Shawmut National Corp.s Merger with Bank of Boston Corp. (A) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Shawmut National Corporation’s Merger with Bank of Boston Corporation (A)

Introduction

The report presents a case about Shawmut National Corporation (SNC), one of the largest bank in New England, which was considering a merger with Bank of Boston Corporation (BKB). The potential merger is expected to reduce cost and improve efficiency in order to avoid any adverse affect of the economic downturn. Further, the report also discusses the exchange ratio for the deal and other organizational issues which need to be addressed in order to achieve long term success.

Problem Statement

The management is concerned about the exchange ratio for the deal and how new strategies are implemented in order to avoid any cultural clashes. Further, the management is also concerned about the efficiency measures that can be achieved from the potential merger.

Economic benefits of potential merger

In 1991, the recession hurt banks significantly which caused the banks to report substantial losses, so in order to reduce cost and improve efficiency banks moved towards merger. The economic down turn caused SNC and BKB to suffer from heavy losses on its non-performing loans, amounting to $1.68 billion and $1.7 billion respectively in 1990, which promoted financial regulations to forbid them to pay dividend; hence in order to tackle the recent problem the banks decided to merge their operations.

The proposed merger is expected to increase the profitability by reducing the head count, closing branches and consolidating back office operations; all these strategies would facilitate the banks to achieve economies of scale which will substantially reduce cost and provides an opportunity to compete globally. Further, the merger of both banks will reduce their non-interest expense by 30%; in order to achieve this saving the banks will close around 100 branches and fire 3,000 to 4,000 peoples, which will result in a cost savings of $300 million per annum.

No doubt, the banks will enjoy a reduction in cost but this will be at the expense of the employee’s dissatisfaction, so the banks shall consider to address any adverse affect of employee’s dissatisfaction and manage different organizational cultures accordingly.

Evaluation of the proposed merger

The merger with BKB will result in a cost saving of 30% in non-interest expenses whereas the figure will be 10% if SNC stands alone. Further, merger will also provide an opportunity for banks to fulfill the minimum capital requirement between $800 million to $1 billion. The cost saving will increase the cash flows of the bank and larger profits will be available to banks for its distribution to shareholders.

Our analysis in Appendix 1 shows that if the company stands alone, then it will result in an equity value of $652.68 million whereas on the other hand, if both the banks are merged together, it will result in an equity value of $1,646.94 million as determined in Appendix 2. Hence, this indicates that the merger of both banks will increase the equity value by $994.26 million.

An increase in worth of the company is a result of expected cost saved from the merger, so the banks must be sure about the reasonableness of assumption used in determining the savings because a slight difference in saving can substantially threaten the overall cash flows.

Evaluation of valuation techniques

The discount rate is used in order to consider the time value of money. If we are discounting the cash flows on cost of equity, it will provide the value of the equity whereas if we are discounting the cash flows using entity of firm approach, so it will require deducting net debts in order to determine the value of equity.

Free cash flows to equity method calculates cash flows available to equity holders after considering interest payment, debt issuance and repayments It is most suitable approach for the valuation of banks because majority of the payments are required to pay to equity holders; in addition it will be most suitable approach to discount the cash flows at cost of equity.

Although both the approaches have the aim to determine the value of the equity of the firm but on the other hand, there are differences in procedures used for valuation of firm. Valuation using cash flow to equity requires detailed analysis of future inflows and out flows, the results of which shows most realistic values of the firm whereas, the firm faces difficulty in predicting future repayments and acquiring new debts, which can have a significant impact on the results of valuation. Further, valuation of firm using discounted cash flow to the firm is a simple approach as compared to valuation using cash flow to equity because it neglects the funds related to future interest and debts but, it has some limitations also that the weighted average cost of capital has been calculated on the basis of cost of debts on the date of assessment and ignores the changes in rate, which may have occurred due to a repayment of loan and acquiring of.................................

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Gifts merger talks between Bank of Boston (BOB) and Shawmut National Corporation (SNC), the country's two largest bank holding companies, and requires students to the current offer BOB value for SNC. Provides information on the latest developments and trends in the commercial banking sector, including the growth of international mergers and bank failures. "Hide
by Benjamin C. Esty Source: Harvard Business School 15 pages. Publication Date: 03 May 1994. Prod. #: 294119-PDF-ENG