9.0% in 1989, 9.5% in 1990, and 10.25% thereafter. The task force further expected the new strategy to produce higher margins for CPP, increase the projected operating profit from CPPs own business by $1.2 million in 1989, $1.5 million in 1990, $2.0 million in 1991, and $3 million in 1992.This increase in CPPs projected operating profit would be over and above that level that would otherwise have been anticipated in those years, and was expected to grow at 5% a year, in line with sales, beyond 1992. (Exhibit 3 gives a five-year forecast of CPPs net income and cash flow assuming Pinkertons is not acquired). However, the task force realized there was a distinct possibility that the new pricing strategy would have no impact on CPPs projected operating profits, and Pinkertons gross margins would improve to just 8.5% in 1988, 8.75% in 1989, 9.0% in 1990, and 9.5% thereafter. The task force was confident that, as a result of eliminating common overhead, Pinkertons operating expenses, as a persona of sales, could be reduced to 6% in 1988, 5.9% in 1989, and 5.8% in 1990 and beyond. The task force was also confi dent that Pinkertons net plant and equipment could be reduced to 4% of sales and maintained at that percentage kin for the foreseeable future.The task force was somewhat less confident in its estimate of improvements to the management of Pinkertons net working capital. This was due to concerns over the ability of CPPs accounting department to cargo hold a much larger and more geographically diverse operation. The task force expected that Pinkertons net working capital, as a percentage of sales, could be reduced to 8.6% in 1988, 7.4% in 1989, and 6.2% thereafter. However, if CPPs accounting department experience difficulties in integrating the two firms operations, then Pinkertons net working capital would remain at 9.5% ofsales.The idea of CPP acquiring Pinkertons was not universally popular. Most of the investment banks and loaners contacted by CPP express negative feelings near the potential acquisition, citing inadequate cash flow and weak market conditions chase the dramat ic dislocation of the stock market in the previous month. However, a representative of Sutro & Co., a prominent West Coast investment bank, indicated he was highly confident he could get financing for the acquisition from either Manufacturers Hanover Trust Corporation or General Electric Credit Corporation. In addition, Wathen had some problems with CPPs board of directors. For example, Berger thought there would be obvious synergies in merging the two businesses, but that there was not decent management depth at CPP capable of running the feature firms. correspond to Berger, there was no COO, no CFO, no marketing manager, and nobody to handle the day-to-day details of operating a $650 million firm. The last thing CPP needed was growth, Berger argued. He felt the field people could handle a larger firm, but the corporate management could not. Nonetheless, the task force pressed on with their analysis of Pinkertons. In addition to current financial market conditions, the analysis t ook special notice of Wackenhut, the only publicly traded security guard firm. (See Exhibits 4 and 5.) Only 12 days after receiving the details of the salefrom Morgan Stanley, and with the reluctant approval of his board, Wathen bid $85 million for Pinkertons.Wathen did not bewilder a response to his bid for two weeks. Through his own network, Wathen knew some other firm had bid more than CPP and that MorganStanley was negotiating with that firm. Wathen was disappointed that he might miss his last opportunity to be one of the biggest in the business. When Morgan Stanley finally called and told Wathen his $85 million bid was too low, and that nothing less than $100 million would be accepted, Wathen was elated that he had another chance to buy Pinkertons. But he suspected the reason Morgan Stanley had finally called him was that the other buyer had been uneffective to finance their higher bid.Financing a $100 Million bidIn a last ditch effort to improve his bid for Pinkertons, Wat hen asked his investment banker to determine the options for financing a $100 million bid. The banker responded with only two utility(a)s. The first alternative came from an investment firm who would provide both debt and equity financing. The debt, in the amount of $75 million, would have a seven-year maturity date and an 11.5% interest rate. The loan star would not be amortized prior to maturity, at which time the entire $75 million would come due. Finally, this debt would be a senior obligation and be backed by all the assets of the new combined firm.The equity, in the amount of $25 million, would be provided in rallying for 45% of the equity in the new combined firm. The second alternative was a 100% debt financing offered by a bank. The bank would lend $100 million at the rate of 13.5% a year. The loan principal would be amortized at the rate of $5 million a year for six years, with a final payment of $70 million at the end of the seventh year. Again, this loan was collater alized by all of the assets of the new combined firm.Under either financing alternative, Wathen was very concerned about the necessary debt service. The new combined firms nonpublic, as well as high-leverage, status could make any cash flow problems over the contiguous five years highly problematic. The task force also reminded Wathen that a $100 million purchase price would result in the cosmos of good will on his balance sheet which would have to be amortized at the rate of $5 million per year for the next 10 years.1 Wathen sat in his office and prepared to make the biggest decision of his career.As an entrepreneur and an experienced security guard executive, Wathen was sure Pinkertons was a good buy. However, he had routinely relied on his board and other advisers forfinancial advice. His board had reluctantly approved his earlier bid of $85 million and was sure to balk at a $100 million bid. How could he justify a $100 million bid for Pinkerton, particularly in light of his ea rlier bid of $85 million? And if he was successful in convincing the board, how was he going to finance the acquisition?