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1. April 6, 1998, saw the announcement of the then biggest merger in history: the $83 billion deal between Travelers Group Inc. and Citicorp. The deal "brought forth a colossus-Citigroup-with a commercial bank (Citibank), an insurance company (Travelers), an investment bank (Salomon Brothers) and a retail brokerage firm (Smith Barney) all under one roof"3 Executives at both companies bet that the one-stop-shop format would lure customers in Cost savings were also an important part of the deal: An estimated 8,000 employees were to be laid off by the completion date. Given are stand-alone earnings forecasts for Travelers and Citicorp. Suppose that revenue synergies were forecast at 5 percent of projected revenue, that annual cost savings of $400 million were expected, and that operating margins were forecast at 12.2 percent of revenue. Stand-Alone Summary Earnings Models 1998F 1999F 2000F 2001F 2002F 2003F Revenues Travelers 41,829 43,653 46,804 49,847 52,837 56,008 Citicorp 23,525 26,139 28,194 30.449 32,733 35,188 65,354 69,792 74,998 80,296 85,570 91.196 Operating Earnings Travelers 4,035 4,420 5,035 5,234 5,548 5,881 Citicorp 4,273 4,806 4,973 5,329 5,728 6,158 8,308 9,226 10,008 10,563 11,276 12,039 Note. 1998-2000 figures taken from report by Judah Kraushaar and Amy Butte, "Citigroup A New Model for the Millennium". Merrill Lynch, July 10, 1998, F = Forecast Calculate the present value of the expected synergies. (Assume a tax rate of 35 percent, a discount rate of 10 percent suitable for the cost and revenue synergies combined, and inflation of 3 percent. Assume also that the transaction is completed at the end of 1998.) (15%)

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