Pinkerton Case Solution: Financial Analysis and Recommendation

This case study solution analyzes the Pinkerton acquisition from a financial perspective, focusing on Wathen's strategic decisions. The analysis includes the calculation of the unlevered cash flow, discount rates, and the weighted average cost of capital (WACC) to determine the present value (PV) of the acquisition. The solution explores the impact of different financing options, including blended financing and 100% debt financing, on the net present value (NPV) and the company's leverage. It also examines the management of net working capital (NWC) and the potential risks associated with the forecasted improvements. The solution recommends renegotiating the offers and highlights the importance of considering various loan structures to mitigate risks and maximize the NPV. Finally, the analysis also emphasizes the importance of understanding the impact of tax and operational profits and making a final recommendation based on the analysis.

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Pinkerton Case
Solution
Amine Acharki

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 The problems of inefficient financial decisions
it the past augmented the occurrence for
choosing new productive financial approach,
which might achieve financial profits for
Wathen. Therefore, CPP, NPV and FCF issued
for selected adequate financial approach for
the organization.
Introduction

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 The amended forecasted CPP has been used
for detected the unlevered cash flow worth
$100 million.
 The discount rate of at 14.59%
 Beta is calculated at 0.809
 Market risk premium is at 7.43%
 Risk free rate is at 8.58%
 The terminal growth rate is at 5%
Using CPP

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 The expected increase in operating profit are
$1.2 in 1989, $1.5 in 1990, $2.0 in 1991, $3.0
in 1992 and increasing 5% per year after that.
 The calculated PV after tax contribution is at
17.52 Million
 The firms unlevered cost of capital 14.59% is
used for deriving the PV
 The weighted average cost of capital of 11.61%
is used with the terminal growth rate of 5%
using the 7 year period
Increase in operating
profit

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 PV of the Unlevered FCF from Pinkerton is
$75.28 million in worst-case scenario
 CPP will also not realize the $17.52 Million
incremental improvements in its own cash
flows
 The weighted average cost of capital we
calculated for Wackenhut was 11.6%, while
beta is at 0.89
 The managers can target a more reasonable
leverage ratio representative of the risk of the
assets
Present Value

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 CPP forecast for improvements are not replicated by
other firms in the same manner
 There is a possibility of other firms having favorable
financing terms
 The debt financing NPV in best condition was at
$36.88
 The debt financing NPV in worst condition was at -
$3.20
 Without additional financing during the period of the
loan, the firm would be very likely to default which
could potentially be very costly
Management of NWC

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 The first options is a blended financing that is,
taking on $75 million in debt and $25 million in
shareholders’ equity.
 Goodwill worth $43.7 Million will be realized with the
use of first option. This will increase the assets to
$185.5 million while total debt will be $78.1 Million.
 The second option is to finance the acquisition of
Pinkerton with 100% debt.
 This will increase the leverage of the organization,
where the total assets will amount to $185.5 Million
and total debt will be at $103.1 Million.
Financing Options

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 This will create an NPV of 17.41 Million.
 This was found by taking CPPs 55% share of
the NPV of purchasing Pinkerton in the best-
case scenario ($36.70)
 Subtracting the 45% share given away of the
PV of CPP's current firm ($19.29).
 If Tom is wrong about the forecast rates, then
the purchase will result in a negative NPV, so
this decision should not be made lightly.
NPV Values

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 Recommendation for Tom is to attempt to renegotiate
both offers.
 Showing our valuation model to multiple investment
bankers, we may be able to negotiate a price for equity
that is somewhere in-between our computed value.
 The terminal value of the company would be more than
enough to cover the principle so refinancing or raising
capital by selling equity would be easy.
 Presentation of different loan structure can help Tom
negotiate an all debt financing deal that mostly
eliminates his risk of default and creates a much larger
Net present value
Recommendation

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THANK YOU