Mellon Financial BNY Group 9 Q1 2 3 5 6

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?
A2. As seen above the synergy cash flow will lead to a cost saving for the bank which will push up its profit. This increase in profit will be reflected in the reserves and surplus and thus will increase the equity and decrease the leverage of the bank. This decrease in leverage will open up the possibility for an increase in debt for the bank.
Q3. Under the terms of proposed deal, what fraction of the synergies will be captured by Mellon legacy shareholders? By BNY legacy shareholders? (“Legacy” shareholders are the former shareholders of BNY or Mellon, after they become shareholders of the new company.
A3.

Initial Shares
Exchange Ratio
Final Shares
% share
Number of shares of Mellon Financials
412
1
412
37%
Number of shares of Bank of NewYork
752
0.9434
709
63%
Total shares

1121

Total synergy derived out of the transaction
5587

Synergy to Mellon Shareholders
2053

Synergy to Bank of Newyork Shareholders
3535

Q5. In the absence of synergies, what exchange ratio would keep the earnings attributed to each legacy share in Q4 2007 equal before and after the merger?
When synergies don’t exist, the following would be the effect,
Before the deal:-
Bank
EPS (1)
No. of outstanding shares (2)
Earnings (=1*2)
Bank