What are the top 4-5 investment rationale points?
1. Achieving Market Leadership: Acquiring Pinkerton’s would allow CPP to tie with Baker Industries as the industry leader in
the security guard sector. Pinkerton’s 1987 sales reached $408.3 million across 150 offices in the U.S., Canada, and the
U.K., while CPP generated $251.5 million. Together, these revenues would exceed $650 million, establishing CPP as a
market-dominant player.
a. Multi-regional success: Pinkerton’s dominance in the East coast combined with CPP in the west coast positions the
company to be a national powerhouse and a household name which would further increase revenue through market
penetration.
b. As market share increases, concentration in certain areas decreases, this increases performance and optimizes on
economics of scale
c. Leveraging the Pinkerton brand name can create opportunities to use premium pricing and establish greater profit
margins in the near future through the acquisition.
2. Rebranding Opportunity: Wathen observed that American Brands’ low-cost pricing strategy diluted Pinkerton's brand
equity, limiting potential revenue. By repositioning Pinkerton’s to offer premium services, gross profit margins are expected
to improve from 8.5% in 1988 to 10.25% by 1990, capitalizing on the brand's historical reputation for quality.
a. The established trust and reputation of the brand can further differentiate future products and services and create a
MOAT that mitigates against the upturns and downturns of the industry, especially in a price sensitive industry.
b. Risks in the transition from a low-cost to a premium strategy includes customer attrition, a smaller customer base,
retaliation & bad PR from the market, and the maintenance of high service quality. The more premium pinkerton
becomes, the more “niche” it does as well, which can be risky in an expansion-focused market during the 80-90’s.
3. Financial Stability and Growth: Pinkerton’s has consistently maintained gross profits near $26 million annually (e.g.,
$26.6 million in 1987) and shown steady revenue growth, climbing from $296.4 million in 1983 to $408.3 million by 1987.
Additionally, Pinkerton’s total assets increased from $63.5 million in 1983 to $87 million in 1987, supporting both
immediate and long-term financial stability post-acquisition.
a. Effective integration of financial operations across a geographically dispersed company presents
operational complexities, which can be mitigated through a phased implementation strategy and advanced
process standardization technologies.
b. Enhancing receivables and payables management over the long term drives greater cash flow stability and
precision in forecasting.
c. Strategic optimization of net working capital, particularly by unlocking cash trapped in receivables and
short-term assets, strengthens liquidity and amplifies free cash flow generation.
4. 6% Reduction in Operating Expenses through Consolidation: Cost savings from merging with Pinkerton’s are
projected to lower operating expenses to 6% of sales by 1988. By integrating support functions and eliminating
redundancies, CPP expects to enhance overall efficiency and profitability.
a. Operational efficiency: Consolidating the HQ, reducing staff, increasing operational efficiency through maximizing
employee load, technology use, and synergetic strengths of both companies all are ways that will reduce costs and
increase the productivity of the company, allowing it to serve more customers at a lower cost and achieve greater market
penetration.
b. Fixed Costs: Fixed costs (comparative) will reduce as both companies can sell-off any redundant equipment, can
maximize workforce, and have to pay less administrative and state fees for licenses, etc.
c. Risks include integration challenges and disagreements amongst top leadership on how to best achieve results post
merger. Often times, these risks are hard to quantify but are the most dangerous, as they can lead to mergers falling and
companies failing post merger.
How can you create equity value from this acquisition?
American Brands is not utilizing the potential value of Pinkertons, creating deadweight loss and loss of brand value for
Pinkerton’s. We see this in Pinkerton’s data that shows a decreasing gross profit margin from 1983 to 1987. However, CPP
can improve and optimize the pricing strategy, that will then improve gross profit margins. They can also increase equity
value by increasing FCF. If CPP takes advantage of all cost synergies, and helps them expand to new geographies beyond
Pinkertons dominance in the east and CPP in the west, Pinkertons will have higher FCF and an overall increase in equity
value. Also, if WACC is reduced by decreasing cost of debt or equity, we can create more equity value.
If you decided to bid again, which of the two financing alternatives would you choose? Why?
Option 1: A $75 million loan at 11.5% interest (unamortized principal) with a 7-year maturity, combined with $25 million in equity financing for
45% equity in the combined firm.
Option 2: A full $100 million loan at 13.5% interest, requiring amortization at $5 million per year for six years with a final payment of $70 million.
I would choose Option 1 for financing because I believe that the terms are better for Pinkerton due to the following reasons:
- Option 1 offers interest only payments for 7 years, thus CPP would avoid outflows of cash for repayments. While Option 2, would put
immense pressure on the cash flow of the company and this would increase the risk as there are uncertainties within Pinkertons financials.
- CPP already operates with limited cash flow, the payment of $18.5 million in first year in option 2 could be risky compared to the first year
payment in option 1.
- Option 1 has equity dilution, however, the current financial situation of Pinkerton it would be better for dilution then increase the amount
debt payments.
- The Equity dilution reduces the financial risk and doesn’t put cash flow problems to be solved quickly.
- The Long term vision of CPP to become the largest player in the security industry, would make option 1 the more flexible offer as it is more
flexible financially for long term financial sustainability.
