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Harvard Business School XXXXXXXXXX
Rev. May 24, 2001
Adam S. Berger (MBA ’91), prepared this case under the supervision of Professor Scott P. Mason as the basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 1991 by the President and Fellows of Harvard College. To order copies or request permission to
eproduce materials, call XXXXXXXXXX, write Harvard Business School Publishing, Boston, MA 02163, or go to
http:
www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
ecording, or otherwise—without the permission of Harvard Business School.
1
Pinkerton (A)
Late one afternoon in November 1987, Tom Wathen, sole owner and CEO of California Plant
Protection (CPP), sat in his office staring at two financing plans. Wathen was trying to decide
whether or not he should increase his $85 million bid to purchase Pinkerton’s—the legendary security
guard firm—from its cu
ent owner, American Brands.
On the previous day, Wathen had been told by Morgan Stanley, American Brands’
investment banker, that his bid of $85 million had been rejected and that nothing less than $100
million would be accepted. While Wathen was elated at still being in the deal, he had a problem.
CPP’s board of directors had reluctantly approved the earlier $85 million bid and were sure to balk at
a $100 million bid. Wathen desperately wanted to buy Pinkerton’s, but was not sure how much it
was worth or how to finance it. Wathen knew he had to act now or miss this unprecedented growth
opportunity and probably his last chance to be one of the industry’s biggest players.
The Security Guard Industry
The security guard industry had two segments: (1) proprietary guards and (2) contract
guards. While both types of guards performed similar services, a proprietary guard was an employee
on the payroll of a nonsecurity firm. Contract guards were “rented” from specialist suppliers like
Pinkerton’s, CPP, Wackenhut, and Baker Industries. The historical growth of the contract guard
segment of the industry was due 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 late 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
trend toward consolidation at the expense of smaller, local guard companies whose employees were
often imperfectly screened and poorly trained.
Pinkerton’s
The security guard industry began in 1850 when Allan Pinkerton founded the Pinkerton’s
Detective Agency. The firm gained fame in the nineteenth century with its pursuit 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 Pinkerton’s men and women.
Pinkerton ran his firm until he died in XXXXXXXXXXThe company was then headed by fou
generations of Pinkertons until the family’s reign ended in 1967 with the death of Robert Pinkerton.
Distributed by The Case Centre North America Rest of the world
www.thecasecentre.org t XXXXXXXXXXt XXXXXXXXXX
All rights reserved e XXXXXXXXXX e XXXXXXXXXX centre
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XXXXXXXXXXPinkerton (A)
2
American Brands, the $5 billion consumer goods company—with
and names such as Lucky Strike
cigarettes, Jim Beam bou
on, Master locks, and Titleist golf balls—purchased Pinkerton’s for $162
million in XXXXXXXXXXAmerican Brands made the acquisition in order to expand the service side of its
usiness and because it saw the Pinkerton’s
and name as a great addition to “a company of great
and names.” The Pinkerton family sold the company to American Brands because they felt the
industry was becoming extremely price-competitive and therefore the company needed a strong
parent to compete and grow. In 1987 Pinkerton’s was among the largest security guard firms in the
United States, with sales over $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 financial
data for Pinkerton’s.
California Plant Protection
When 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
125 offices in 38 states and Canada. Exhibit 2 gives selected financial data for CPP. Wathen built
CPP with his consummate marketing skills and the strategy of differentiating the firm with employee
screening and continual training. CPP’s expansion was aided by the explosive growth of California’s
economy and because the bigger, more established East Coast security guard firms had ignored the
West 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 Murphy. Berger was
an entrepreneur, COO of an electrical connector firm and a CPP director since XXXXXXXXXXHall was an
attorney, a former vice president of MCA, the former California Secretary of Health, Education and
Welfare, and a CPP director since XXXXXXXXXXMurphy was president of ERLY Industries, a director of
several companies, and a CPP director since 1975.
CPP’s Acquisition of Pinkerton’s
Wathen wanted to buy Pinkerton’s for several reasons. First, he had always had the goal of
creating the largest firm in the security guard industry, and the acquisition of Pinkerton’s would put
him in a virtual tie with Baker Industries—a 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 Pinkerton’s and destroying a great
and name with its pricing strategy.
In October 1987, American Brands announced it had decided to sell Pinkerton’s because the
security guard firm no longer fit into Brands’s long-range business strategy. Upon this
announcement, Je
y Brown, CPP’s secretary 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 Pinkerton’s. Tom was
always hung up on being the largest, and on Pinkerton’s name.”
Morgan Stanley, an investment bank, was to represent American Brands in the sale and the
idding promised to be hotly contested. A task force of senior managers was quickly formed to
prepare CPP’s bid which they knew, given the time pressures of the sale, would not have the benefit
of adequate preparation.
The task force believed there were three ways CPP could create value by acquiring
Pinkerton’s. The most obvious source of value would come from consolidating the operations of CPP
and Pinkerton’s 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 Pinkerton’s net working capital. The third source of value, and possibly
a unique insight by Wathen and the CPP task force, was the Pinkerton’s name. They believed that,
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Pinkerton (A XXXXXXXXXX
3
while the industry was highly price-competitive, the services of both Pinkerton’s and CPP could be
successfully marketed under the Pinkerton’s name at a premium price.
Specifically, the task force felt that even though higher prices could lead to reduced revenue,
the resulting improvement in gross profit margins, due to the marketability of the Pinkerton’s name,
would be sufficient to result in greater gross profits. For example, the task force believed that a
premium price strategy would definitely reduce Pinkerton’s revenues since that firm had acquired a
significant amount of business since 1985 using a low-price/high market-share strategy.
The new pricing strategy would result in Pinkerton’s 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 impact of the new strategy on profitability. They expected
that the new pricing strategy would improve Pinkerton’s gross profit margins from 8.5% in 1988 to