PINKERTON ACQUISITION DILEMMA : WORTH 100 MILLION OR NOT? Harvard Case Solution & Analysis

SYNERGISTIC BENEFITS FOR CPP OF ACQUISITION

The synergistic benefits being obtained by CPP after the acquisition of Pinkerton, are as follow:

Cash Flow from Benefits ($ M)1987198819891990199119925% Growth
Projected Operating Profit Increase0.000.600.751.001.50
Amortization of Goodwill5.005.005.005.005.00
Net Cash flows5.005.605.756.006.50
Discount Factor @ 13.5%     0.881     0.776     0.684     0.603     0.531
Discounted Cash flows4.414.353.933.623.45
Terminal Value of Benefits18.53
NPV Of Synergistic Benefits for CPP38.28

The Assumptions maintained in this scenario are as follows:

  1. The value of the projected operating profit increase is calculated after the expected value of 50% is taken of the increase in profits.
  2. Amortization of Goodwill is for a limited period, so in that case it is not used in the computation of the terminal value of achieved synergistic benefits.
  3. This calculation is also as a stand point of CPP only, without considering the impact of the $ 100 Million Value which will be accounted in later stage.

Analysis

The synergistic benefit net present value for CPP is calculated $ 38.26 million, which when considered to the standalone point of view of Pinkerton will reach to a value of 38.26 + 79.9 = $ 118.16 million. Until this point of our analysis, the acquisition of Pinkerton looks viable and decreasing the $ 100 Million purchase price will provide an after estimate value of $ 18.16 million, but the complete value of the acquisition is to be measured to provide the final value for the acquisition.

COMPLETE DCF OF THE PINKERTON ACQUISITION

The Final Discounted Cash flow for the acquisition of Pinkerton are as follows:

Total Cash Flows ($ M)198719881989199019911992
Profit After tax of Pinkerton       4.85       5.27       6.60       8.33       8.75
Increase in Profits for CPP       5.00       5.60       5.75       6.00       6.50
Net Profits Increase       9.85     10.87     12.35     14.33     15.25
Capital Amount Invested    100.00
less: Net Investment in Plant and Equipment     11.77     10.30     10.81     11.35     11.92
Less: Net Working Capital     26.62     21.75     21.22     22.28     23.39
Net Cash flows   (100.00)    (28.53)    (21.18)    (19.68)    (19.29)    (20.06)
Discount Factor @ 13%       1.00       0.88       0.78       0.68       0.60       0.53
Discounted Cash flows   (100.00)    (25.14)    (16.44)    (13.46)    (11.63)    (10.65)
Terminal Values:
Pinkerton     57.39
CPP     18.53
NET PRESENT VALUE OF THE ACQUISITION FOR CPP                                                   (101.39)

In this part all the calculations are computed with the projected capital increase, net working capital, cash flows and terminal values of both the organizations and their benefits and the overall NET PRESENT VALUE of the potential Acquisition of Pinkerton by CPP.

Analysis

The total value of the project acquisition of Pinkerton for CPP is at $ (101.39) Million, this value suggests that the acquisition for CPP will eventually devalue the organizational NPV by approx. $100 Million. The standalone NPV and synergistic effects of both the organizations may total out to a total NPV of 118 million positively (As done in the Last Part above), but after considerance of the other costs; such as the price of $ 100 Million, Net investment in PP&E, and investment in Net working capital have reduced the NPV to a loss of more than 100 Million which is more than the initial investment.

FINANCING OPTIONS EVALUATION

Option 1

The first option is the Debt + Equity Option, this involves $ 75 Million of Debt with an 11.5% interest with no amortization, with added equity share in 45% of the Pinkerton. The calculations and its value are provided below:

YEARS1988198919901991199219931994
Option - A
Finance Cost8.6258.6258.6258.6258.6258.6258.625
Repayment75
8.6258.6258.6258.6258.6258.62583.625
D.F @ 13.5%       0.88       0.78       0.68       0.60       0.53       0.47       0.41
Present Values       7.60       6.70       5.90       5.20       4.58       4.03     34.46
Total Cost of Option - A    (68.47)

This provides a total further costs with a present value of $ 68.47 Million, reducing the total NPV further to around negative $ 170 Million. This is only the finance part, with equity share further to be provided to the banking institution.

Option 2

This is another financing option available to the organization with a $ 100 Million loan at 13.5% interest annually. This loan can be amortized with a final settlement of $70 million in the 7th year. The attributable costs for this project are provided below:

This option is more expensive than the last option increasing in Costs by further 100 Million in value, making the total NPV of Negative $ 209 Million Approx.

CONCLUSION OF PROJECTIONS

After the calculation and assessment of the profitability figures and their projections in the future, the costs and benefits don’t meet up. The total costs for Wathen are far more than the projected increase in the organizational value.

It is suggested to Mr. Wathen that total NPV for the project is more than $ (200) million in value, when the financing options are also considered.

No matter, the organizational benefits which will be in qualitative nature, the quantitative part of the analysis is in negative figures by more than 100% of the value in the project.

This will only destruct the organizational value of CPP in future, for this instance; Mr. Tom Wathen should side up with the board and reject the project........

 

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