Mellon Financial and the Bank of New York Case Solution & Answer

Mellon Financial and the Bank of New York Case Solution

In order to analyze the present value of the synergies which could be result with this merger from the cost saving of $ 700 million, the following calculation is performed using the discount rate as gives for the combined company of 7.46% and the tax rate of 38%.

Cost Synergies
Year 0 1 2 3 4
1 Pre-Tax Cost Savings, Constant Dollars  $  105  $  350  $ 595  $   700
2 Expected Inflation Rate 1% 1% 1% 1%
3 Growth Rate of FCF (nominal), in perpetuity 2%
4 Discount Rate 7.46%
5 Ongoing Investment/Savings (year 3+) 5%
6 Pre-Tax Cost Savings, Current Dollars  $  106  $  357  $ 613  $   728
7 Tax Expense (@ .40) 38%       40     136    233       277
8 After-Tax Cost Savings       66     221    380       452
9 Less: Investment Necessary to Realize the Savings  $ (1,300)    (692)    (337)     (61)
10 Plus: Disinvestment Associated with the Savings         –
11 Subtotal    (1,300)    (626)    (116)    319       452
12 Terminal Value    8,437
13 Free Cash Flow  $ (1,300)  $ (626)  $ (116)  $ 319  $ 8,889
14 Net Present Value of Cost Savings $4,940
15 Internal Rate of Return of Synergy Investment 52%

It can be seen from the net present value of the cost savings with this synergy that the company could get benefit from this merger. For the calculation, the expected inflation rate is taken to be 1% for each year. The internal rate of return with this cost saving would be 52%, which also depicts the viability of the transaction.

In addition to this, it can be seen that the graph which shows the return of the individual companies could show a much a higher trend with this proposed merger. In order to know the fraction of synergies captured by the two companies, the overall value of synergy should be calculated which is summarized as below:

Value of firm
PV of FCFF in high growth = $1,275.83 $2,623.18 $3,986.51
Terminal value = $9,771.24 $16,783.51 $44,953.15
Value of firm today = $9,101.96 $15,406.55 $39,990.87
Value of Synergy  
Value of independent firms $24,508.50
Value of combined firm $39,990.87
Value of synergy $15,482.36

Based on the last stock prices the exchange ratio would be 1:0.889 for BNYC and 1:1 for Mellon, however the actual exchange ratio is 1:0.9434 for BNCY and 1:1 from Mellon. Therefore, in this case BNYC will benefit from the difference. By solving the ratios of EPS for BNYC and Mellon, the exchange ratio is 0.997.

Conclusion and Recommendation

By analyzing the above case qualitatively as well as quantitatively, some recommendations can be made. It can be seen that the merger could provide benefits for both the companies in terms of increased customers from the expansion in the global market. Moreover, with this merger,the new company would provide the one stop solution for the financing needs of the customers. Moreover, there would be increased cost saving whose present value is calculated to be $ 4940. With all these analyses, it is recommended for the company to go for the merger of equals with the name of the new company as The Bank of New York Mellon Inc. In addition to this, the increase in profit would, thus, result in the increase in the equity and decrease the leverage of the bank which could open up the possibility for an increase in debt for the bank.Moreover, there would be no loss for both the companies in this merger………………….

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