Executive summary
California Plant Protection (CPP) is a medium sized security firm, which is considering expanding their business by buying a larger firm named Pinkerton. The first bid was $85 million but this was rejected, and CPP was informed that any bids under $100 million would face the same result. The key questions we have addressed are whether a $100 million bid for Pinkerton can be justified and if so, how the acquisition should be financed.
We find the value of Pinkerton for CPP to be greater than $100 million and that financing alternative 1 generates the greatest value for CPP. Based on this we recommend Wathen to increase the bid to $100 million and finance this with 75% debt and 25% equity.
Detailed Analysis
In the process of making an estimate of the value of Pinkerton’s future cash flow, we based the numbers on the task force’s expectations. There are no indications of Pinkerton having any debt to consider, and therefore we chose the Equity DCF method to estimate the value, and for this we needed a discount factor. This was found by using the unlevered cost of equity based on data from Wackenhut. …show more content…
Because EBITA is negative it limits our possibilities to which multiples we can use. We have used price over sales and found a value of $75 million. This amount is calculated from the numbers before the strategic changes and without the synergy effects. If we consider the growth this is supposed to give, then the value will be estimated to over $100 million, and therefore this supports our decision to bid $100 million for Pinkerton. However a price to sales multiple is inconsistent as the numerator and the denominator do not accrue to the same claimants. Hence we have chosen not to attach importance to this value estimate.
In addition to the mentioned benefits, the case states that this acquisition would help CPP to become one of the biggest firms in the market. If used wisely, this position would most likely help CPP to attract further valuable customers and maybe be able to control the movement in the market to some extent. Of course it cannot be forgotten how large this market is, and therefore the largest firm may not have that much of an influence in the market as a
California Plant Protection (CPP) is a medium sized security firm, which is considering expanding their business by buying a larger firm named Pinkerton. The first bid was $85 million but this was rejected, and CPP was informed that any bids under $100 million would face the same result. The key questions we have addressed are whether a $100 million bid for Pinkerton can be justified and if so, how the acquisition should be financed.
We find the value of Pinkerton for CPP to be greater than $100 million and that financing alternative 1 generates the greatest value for CPP. Based on this we recommend Wathen to increase the bid to $100 million and finance this with 75% debt and 25% equity.
Detailed Analysis
In the process of making an estimate of the value of Pinkerton’s future cash flow, we based the numbers on the task force’s expectations. There are no indications of Pinkerton having any debt to consider, and therefore we chose the Equity DCF method to estimate the value, and for this we needed a discount factor. This was found by using the unlevered cost of equity based on data from Wackenhut. …show more content…
Because EBITA is negative it limits our possibilities to which multiples we can use. We have used price over sales and found a value of $75 million. This amount is calculated from the numbers before the strategic changes and without the synergy effects. If we consider the growth this is supposed to give, then the value will be estimated to over $100 million, and therefore this supports our decision to bid $100 million for Pinkerton. However a price to sales multiple is inconsistent as the numerator and the denominator do not accrue to the same claimants. Hence we have chosen not to attach importance to this value estimate.
In addition to the mentioned benefits, the case states that this acquisition would help CPP to become one of the biggest firms in the market. If used wisely, this position would most likely help CPP to attract further valuable customers and maybe be able to control the movement in the market to some extent. Of course it cannot be forgotten how large this market is, and therefore the largest firm may not have that much of an influence in the market as a