Pinkerton’s Detective Agenc Essay

Pinkerton (A) modern one afternoon in November 1987, Tom Wathen, sole owner and CEO of calcium Plant aegis (CPP), sit down in his office staring at two financing plans. Wathen was trying to decide whether or not he should cast up his $85 billion press out to purchase Pinkertonsthe legendary credentials bind firmlyfrom its current owner, American Brands.On the previous day, Wathen had been told by Morgan Stanley, American Brands enthronization banker, that his bid of $85 million had been rejected and that nothing less than $ degree Celsius million would be accepted. While Wathen was uplift at still being in the deal, he had a problem. CPPs circuit board of directors had reluctantly clear the earlier $85 million bid and were sure to balk at a $ atomic number 6 million bid. Wathen desperately precious to misdirect Pinkertons, only when was not sure how much it was worth or how to pay it. Wathen knew he had to act now or miss this unprecedented growth opportunity and pr obably his depart chance to be one of the industrys biggest players.The Security Guard IndustryThe earnest contain industry had two segments (1) proprietary vindications and (2) distill obtains. While both types of guards performed similar services, a proprietary guard was an employee on the payroll of a non security measures firm. Contract guards were rented from specialist suppliers like Pinkertons, CPP, Wackenhut, and Baker Industries. The historical growth of the contract guard segment of the industry was cod in part to companies concluding that they gained operating flexibility by contracting out their security needs as opposed to managing their own security operations. By ripe 1987, security guard services was a $10 billion industry growing at 6% a year. But the industry was also mature, fragmented, and price-competitive. As a result there was an ongoing class toward consolidation at the expense of sm eitherer, local guard companies whose employees were often imperfec tly 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 century with its spare-time activity of such outlaws as Butch Cassidy and the Sundance Kid. In the film portrait 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 rule ended in 1967 with the death of Robert Pinkerton. Adam S. Berger (MBA 91), prepared this case under the supervision of Professor Scott P. stonemason as the basis for class discussion rather than to illustrate either effective or unproductive handling of an administrative situation.American Brands, the $5 billion consumer goods companywith steel names such as Lucky Strike cigarettes, Jim Beam bourbon, Master locks, and Titleist golf ballspur chased Pinkertons for $162 million in 1982. American Brands make the acquisition in order to expand the service side of its business and because it saw the Pinkertons brand name as a owing(p) addition to a companyof great brand names. The Pinkerton family change the company to American Brands because they matt-up 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 sales everyplace $400 million, 150 offices in the United States, Canada, and the United Kingdom, and a particular strength in the eastern 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 cxxv offices in 38 states and Canada. Exhibit 2 gives selected financial data for CPP. Wathen built CPP with his consummate marketing skills and the out field of operation of differentiating the firm with employee screening and continual training. CPPs expansion was aided by the explosive growth of Californias economy and because the bigger, more established East chute security guard firms had ignored the westbound 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 stump spud. Berger was an entrepreneur, COO of an electrical connector firm and a CPP director since 1975. Hall was an attorney, a former 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 Pinkertons 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 virtual tie with Baker Industriesa subsidiary of Borg Warner and the largest provider of contract guard services. Secondly, Wathen had been convinced for some time that American Brands was mismanaging Pinkertons and destroying a great brand name with its price dodging. In October 1987, American Brands announcedit had decided to sell Pinkertons because the security guard firm no longer fit into Brandss long-range business strategy.Upon thisannouncement, Jerry Brown, CPPs secretaire and general counsel, recalls, Tom Wathen called me in and from that moment I knew he was going to do whatever it took to buy Pinkertons. Tom was always hung up on being 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 force of senior managers was right away formed to prepare CPPs bid which they knew, given the time pressures of the sale, would not have the benefit of capable preparation.The task force believed there were three ways CPP could create value by acquiring Pinkertons. The around 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 redundant offices. Second, the task force believed that significant improvements could be made in the management of Pinkertons net on the job(p) capital. The third source of value, and possibly a unique sagacity by Wathen and the CPP task force, was the Pinkertons name. They believed that, while the industry was highly price-competitive, the services of both Pinkertons and CPP could be successfully marketed under the Pinkertons name at a premium price. Specifically, the task force felt that even though higher prices could lead to reduced reven ue, the resulting improvement in gain profit margins, due to the marketability of the Pinkertons name, would be sufficient to result in greater crude profits.For example, thetask force believed that a premium price strategy would definitely reduce Pinkertons revenues since that firm had acquired a significant gist 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 strike of the new strategy on profitability. They expected 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, increasing 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 only 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 percentage 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 confident that Pinkertons net set up and equipment could be reduced to 4% of sales and mai ntained at that percentage relationship 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 handle a much bigger 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 experient 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 lenders contacted by CPP expressed banish feelings about the potential acquisition, citing inadequate cash flow and weak market conditions following the dramatic partitioning of the stock market in the previous month. However, a represen tative 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 arrogance Corporation or General Electric Credit Corporation. In addition, Wathen had some problems with CPPs board of directors. For example, Berger public opinion there would be obvious synergies in merging the two businesses, but that there was not sufficient management depth at CPP capable of running the unite firms.According 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 stand up 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 took special notice of Wackenhut, the only publicly traded se curity 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 receive a response to his bid for two weeks. Through his own network, Wathen knew 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 surmise the reason Morgan Stanley had finally called him was that the other buyer had been unable to finance their higher bid.Financing a $100 Million BidIn a last ditch effort to improve his bid for Pinkertons, Wathen asked his investment banker to determine the options for financing a $1 00 million bid. The banker responded with only two alternatives. The first alternative came from an investment firm who would provide both debt and rectitude financing. The debt, in the amount of $75 million, would have a seven-year adulthood and an 11.5% interest rate. The loan principal 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 exchange 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 hire of $70 million at the end of the seventh year. Again, this loan was collateralized by all of the assets of the new combined firm.Under either financin g alternative, Wathen was very concerned about the required debt service. The new combined firms nonpublic, as well as high-leverage, status could make any cash flow problems over the next five years highly problematic. The task force also reminded Wathen that a $100 million purchase price would result in the creation of good will on his balance carpenters plane 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, oddly in light of his earlier bid of $85 million? And if he was successful in convince the board, how was he going to finance the acquisition?