Page 431 - The Case Lab Book

applied this strategy very successfully with the launch of “diet” and “caffeine-free” variants of
their mainstream brands. In these cases, the asset created by a strong brand
name has been transferred from one product to another, thus providing a common example of the
transfer-based synergy which can occur between marketing activities.
While the presence of valuable synergies among related businesses is undeniable, their treatment
in discounted cash flow analysis remains problematic. In essence, the analyst must attempt to
derive an estimate of the interaction term, NPVAB. One reason that this problem is difficult is
that the two activities that create the synergy will seldom be evaluated contemporaneously.
Thus, synergy can be considered as a special form of strategic growth option where the
realization of the value of the interaction term is contingent on the success of a primary project.
Because senior executives tend to view projects as mutually exclusive, the potential benefits
from synergies and strategic growth options are rarely considered. This problem is especially
difficult when products are divided into individual profit centres. Traditional capital budgeting
assumes that current and future incremental cash flows accruing to a project can be accurately
and unambiguously distinguished from any other activities undertaken within the firm. In
practice, valuing these synergistic cash flows is extremely difficult.

Goodwin has an accountant's brain and an eye for the deal. Furthermore, his acquisitions have
been regarded as text book case studies at leading business schools. His steeliness conceals a dry
sense of humour, but his mind is focused on what works and what doesn't and his timing has
always been immaculate.

Mike Trippett, at Oriel Securities, added: "It comes down to the synergies that they can extract.
But I still think the bank needs to add what the operational risks are of segmenting ABN into
three pieces. They've got to produce some pretty exacting synergies to make the deal stand up."

Those who know Goodwin's mode of operation say he would never allow the bank to overpay.
The on-message line is that RBS is a leader in terms of extracting value and that the deal should
be viewed over the economic cycle, not in the short-term context of recent difficulties.
Furthermore, the bank regards its ability to put businesses together and achieve cost synergies as
a core skill and, with the much bigger NatWest deal as evidence, no one should think that it will
deviate from the savings and added-value targets it laid down in its offer documents. It has
forecast cost savings and revenue benefits of €1.8bn which is equal to three times the pre-tax
profits of the businesses it is buying.

"RBS needs to be seen to be focusing on shareholder return. The company has not been rewarded
by its acquisitions, certainly not in the last five years, and it should start paying more attention to
what the stock market is saying, and to its rating, and less attention to these acquisitions."

One banking commentator said yesterday: "It bravely becomes significantly bigger in global
investment banking and commercial banking at a time when retrenchment might seem more
appropriate."