Q1. What is the approximate, net of tax, present value of the cost savings synergies created by the deal if the relevant cost of capital (discount rate) is 7%?
A1. Given: Cost of Capital = 7%
Assumption: Tax rate (US Corporate Tax Rate) = 33%
Year
2007
2008
2009
2010
Terminal
Annual Cost Saving ($ Mio)
105
350
595
700
10000
One Time Charge ($ Mio)
692
337
61
0
0
Net Cost Saving ($ Mio)
-587
13
534
700
10000
Tax Rate
33%
33%
33%
33%
33%
After Tax Cost Saving ($ Mio)
-393.29
8.71
357.78
469
6700
Discount Factor
0.966736
0.903492
0.844385
0.789145
0.789145
Present Value of Cost Savings
-380.208
7.869416
302.1041
370.109
5287.271
Net Present Value ($ Mio)
5587.146
Q2. Will synergy cash flows allow the banks to increase their debt?
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of shares of Mellon post deal (*Cumulative total earnings/Pre deal EPS)
1152.13 million (=748.887/0.65)
Shares of Mellon (1:1 exchange ratio)
411.9 million
Shares of Bank of New York
740.23 million (=1152.13-411.9)
To maintain the EPS pre and post deal, the following exchange ratio is calculated:-
Exchange ratio= Bank of New York post deal shares/ Bank of New York pre deal shares =740.23 million/751.8million =0.9846
The exchange ratio of 1:0.9846 will maintain the EPS both pre and post deal.
Q6. In the absence of synergies, is the proposed deal accretive or dilutive for Mellon shareholders? For BNY shareholders?
The proposed deal (and as executed) had the following exchange ratios:
CASE A
Bank of New York: 1:0.9434
Mellon Financial: 1:1
BNY Shareholders experienced a loss of 1.69% as per the EPS post-merger, in comparison to the EPS if the merger had not taken place.
Mellon Financial Shareholders experienced a gain of 3.39% as per the EPS post-merger, in comparison to the EPS if the merger had not taken place.
If the merger had taken place as per the current EPS values only, i.e. at the Exchange ratios as given below:
CASE B
Bank of New York: 1:0.8859
Mellon Financial: 1:1
BNY Shareholders experienced a loss of 5.08% as per the EPS post-merger, in comparison to the EPS if the merger had not taken place.
Mellon Financial Shareholders experienced a gain of
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