The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning case study is a Harvard Business School (HBR) case study written by Robert F. Bruner. The The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning (referred as “Integration Announcement” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Financial management, Mergers & acquisitions, Strategic planning.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning Case Study

With their announcement on December 8, 1997, of their proposed merger, the CEOs of Union Bank of Switzerland and Swiss Bank Corporation must prepare a plan of integration of the two firms. This case presents the press release of the announcement and relates the reaction of investors and journalists. The case also presents a framework for setting the strategy of post-merger integration and summarizes the integration task before the executives. The tasks for the students include: 1. Assess the public communication of this deal. The public announcement launches the integration effort and sets a tone that can help or hinder the subsequent combination. 2. Survey the integration planning process. The executives of the two firms were committed to having a detailed integration plan in place before the consummation of the deal--this is consistent with current thinking about the desirability of avoiding a slow integration. Thus, the case is an illustration of the kinds of issues that must be resolved quickly. 3. Describe and evaluate the integration strategy of the new firm. The case surveys the process of integration planning between the announcement and consummation dates of the merger and outlines the approaches in the various business units. The student must consider the influence of various strategic issues including the balance of autonomy versus absorption, relatedness, and control versus consultation (these are described in the case.) The (A) case in the series describes the proposed terms of merger and invites students to value the benefits of the deal and assess the strategic motives. The (C) case summarizes the integration effort and the economic results over the five years following the transaction. It is recommended that the instructor distribute the (A) case for advance preparation by students and hold the (B) and (C) cases for discussion after the (A) case.

Case Authors : Robert F. Bruner

Topic : Finance & Accounting

Related Areas : Financial management, Mergers & acquisitions, Strategic planning

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Calculating Net Present Value (NPV) at 6% for The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10000866)	-10000866	-	-
Year 1	3471640	-6529226	3471640	0.9434	3275132
Year 2	3970204	-2559022	7441844	0.89	3533467
Year 3	3975127	1416105	11416971	0.8396	3337593
Year 4	3242275	4658380	14659246	0.7921	2568185
TOTAL			14659246		12714378

The Net Present Value at 6% discount rate is 2713512

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Internal Rate of Return
3. Net Present Value
4. Payback Period

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Integration Announcement shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Integration Announcement have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Finance & Accounting Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Integration Announcement often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Integration Announcement needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10000866)	-10000866	-	-
Year 1	3471640	-6529226	3471640	0.8696	3018817
Year 2	3970204	-2559022	7441844	0.7561	3002045
Year 3	3975127	1416105	11416971	0.6575	2613711
Year 4	3242275	4658380	14659246	0.5718	1853781
TOTAL					10488354

The Net NPV after 4 years is 487488

(10488354 - 10000866 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10000866)	-10000866	-	-
Year 1	3471640	-6529226	3471640	0.8333	2893033
Year 2	3970204	-2559022	7441844	0.6944	2757086
Year 3	3975127	1416105	11416971	0.5787	2300421
Year 4	3242275	4658380	14659246	0.4823	1563597
TOTAL					9514137

The Net NPV after 4 years is -486729

At 20% discount rate the NPV is negative (9514137 - 10000866 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Integration Announcement to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Integration Announcement has a NPV value higher than Zero then finance managers at Integration Announcement can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Integration Announcement, then the stock price of the Integration Announcement should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Integration Announcement should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Understanding of risks involved in the project.

What will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning

References & Further Readings

Robert F. Bruner (2018), "The Merger of Union Bank of Switzerland and Swiss Bank Corporation (B): Integration Planning Harvard Business Review Case Study. Published by HBR Publications.