Mellon Financial Case Assignment questions

Q1 1.      What is the approximate net of tax present value of the cost savings synergies created by the deal if the releva

2007 2008
Cost Savings 105 350
Integration expenses 692 337
Other charges 70 70
Savings -657 -57
Taxes -230.0 -20.0
Net Gain -427.1 -37.1
TV
After tax gains -427.1 -37.1

NPV of after tax cost synergies 5120.7

Q3 Under that terms of proposed deal, what fraction of the synergies will be captured by Mellon legacy shareholders? By
Millions Bank of NY Mellon
Shares Outstanidng 752 412
Shares to be issued 709.4 412 Exchange Ratio
Total new shares 1121.4
Stake 64% 36%
NPV of synergies 5120.7
Synergies gained by legacy s 3260.4 1860.2

Q4 Based on the last closing stock prices, and assuming no synergies, what exchange ratio would leave the per share value

PBNY = BNY stock price prior to deal announcement

PMellon = Mellon stock price prior to deal announcement
x = exchange ratio
Acquisition Premium = x*PBNY - PMellon = 0.94*35.48 - 40.05 =
To express as percentage of Mellon's closing price, divide by PMellon:
To express as total premium for all Mellon shares, multiply by n:

BNY Mellon
Share Price 35.48 40.05
No. of Shares 752 412

Zero Premium Exchange For every 1 share, 0.9434 For every 1 share, 1 share
Ratio
Actual Exchange Ratio 0.9434 1
Q5      In the absence of synergies, what exchange ratio would keep the earnings attributed to each legacy share in Q
 The deal will be accretive for BNY if EPSNewco > EPSBNY:

Newco:
Total earnings 2440
Shares outstanding 1121
EPSNewco 2.18

Currently, the deal is accretive from the BNY's perspective:

EPSNewco = $ 2.18
EPSBNY = $ 2.04

The deal is neither accretive nor dillutive for the BNY if EPS for both sets of shareholders stays at the same level.
Hence the exchange ratio of the companies should be equal to the ratio of the companies' earning per share.

EPSMellon / EPSBNY = 1.08

For any exchange ratio smaller than 1.08, the deal would be accretive for the BNY.
For any exchange ratio greater than 1.08, the deal would be dillutive for the BNY.
If x =1.08 then the deal is neither accretive nor dilutive:

Total earnings 2440

Shares Outstanding 1196.31
EPSNewco 2.04
EPSNewco = EPSBuyer

5. Suppose that BNY and Mellon are both trading at their fair stand alone values and that the combination will produce $90
highest price BNY would be willing to pay per share and still break even on the deal? What is the exchange ratio associated wi

Mellon stock price 40.05

Mellon Shares Outstanding 412
Fair Stand Alone Value for Mellon 16501
Synergy 0 No synergy considered
Total Value 16501
Offer Price Per Share 40.05
BNY Stock Price 35
Zero NPV Exchange Ratio 1.13

Mellon stock price 40.05

Mellon Shares Outstanding 412
Fair Stand Alone Value for Mellon 16501
Synergy 5121
 Total Value 21621
Offer Price Per Share 52.48
BNY Stock Price 35
Zero NPV Exchange Ratio 1.48
by the deal if the relevant cost of capital (discount rate) is 7%%?

2009 2010
595 700 Dicsount rate 7%
61 0
70 0
464 700
162.4 245.0
301.6 455.0
6500.0
301.6 6955.0

gacy shareholders? By BNY legacy shareholders? (“Legacy” shareholders are the former shareholders of BNY or Mellon, after the

Exchange Ratio 0.9434

ave the per share values of Mellon and BNY stock the same? (This is sometimes called “Zero premium” exchange ratio.) How does

35.48
40.05
1.13
-6.58
-16%
-2710

each legacy share in Q4 2007 equal before and after merger?

stays at the same level.
s' earning per share.

nation will produce $900 in synergies. What is

nge ratio associated with this offer price?
rs of BNY or Mellon, after they become shareholders of the new company.)

m” exchange ratio.) How does the actual exchange ratio differ from this number? Who benefits from the difference?
difference?