Transcript Document

M&A :
Mellon Financial
&
The Bank of New York
Tatiana Postnikova
Vladimir Trembovolsky
SYNERGY
Igor Postnikov
Case Cracking Plan
^ ^
Situation Description
^ ^
structure
^
Summarizing
^
Recommendations
Objectives Verification:
Case cracking
2
Situation Description
subject: M&A deal
two banks: Mellon Financial & The Bank of New York
goal:
To get synergy effect
M&A agreement main
characteristics:
M&A between
Mellon & BNY
Tip of
integration
National or
Global merger
Kind of capital
merger
Relationship
beetwen
companies
Merger
conditions
Horizontal
integration
National
merger
Corporation
Friendly merger
Equal merger
Taking
synergy effect
3
SYNERGY
Situation Description
M&A reasons:
brand positioning in
existing segments
Complementarily of
client bases
Entrance in new
market segments
M&A reasons
Gain in
competitiveness
Cross-selling
potential
Economy on scale
Points to estimate:
objective:
SYNERGY
^
Estimation of expediency of
transaction conclusion
for Mellon Financial bank
 Estimate possibility to receive an acquisition
premium for Mellon shares
 Make optimum decisions about share capital
 Estimate Pittsburgh role
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structure
2.1.1.a) EBIT
Estimation of
expediency of
transaction
conclusion
2.1 Estimation of
synergy effect
1. Description
of submitted
salient points
of the merger
agreement
2.2 Maximum
transaction price
estimation
2.3Real transaction
2.1.1
independent
estimation of
each company
market cost
2.1.1.b) WACC
2.1.1.c) FCF
2.1.2
Estimation of company cost after merger
without taking into account synergy effect
price estimation
2. Calculation
of favourable
merger
agreement
conditions for
Mellon side
2.4 Searching of
optimum decisions
about share capital
2.1.4
Estimation of synergy effect cost as the
difference between market company cost
after merger and company cost after
merger which include synergy effect
3.1 Analize all
3. Estimation of
obligations to
the Pittsburgh
region
2.1.3 Calculation of company cost with
synergy effect value
thorniest negotiating
points
3.1 Analyze all
given proposals
2.4.1
Estimation of a share of Mellon
shareholders
2.4.2
Estimation of additional share emission
quantity
5
SYNERGY
1. Description of submitted salient points of the merger agreement
 Company name: Mellon + The Bank of New York = the Bank of New York
Mellon Corporation
 Headquarter - New York City
 Pittsburgh functions –
• back-office support functions (hr, accounting)
• facilities management
• technology operations
• cash management
• stock transfer businesses
 The leadership structure had been agreed
18 MONTHS
^
 The board
18 members
10 - The Bank of New York
8 - Mellon Financial
16 members
9 - The Bank of New York
7 - Mellon Financial
 Change-in-control provisions for Mellon employees had been agreed
Points to discuss
 an acquisition premium for Mellon shares
 decisions about share capital
 Pittsburgh role
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SYNERGY
2. Calculation of favourable merger agreement conditions
2.1 Estimation of synergy effect
2.1.1 independent estimation of each company market cost
2.1.1 a) EBIT & Estimated EBIT Grow for Bank of New York
Interest Income
2001
2002
2003
2004
2005
(2006)
3 620
2 613
2 330
2 453
3 356
3 303
-1 939
-948
-721
-808
-1 447
-1 349
-375
-685
-155
-8
-15
57
1 306
980
1 454
1 637
1 894
2 012
Foreign Exchange Income
206
165
193
255
274
288
Gains/Losses on Sale of Securities
154
-118
35
59
97
86
Trading Account Income
132
69
134
109
117
114
0
0
0
0
0
0
2 701
2 893
3 485
4 008
3 932
4 178
267
98
126
147
470
511
3 460
3 107
3 973
4 578
4 890
5 176
Salaries and Benefits
-1 588
-1 562
-2 002
-2 314
-2 532
-2 721
Other Operating Expenses
-1 200
-1 170
-1 522
-1 760
-1 934
-2 081
1 978
1 355
1 903
2 141
2 318
2 386
43
-19
-174
15
5
-3
2 021
1 336
1 729
2 156
2 323
2 383
-715
-470
-605
-759
-796
-812
37
36
33
43
44
45
Net Income
1 343
902
1 157
1 440
1 571
1 617
EBIT =Net Income + Interest Expense +
Income Taxes
3997
2320
2483
3007
3814
Interest Expense
Provision for Loan Losses
Net Interest Income
Trust Income
Commission & Fees
Other Operating Income
Total Fee and Other Income
Net Operating Income
Extraordinary and Other Income, Net
Income before Tax
Income Taxes
Equity in Earnings
SYNERGY
The Bank of New York
EBIT Grow (2005-2006) = 29,08%
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4923
2. Calculation of favourable merger agreement conditions
2.1 Estimation of synergy effect
2.1.1 independent estimation of each company market cost
2.1.1 a) EBIT & Estimated EBIT Grow for Mellon Financial
Interest Income
2001
2002
2003
2004
2005
(2006)
1 397
1 056
917
862
1 159
1 111
-823
-446
-348
-404
-674
-644
4
-172
-7
11
-19
-24
578
438
562
469
466
444
194
146
147
185
202
204
Gains/Losses on Sale of Securities
0
59
62
8
1
1
Trading Account Income
0
0
0
0
0
0
Trust Income
1 091
1 574
1 484
1 487
778
715
Commission & Fees
1 711
1 883
1 863
2 063
2 848
3 075
42
24
83
151
198
229
3 038
3 686
3 639
3 894
4 027
4 225
Salaries and Benefits
-1 528
-1 865
-1 848
-1 963
-1 764
-1 811
Other Operating Expenses
-1 033
-1 243
-1 287
-1 356
-1 638
-1 759
1 055
1 016
1 066
1 044
1 091
1 098
0
5
-72
36
182
218
1 055
1 021
994
1 090
1 273
1 317
Income Taxes
-239
-326
-311
-357
-433
-472
Equity in Earnings
-380
-28
-6
67
72
162
436
667
677
800
912
1 007
1498
1439
1336
1561
2019
Interest Expense
Provision for Loan Losses
Net Interest Income
Foreign Exchange Income
Other Operating Income
Total Fee and Other Income
Net Operating Income
Extraordinary and Other Income, Net
Income before Tax
Net Income
EBIT =Net Income + Interest Expense +
Income Taxes
SYNERGY
Mellon Financial
EBIT Grow (20052006) = 33,38%
2693
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2. Calculation of favourable merger agreement conditions
2.1 Estimation of synergy effect
2.1.1 independent estimation of each company market cost
2.1.1 b) WACC of Mellon Financial , WACC of Bank of New York
Bank of New York
Mellon
Re = beta
1,41
1,27
cost of debt
Rd
11%
11%
corporate tax rate
Tc
35%
35%
market value of the firm's debt
D
9 511
5 550
market value of the firm's equity
E
10 287
4 265
V=E+D
V
19 798
9 815
percentage of financing that is equity
E/V
0,5
0,4
percentage of financing that is debt
D/V
0,5
0,6
WACC
0,77
0,65
Bank of New York
Mellon
EBIT
4923
2693
Tc
35%
35%
FCF
2479,10
1312,35
Bank of New York
Mellon
EBIT grow
29,08%
33,38%
FCF
2479,10
1312,35
WACC
0,77
0,65
CV
6719,61
5482,12
cost of equity
Weighted Average Cost Of Capital
2.1.1 c) FCF of Mellon Financial , FCF of Bank of New York
Earnings Before Interest and Taxes
Corporate Tax rate
Free Cash Flow = EBIT * (1-Tc)
each company market value calculation
Estimated EBIT grow
Free Cash Flow
Weighted Average Cost Of Capital
Company Value
SYNERGY
CV=(FCF*(1+EBITgrow))/(WACC-EBIT grow)
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2. Calculation of favourable merger agreement conditions
2.1 Estimation of synergy effect
2.1.2
Estimation of company cost after
merger without taking into
account synergy effect
Company Value
w/o synergy effect
weight average
EBIT grow
weight average
WACC
2.1.3
Calculation
of company
cost with
synergy
effect value
2.1.4
Estimation of synergy effect cost as difference
between market company cost after merger and
company cost after merger which include
synergy effect
CV bny&mellon
CVbny+CVmellon
12 201,72
EBIT bny&mellon
(EBITbny*CVbny+EBITmellon*CV
mellon)
/CVbny&mellon
31,01%
WACC bny&mellon
(WACCbny*CVbny+WACCmellon
*CVmellon)
/CVbny&mellon
0,72
Bank of New York
Mellon
BNYMC
BNYMCs
Revenues
5674
5186
10860
10860
Operational Costs (-8,5%)
4466
3402
7868
7199,22
EBIT
3814
2019
5833
6501,78
29,08%
33,38%
31,01%
31,01%
WACC
0,77
0,65
0,72
0,72
Corporate tax rate
35%
35%
35%
35%
1547,59
558,64
2106,23
3172,65
EBIT Grow
Company value CV
synergy effect = 3172,65 - 2106,23 = 1066,42
only merges which provide additional market company value in comparison with the
sum of separately taken company value are economically effective. In this case cost of a
synergy from cost reduction will be =1066,42
SYNERGY
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2. Calculation of favourable merger agreement conditions
2.2
Maximum
transaction
price estimation
2.3
Real
transaction
price
estimation
CVbny&mellon
13 646,97
CVbny
6 719,61
CVmellon
5 482,12
P(Mellon)max = CVbny&mellon -CVbny
P(Mellon)max
5627
P(Mellon)real = (P(Mellon)-CVmellon)*Mellon share +CV Mellon – Deal
Expenses
P(Mellon)real
5536
2.4
Search of optimum decisions about share capital
2.4.1 Estimation of share of Mellon shareholders
2.4.2 Estimation of additional share emission quantity
N bny
CV bny&mellon
P(Mellon) max
Estimation of additional
share emission quantity could be calculating as:
ΔN bny / (N bny + ΔN bny) * CV bny&mellon =
P(Mellon) max
ΔN bny
752000000
6 719,61
5 627
527 620 686
Total quantity of schares after merger shold be:
ΔN bny +N bny
1 279 620 686
Shareholders share could be calculated as ΔNa/ΔNa+Na
ΔNa bny/ΔN bny+N bny
Exchange ratio = 1,28
SYNERGY
41%
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3. Estimation of obligations to the Pittsburgh region
3.1
thorniest negotiating
points regarded the city of
Pittsburgh
Pittsburgh lose the
headquarters of an
important and historical
company
3.2
Proposals regarded the
role of the city of
Pittsburgh
Pittsburgh was designated a “global growth
center” of the new company
M&A would increase in employment in
Pittsburgh
BNYMC would continue to donate an
additional $1.2 million annually to the
Pittsburgh community
Deep ties to civic and
charity organizations
BNYMC would donate $20 million to the
newly formed Mellon Charitable Foundation
BNYMC would create an advisory board for
community development
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Summarizing
Before make recommendations let us summarize,
what we’ve said, rewarding back to our main structure:
Estimation of
expediency of
transaction
conclusion
2.1 Estimation of
synergy effect
1. Description of
2.2 Maximum
submitted salient
points of the
merger
agreement
transaction price
estimation
2.3Real transaction
2.1.1
independent
estimation of
each company
market cost
2.1.1.a) EBIT
2.1.1.b) WACC
2.1.1.c) FCF
2.1.2
Estimation of company cost after merger
without taking into account synergy effect
price estimation
2. Calculation of
favourable
merger
agreement
conditions for
Mellon side
2.4 Searching of
2.1.3 Calculation of company cost with
synergy effect value
optimum decisions
about share capital
2.1.4
Estimation of synergy effect cost as the
difference between market company cost
after merger and company cost after
merger which include synergy effect
3.1 Analize all
3. Estimation of
thorniest negotiating
points
obligations to the
Pittsburgh region
3.1 Analyze all
given proposals
2.4.1
Estimation of a share of Mellon
shareholders
2.4.2
Estimation of additional share emission
quantity
13
SYNERGY
Recommendations
Our recommendations are the following:
Taking into account what modest accounting dilution that the Bank of New York
would realize under the proposed exchange ratio pushed the Bank of New
York to its limit. In case if it is impossible to change exchange ratio for
mutual benefit where are at least two ways to make merger agreement
more profitable for Mellon Financial:
1. Share of shareholders
Firstly, discuss again the share of shareholders. As it have been calculated
above – optimal variant would be if
37%
Mellon shareholders take 41%
The Bank of New York
59%
^
63%
2. Premium
59%
41%
Secondly, if share of 41% will not be
accepted by Bank of New York shareholders, the
Bank of New York should pay a premium for
Mellon shares. The premium size could be
calculated as average between
Mellon
Bank of New York
max & real transaction price
Premium = 4,5 $ for each share
3. Pittsburgh role
Well estimated, good proposal - nothing to change
SYNERGY
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Thank you for your attention!
 to enter into a definitive agreement to
merge
 create the largest securities servicing
and asset management firm globally
>
Q&A
>
We hope our solution
will help to Mellon
Financial & The Bank
of New York
PHOTO:
Tom Renyi, Chairman and CEO of The Bank of New York,
and Bob Kelly, Chairman, President and CEO of Mellon.
SYNERGY
15