Mellon Financial BNY Group 9 Q1 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) = 35%

Year
2007
2008
2009
2010
Annual Cost Saving ($ Mio)
105
350
595
700
Tax Rate
35%
35%
35%
35%
After Tax Cost Saving ($ Mio)
68.25
227.5
386.75
455
Discount Factor
0.966736
0.903492
0.844385
0.789145
Present Value of Cost Savings
65.97977
205.5444
326.5659
359.0609
Net Present Value ($ Mio)
957.1511

S.No.
Assumptions
1
WACC
7%
2
Tax Rate
35%
Q2. Will synergy cash flows allow the banks to increase their debt?
A2.
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 of New York
0.64
751.8 million
481.152 million
Mellon Financial
0.65
411.9 million
267.735 million
Total

748.887 million

After the deal:-
Pre deal Earning per share of Mellon
0.65
No. 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