Feeling A Bit Insecure

Thomas W. Wathen is a little miffed. After a recent breakfast meeting at the Radisson Bel Air Summit Hotel, the chairman and chief executive of Pinkerton's Inc. pulls his waiter aside. Why must he pay full price for valet parking, Wathen asks. Eating at the hotel's restaurant, he argues, entitles him to a dollar off the $3.50 charge.

It's no wonder Wathen, 62, is worried about his expenses these days. Costs at his security guard company, which he purchased from American Brands Inc. for $95 million in 1988, have been soaring in the wake of a major acquisition spree. Pinkerton's, based in Van Nuys, Calif., saw its operating expenses rise 36%, to $24.4 million, in the first six months of this year. Earnings plummeted 41%, to $2.5 million, on $322 million in revenues. To top it off, management's overoptimistic earnings projections have prompted a nasty shareholder lawsuit. Its once high-flying stock traded at 36 early this year but has slumped to around 15 (chart, page 71). President Albert J. Berger stepped aside in June.

Now, Wathen is tightening the company's purse strings. He has scaled down a troublesome investigative-services acquisition, sold off a money-losing undercover drug-investigations business, and sworn off a planned expansion into alarm systems. Wathen also has put in a new computer system to keep tabs on the company, and he has hired a new numbers man, Robert J. Vitamante, former chief financial officer at Olsten Corp. With his help, Wathen hopes to consolidate more offices and slash staff.

`SLUG IT OUT.' With the security industry growing at a real rate of only 4% a year, Pinkerton's may have trouble achieving highflier status again. Cutting back on acquisitions means it will have to grow internally, and competitors are gearing for a fight. "They are going to have to slug it out in the marketplace with everyone else," says Fred Kohnke, who runs Burns International Security Services Inc.'s California unit. Wathen argues he still can profit by acquiring small domestic guard operations, but he will avoid bigger fish for now.

Pinkerton's has gone through tough times before. It was losing money under American Brands, which had cut fees in order to gain market share. Spying an opportunity, Wathen borrowed $105 million to buy the 142-year-old company and combine it with his existing security business, California Plant Protection Inc., with $250 million in sales. Within a year, he and longtime friend Berger had consolidated the two companies, raised rates, slashed costs, and brought the combined company into the black.

But to make it grow, management focused on acquisitions. In 1991, Wathen and Berger spent $25.8 million to buy 11 smaller guard companies in the U.S. and four more in Britain and Mexico. This added nearly $64 million to the company's revenues, which hit $638 million last year. But that wasn't enough for Pinkerton's. Berger decided to branch out into higher-margin services, such as background checks and workers'-compensation investigations. Last fall, he bought Nashville-based Business Risks International for $3.8 million.

Folding in the foreign businesses and BRI, however, has proved problematic. Leases it hadn't counted on kept Pinkerton's from closing some overseas offices. And at labor-intensive BRI, which was losing money to begin with, Berger found it hard to cut managers who had formed strong client relationships. Wathen has trimmed investigations offices back to 28, from 42, but he concedes the company hasn't moved quickly enough to consolidate its other far-flung acquisitions. "It's not that it was difficult," he says. "It just wasn't done."

ABOUT-FACE. As costs mounted, the recession also took its toll on domestic margins. Yet no one at Pinkerton's realized what was happening. "The real fault with the company was not having stronger financial controls," says investment manager James Ruf, president of Ruf Investment Group in Weston, Conn. Berger, who is still on the board, concedes that Pinkerton's billing and scheduling system was inadequate.

Whatever the reason, executives told investors that business was booming. They predicted 25% earnings gains for the second quarter--only to disclose six days after the quarter ended that results would be way off. Furious about the delay--and angered that Berger had unloaded his 11,200 shares and Wathen 37,000 of his 2.9 million shares before the announcement--some investors filed a class action alleging that Pinkerton's fraudulently inflated its stock. Pinkerton's denies any wrongdoing.

Still, Pinkerton's has basic strengths, such as some big-name clients. It continues to supply security guards for a subsidiary of ITT Corp., among others. In June, Pinkerton's landed an $8 million contract with a division of Hughes Aircraft Co., a sure boost to the bottom line. But Wathen is decidedly guarded about future earnings. "I probably won't ever make another projection in my life," he says. That's one part of his new strategy no one would question.