Page 430 - The Case Lab Book

RBS is a legendary cost-cutter. And doubtless it will display those talents to the full in the
integration of its bits of ABN, after that bank is broken up and shared out between the troika.

However it is very difficult to argue that the banking trio is obtaining assets from ABN on the
cheap. Note that RBS's share price has fallen by 15% or so since the consortium said in the
spring that it wanted to buy ABN, while the consortium's largely cash offer for ABN was
actually nudged up.

The 15% fall in RBS's share price may well be a proxy for the fall in the intrinsic value of ABN,
given what has happened to banking markets over the past couple of months. And the part of
ABN that has surely been most hurt would be what RBS will end up owning. That is the
operation that deals with the bruised clever clogs of private equity, hedge funds, other banks and
the treasury departments of companies.

Synergy Theory

The use of discounted cashflow (DCF) techniques to evaluate major investment proposals is now
commonplace. What is less generally known is that DCF analysis becomes unreliable when used
to solve several common problems including the treatment of risk, real options, synergy and
intangible assets. Argues that these problems occur primarily because the DCF approach
assumes that decision makers are able to make accurate estimates of incremental risks and
returns; a situation seldom encountered in practice. States that managers should beware the
illusion of confidence created by financial figures developed in the absence of certainty.
Suggests that in these cases, financial analysis should be supplemented, even supplanted, by
strategic thinking and sound managerial judgement.

Synergy

The concept of synergy appears in some of the earliest writings in corporate strategy
and has recently reappeared in the 1990s under the label “core competencies” [13]. Put simply,
synergy is the notion that the whole is greater than the sum of the parts, or in the terminology of
capital budgeting:

NPVA+B = NPVA + NPVB + NPVAB

Synergies can arise when two discrete operations either share an activity in the value
chain or transfer assets from one operation to another. For instance, the petroleum industry
provides a good illustration of how synergy can be obtained by sharing activities in the value
chain. In this industry, a wide range of consumer products, including petroleum, gas and motor
oil are distributed through a single distribution point, the ubiquitous service station, thus
avoiding the need to establish expensive distribution facilities for each product. In marketing, the
technique of product line
extension attempts to transfer the reputation and brand name of a successful product to new
related variants[14]. Soft drink companies, such as Coca-Cola and Pepsi, have