CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Merger is combination of two or more than two corporations in which only one
corporation survives and the merged corporation goes out of existence. In a merger,
the acquiring company assumes the assets and liabilities of the merged company.
Maintaining the identity of one of the corporations and acquisition is the process of
acquiring the assets in the course of the merger. And another word merger is the
combination of two or more entities by purchase acquisition whereby the identity of
one of the entities remain while the others beings dissolved. The reason behind the
merger transactions are basically gaining market share, competitive advantage,
increasing revenues and risk and product diversifications. (Gaughan, (2002), De.
Pamphills, (2003).

An acquisition occurs when one company takes a controlling ownership interest in

another form, a Legal subsidiary of another firm, or selected assets of another firm
such as a manufacturing facility. (De. Pamphilis, 2003).

Merger and acquisitions (M&A) are a recurring phenomenon in global Scenario.

Merger and acquisition activities are found in all sectors over the world including
banking sector is influenced by various factors such as profitability, liquidity,
financial standard, operational and managerial efficiency, market share, shareholders’
value, leverage, earning per share. The most dominant reason for M&A to take place
is the synergy that can be created by the combination of business activities which will
lead to better, faster and low cost performance. Essentially, a business that has
complementary strengths and weaknesses. (Renaud, 2016)

The history of Merger and acquisitions began long before early 1900’[Link] period of
time covers six main waves of M&A for the past 100 years and these are those of the
early 1900’s, 1960’s, 1980’s, 1990’s and 2000’s. In the past decades, M&A activities
have increased rapidly and come to a light since 2000 when Asian the market started
following the trend of U.S and Europe to cope with the downturn of economic and
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financial markets that began in 2000. Emerging countries such as India, China, South
Korea and some ASEAN nations entered into the M&A activity as new major players
in global market. Besides, cross-border M&A become an instrument to purpose a
business growth in global markets. (Chand 2009)

The most of the researcher investigates the impact of merger and acquisition on two
basis first on accounting method and second on the share price of data. While the
accounting performance measures are very difficult to compare. Moreover, the
difficulty arises in attempting to ascertain a valid combined performance measure for
bidder and target as target either ceases to exist or remain an independent subsidiary
of the bidder. In both cases financial reporting of holding, combine firm or target will
be different (Powell and Stark 2005). However, whether a no of researcher conducted
on accounting data to measure the impact of operating performance in long and short
run argues that any benefit arising from acquisition will eventually be appear in
company’s accounting performance or records (Tuch & O’ Sullivan, 2007).

Operating performance studies attempt to identify the source of gains from mergers
and to determine whether the expected gains at announcement are ever actually
realized. If merger truly create value for shareholders, the gains should eventually
show up in the firms’ cash flows. These studies generally focus on accounting
measures of profitability, such as return on assets and operating margins (Andrade,
Mitchell, & Stafford 2001).

Since April 2011, when Nepal Rastra Bank (NRB) introduced the merger Bylaws
were introduced, there were 198 class ‘A’, ‘B’ and ‘C’ financial institutions in
existence. The number has come down to 176, inclouding five development banks
that have come into existence since then.

The Nepalese financial sector has witnessed a tremendous growth in the number of
financial institutions after the 1980’s by adopting an economic liberalization
regulation with a mixed economic model. However, the unnatural increment of the
BFIs has brings several financial challenges and complexities. The financial indicator
had indicated that the Nepalese financial sector was weak, vulnerable and, at the
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verge of a collapse. “Merger is a golden opportunity for BFIs. This facility is floated
to reduce the number of BFIs to strengthen them” (The Himalayan Times 2013).

The Nepal Rastra Bank, as the main principle body of all the BFIs was becoming
concerned with the unfortunate state of the BFIs. The central Bank planned to
improve the health of the financial sector by introducing the merger Bylaw 2011
grounded on the company Act 2063 article 177, BAFIA 2063 article 68 and 69 that
pressurize all the BFIs for immediate merger as a consolidation. A merger was not a
choice of the Nepal Rastra bank but it was a compulsion strategy to increase the
capital and strengthen their capacity to face the competitive market. Otherwise, many
BFIs may have to die (Gautam2012).

The researcher will highlight the merger impacts on the performance of company
liquidity, profitability, market prospect and their shareholders. It will be of significant
importance for company and other firms in the institutions to recognize the
importance of merger and acquisitions and impacts on company’s performance and
synergies achieved through them. This research will also be helpful to managers and
executives as it will provide them an in-depth analysis of the relationship between
merger and performance level. This study would particularly be helpful to following
stakeholders: Corporate stockholders and managers, investors, government, brokers,
investments banks, business partners, creditors, customers and the public in general.

Mergers and acquisitions (M&A) are being increasingly used the world over for
improving competitiveness of companies through gaining greater market share,
broadening the portfolio to reduce business risk, for entering new markets and
geographies, and capitalizing on economies of scale etc. Merger is the combination of
two or more entities through a purchase acquisition or pooling of interests, it is
different from consolidation as there is no new entity is created from merger. The
motives behind mergers acquisitions are economy of scale, economy of scope,
increase market share and revenues, taxation, synergy, geographical and other
diversification. Due to these reasons banks merged with one another or targeted by
acquiring bank.
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Decisions on merger and acquisition deals require a serious focus and attention need
to be paid when companies make acquisition because it might affect the financial
performance of the bidder firm. Where such merger and acquisitions take place, the
acquiring company may not always be in profitable positions; it impacts the liquidity,
profitability, operational and managerial efficiency status of the acquirer companies.
Companies should pursue M&A’s only if it creates values. Merger and acquisition
becomes fruitful if synergies arise in the terms of operational, financial synergy and
managerial synergy.

The primary reason cited for M&A’s is to achieve synergy, commonly described as
the “2+2” =5 effect (cartwright & cooper , 1993;webwe, 1996) by integrating two or
more business units in a combination that will increase competitive advantage (Porter,
1985). Regrettably, M&A, appear to be only financially and strategically appealing on
paper (Ashkenas, Demonaco, & Francis, 1998; Cartwright & cooper, 1992; Clemente,
2001; Schraeder, 2001). The evidence suggests that M&A do not live up to their
potential and in some cases perform even less than market average (Cho, 2002).
Historically, merger failures were only discussed with financial and strategic
explanations. Recently there has been growing acceptance among researchers that the
human dynamics or the human resource issues after and following the actual merger
or acquisition of two or more organizations are significant determinants of merger
success or failure (Buono & Bowditch, 1989; Cartwright & Cooper, 1993a; Marks &
Mirvis, 1992; Schraeder, 2001).

Mergers and acquisitions decisions are critical to the success of corporations and their
managers. Many corporations find that the best way to get ahead is to expand
ownership boundaries through mergers and acquisitions. For others, separating the
public ownership of a subsidiary or business segment offers more advantages. At least
in theory, M&A create synergies, gain economies of scale, expand operations and cut
costs. Investors may expect mergers to deliver enhanced market power. It is no secret
that plenty of mergers do not work. In theory, M&A is great, but in practice, things
can go awry. Various empirical results have revealed that many of mergers were
disappointed, where the motivations that drive mergers can be flawed and efficiencies
from economics of scale may prove elusive. (Stephen N.M).
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1.2 Statement of the problem

Merger and acquisition was new thing to the Banking and financial institutions (BFI)s
of Nepal when the Nepal Bank, Supervisory and regulatory body of all the BFIs has
issued merger by-laws in May 2011, it is something in which Nepal Rastra Bank has
been preparing for years (Gyanwali, 2013). However, Many had doubts that the BFIs
would go for merger immediately as there were no separate acts and law for merger
implementation. The objectives of the merger by-laws is to strengthen the BFIs
position and performance by reducing the number of institutions. The merger bylaws
have a provision that can pressurize all BFIs to go for an immediate merger in the
form of consolidation. (Nepal Share Bazar 2013).

The economic liberalization of the financial sector in Nepal, there has been an
unnatural growth of banks and financial institutions which led to an intense cutthroat
competition amongst them in enticing institution, borrowers and individuals. Before
the merger bylaws was introduced, the BFIs endorsed easy loans to real estate, land
and housing sector borrowers without assessing their financial capacity for repayment
of interest and principle amounts. This led to rapid rises in the value of land and
building. When the price started to fall, the borrowers were unable to pay back
resulting to a shortfall of liquidity.

The Nepalese financial sector has witnessed a tremendous growth in the number of
financial institutions after the 1080’s by adopting an economic liberalization
regulation with a mixed economic model. However, the unnatural increment of the
BFIs has brings impact of merger and acquisitions on financial performance of
institutions such as: profitability, liquidity, leverage, operational and managerial
efficiency, market share, shareholders’ value, earning per share and financial
standard. Shareholders and managers of banks turn to mergers and acquisitions in the
hope of improving financial performance in their banks but studies on this subject
have produced mixed results. Some studies have suggested that merging banks
perform better than the individual banks performed before the merger whereas other
studies have not found any meaningful improvement in financial performance as a
result of a merger. The study has been also focusing the impact of merger and
 6

acquisitions on financial performance. Here the study will be mainly focused on

following issues:

1. What is the impact of merger and acquisitions on shareholder’s value?

2. What is the impact of merger and acquisition on profitability ratio?
3. What is the impact of merger and acquisition on Leverage ratio?
4. What is the impact of merger and acquisition on financial performance?

1.3 Purpose of the Study

The basic objective of the study will be to analyze the impact of merger and
acquisitions to determine the financial performance in merger banks in Nepal. The
present study in an attempt to check the financial performance of merger and
acquisitions deals with respect to some selected banks in Nepal by considering the
following objectives:
1. To examine the impact of the merger and acquisitions on the
shareholders’ value?
2. To examine the impact of merger and acquisitions on profitability of
financial institutions?
3. To identify the impact of merger and acquisition on leverage ratio?
4. To examine the impact of merger and acquisition on financial
performance?

1.4 Significance of the study

The study is directed towards merger and its impact on financial performance in
Nepalese banking and tries to examining the impact of profitability, liquidity,
shareholder’s value, and leverage ratio on financial institution after merger of BFIs.
Hence, this study is relevant to the banking sector of Nepalese it provides the
authority insight and basis for enforcing financial policy after merger and regulations.
The society is also expected to benefit from the output of this research study since this
serves as on information base which adds up to the existing body of knowledge and
data on banking and financial institution.
 7

The study would have significance to a numbers of stakeholders. The study would be
of value to investors and knowledge on the Understanding of the impact of merger
and acquisitions in analyzing banking performance. It would also benefit other firms
in competitive institution. The study would further provide more insight into the
relationship between merger and acquisitions and performance of financial institution
which would be of value to academicians and researchers in the same field. This study
provides development for academics and practical implication for banking and
financial sectors. The result is expected to inform BFIs about their employee response
to the variety of factors which involve in financial performance after merger. BFIs
may take clues from this and improve their financial policy practice for performance
after merger. In the recent years financial institutions of Nepal have been
characterized by a low volume of turnover, high interest rate in lending, high interest
rate spread, inefficient management, lack of project financing practice, inadequate
working fund and unhealthy competition. Some financial institutions such as the
Gorkha Development Bank, Nepal Share market, Capital Merchant and finance were
caught with a weak supervision and miss corporate governance. Moreover, the state-
owned financial institutions such as the Rastriya Banijya Bank and the Agriculture
Development Bank are market with excessive operating expenses and low operating
profit. There are many reasons why companies decide to participate in M&A deals.
The primary reason is the determination to grow. There are two growth options:
internal or organic growth (e.g. hiring additional salespeople, developing new
products, expanding geographically, which in fact is a very time and strength
consuming options); and inorganic growth (e.g. acquisition of or merger with another
firm, often done to gain access to a new product line, customer segment, or
geography) or by external means (e.g. franchising, licensing, joint ventures, strategic
alliances, and the appointment of overseas distributors, which are available to
growing companies as an alternative to mergers and acquisitions as a growth engine).
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1.5 Limitation of the study

This study is for the academic purpose so that it contains its limitations because it
should be limited due to various constraints. This study also has its some limitation
under which the study will go forward.
1. This study is based on the secondary data.
2. This study is based on only focus on literature on merger and
acquisition practice and topic.
3. This study is focused on the policy adopted by Nepal Rastra Bank
(NRB) for merger and Acquisition (M&A) and the output come on the
Bank and financial sector from the strategy.
4. Study is focused on impact of merger and acquisition on financial
performance in banking sector.
5. The period of study considered is seven fiscal year.

1.6 Chapter Plan

The entire research work will have been divided into five chapters. The work starts
with chapters 1 is the Introduction chapter ;deals with background and introduction of
the subject matter which is under consideration for the empirical research .It will
contain the researcher’s justification choosing the research title among the
voluminous area of research in Nepal followed by the statement of problem and the
research question which shall be tested and answered during the research period .The
key objective and limitation of the study is followed by outline of the study in the
chapter. The second chapter is based on literature review. It includes the review of
empirical studies which have been concerned with impact of merger and acquisition
on financial performance. Similarly, chapter 3 is the Research Methodology. It will
have the key part of the study because it contains the details of the research method to
be followed in the research work. The research framework nature and source of data,
secondary data development for financial performance collecting data, the tools and
techniques and method which have been used in the study will have been discussed in
this part. Chapter 4 will have been presentation and analysis of data. Chapter 5 will
present the summary, conclusion and recommendation, followed by reference.
 CHAPTER TWO
LITERATURE REVIEW

2.1 Review of Previous Works

2.1.1 Review of Articles in the Journal

Gupta & Banerjee (2017) “impact of merger and acquisitions on financial

performance”: Evidence from selected companies in India. This research paper
scrutinized the impact of merger and acquisitions on the financial performance of
selected acquire firms across India. The particular paper seeks objectives of effect of
merger upon profitability and liquidity position. It analyzes three years pre and post-
merger financial performance of the companies. Sample size of this research consists
of selected seven different industries undergone merger and acquisitions during 2006-
2012. To achieve the study’s objective secondary data of three years prior and post-
merger collected from annual audited financial statements from period 2000-2015.
Various financial ratios applied to assess the profitability and liquidity position. The
analysis is conducted with the help of statistical tool paired t test used on accounting
ratios by SPSS to test the significance of the study. The finding of this study shows
that there is no improvement in financial performance of acquirer companies after
merger. Post-merger profitability and liquidity indicators of selected sample
deteriorated.

Joash & Niangiru (2015) in their research study, “The Effect of mergers and
Acquisitions on Financial Performance of Bank (A Survey of Commercial Banks in
Kenya)”. Mergers and acquisitions perform a vital role in corporate finance in
enabling firms achieve varied objectives and financial strategies. In Kenya, banks
have been merging with the goal of improving their financial performance. Studies
done on mergers and acquisitions have not conclusively established whether or not
banks benefit from mergers. Most studies have observed that mergers did not lead to
an improvement in financial performance as indicated by their profitability and
earnings ratios. This study examined the banks that have merged or acquired in Kenya
for the period between 2000 and 2014. The aim of the study was to analyze whether
 10

the merger had any effect on the banks’ performance. The study was guided by the
following specific objectives; to determine the effect of the mergers and acquisitions
on the shareholders’ value and to examine the implication of the mergers and
acquisitions on profitability. The study was a census of which all the 14 banks that
have merged or acquired others in the period from 2000 to date were investigated.
Data was collected by use of questionnaires with both open and closed ended
questions. The collected data was analyzed using SPSS where the co-efficient of
correlation obtained was used to determine the nature of the relationship between the
independent and dependent variables. The study found out that the mergers and
acquisitions raised the shareholders’ value of the merged/acquiring banks in Kenya.
The study further revealed that the main reason why most banks merged or acquired
was to raise their profitability. The researcher recommended that through feasibility
studies should be carried out before the merger/acquisitions in other sectors of the
economy should be established with a view of drawing a parallel with the effects of
the same processes in the banking sector.

Tajalli & Amir (2014). Made a study on the “An Analysis of Impact of Merger and
Acquisition of Financial Performance of Banks: A case of Pakistan”. This study is
testing the impact of merger and acquisition of banks and provides insights about their
role after merger on banks profitability. In this paper six financial ratios are used for
analysis these ratios are profit after tax, return on asset, return on equity, debt to
equity ratio, deposit to equity ratio and EPS. Ten banks are selected as sample for
analysis which gets into merger from 2007-10. 3 year pre-merger and 3 year post-
merger data points are taken for all the 10 cases and their averages are compared. In
SPSS paired sample T-test is applied for analysis and findings shows that only at 5%
level of significance only ROE is affected by the merger and acquisition and other
ratios, have no impact from strategy.

Bhutta Rashid Mushtaq, Saad Muhammad, Tariq Tamoor Ali, vol.13,2015. “Impact
of Merger or Acquisition on Financial Performance of Firm: A Case Study of
Pakistan Telecommunication Limited (PTCL). The study depicts pre and post event
effect of merger and acquisition on the service industry in Pakistan. The study is
divided into two parts. In the first part, regression model is used to analyze the impact
 11

of financial position ratios and profitability ratios on the bankruptcy score. In the next
part, this study analyzes the trend of study with data ranging from year 2003 to 2009.
The findings of the study has shown a positive significant impact of financial position
and profitability ratios on the firm bankruptcy score. The findings from the second
part show that the bankruptcy score is affected negatively, by using financial ratios,
after the acquisition. Also in the long term, financial position of the firm remains
unaffected. The data range shows a stable trend of financial position over the period
of time. The findings of the study suggest the decline in performance of PTCL during
the observed time period.

Goyal Dr.K.A. and Joshi Vijay, Issue2, Vol. (March-2012). “Merger and Acquisition
in Banking Industry: A Case Study of ICICI Bank Ltd.”. To keep the head high in
globalized economy one has to overpower these challenges and issues to become a
success story. We consider a case of ICICI Bank Ltd., the largest private sector bank
in India, which has acquired nine financial firms to make the steps of the ladder of
success. Therefore, the aim of this article is to study the growth of ICICI Bank Ltd.
Through mergers, acquisitions, and amalgamation. This article is divided into four
parts. The first part includes introduction and conceptual framework of mergers and
acquisition. The second part discusses the historical background of ICICI Bank Ltd.
And followed by review of literature. The third part discusses all the mergers,
acquisition, and amalgamations in detail. Finally, the article concludes that a firm
must devise a strategy in three phases i.e. Pre-merger phase, acquisition phase and
post-merger phase. The article will be helpful for policy makers, strategy makers, HR
people, bankers, researchers, and scholars.

Njogo, Ayanwale and Nwankwo (2016). In their reasarch study .” Impact of mergers
and Acquisitions on the performance of Deposit money banks in Nigeria”. Business
combination through mergers and acquisitions has become a global phenomenon to
achieve economies of scale and higher productivity. The need for financial institutions
to merger becomes even more imperative in the face of the onslaught of greater
competition arising from globalization. This study evaluated the impact of mergers
and acquisitions which started in 2005 on the performance of deposit money banks in
Nigeria using a sample of ten (10) banks. This research made use of secondary data,
 12

obtained from the bank’s annual reports and statement of accounts covering a period
of 2001-2010. Using nine (9) variables; Return on Assets, Return on Equity, Net
profit Margin, Asset Utilization, Equity Multiplier, Earning per share, Debt Equity
ratio, Debt Asset ratio & Leverage ratio, the study evaluated the performance of the
banks before and after mergers and acquisitions using pair sample t-test. The results
showed that is significant difference in the performance of Deposit Money Banks in
the pre and post- mergers periods using the ROA, ROE and LR as yards tick but
shows no significant impacts in the performance of Deposit Money Bank using other
variables as yard stick. The study hereby recommends that the CBN should set and
enforce corporate governance standards for commercial banks and also enforce risk
based supervision in banks.

Kanahalli & Jayaram (2014) in their research study, “Effect of merger and
Acquisitions o financial performance: A study Tata group”, attempted to determine
the success of merger and its impact on post-merger financial performance of acquirer
companies in the Indian by selecting Tata two groups companies. Study dependent on
secondary data as financial statements collected from various articles, books,
magazines & money control websites. To evaluate the collected data financial ratios,
paired “t” test used in the study that revealed no significant difference between
financial performance of companies before & after merger.

Daddikar & Shaikh (2014) in their article, “Impact of merger and acquisitions on
Surviving Firm’s Financial Performance: A case study of Jet Airways Ltd”. Examined
the impact of merger and acquisitions on financial profitability during the post-merger
period. To perform the study Jet Airways Ltd selected as the sample, of which
financial data collected from investment websites, NSE & BSE websites & various
journals. Study used different financial ratios such as Profitability ratios, Liquid
ratios, financial standards to compare pre & post-merger situations and statistical tools
such as paired “t’ test employed to determine the results that exhibit that there is no
significant difference on financial efficiency or performance after merger. The study
found no relevant improvement in the return on investment and net profit margin of
acquiring company.
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Khan (2011) studied the effect of merger and acquisitions on financial performance of
Indian banks. A sample size of 35 Indian banks undergone merger and acquisitions
since post liberalization period. For evaluation the study secondary data collected
from Bombay Stock Exchange sites, National Stock Exchange sites and from
published annual reports. Study applied financial parameters in terms of Gross Profit
margin ratio, Return on equity, Debt- Equity Ratio to analyze the pre-post financial
performance as well as Statistical tool as Independent t test to assess the significance
difference two situations. The results suggested merger and acquisitions have positive
impact on operating performance of acquiring Indian banks, also found that
shareholders value increased or benefited by the strategy M & A.

Maditinos, Theriou & Demetriades (2009) investigated the merger and acquisitions
effect on financial performance of two IONIKI-LAIKI and PISTEOS banks. To
perform the study secondary data collected from various sources as investment sites,
stock exchange sites from period 1990-2003. Research study conducted in two parts,
on one hand effects of merger in short period and other in long run. Collected data
was result stated merged bank (Alpha Bank) not only obtained improved profitability
but also achieve better competitive position in average industry.

Verma & Sharma (2014) reviewed the impact of merger on financial performance of
Indian telecom sectors involved in M&A during 2001-2008. A Sample size of 59
companies under gone merger and acquisitions deals from 2001-02 to 2007-08 have
been selected. Secondary data extracted for six years from CMIE data base
PROWESS. The study used regression model and various financial ratios to analyze
the data that depicted the acquirer firms have leverage synergies but eventually lead to
decrease the Return on shareholder’s funds after merger and acquisitions. Overall
financial performance insignificantly improved in post-merger period.

Moctar & Chen (2015) evaluated the impact of merger and acquisitions on financial
performance of commercials banks in West Africa. In their case study sample size
two groups of banks selected that experienced merger and acquisitions in Economic
community of West African states. Secondary data was collected through annual
financial statement reviews of selected banks. To analyze the data, financial ratios as
 14

liquid ratio, Return on Equity (ROE), Return on Investment (ROI), investment

valuations ratios used in the study that concluded negative impact of (M&A) on the
financial performance. Further, study revealed that financial improvement could not
be achieved in short-term, that seen in long term period.

Agrawal & Singh (2015) conducted a case study on effect of merger on financial
performance of Kingfisher Airlines; objective of the study was to analyze the pre 7
post-merger of financial performance of KFA (Kingfisher Airlines). Study used
accounting ratios in terms of profitability, liquidity, earning per share, leverage to
evaluate the data. With statistical technique as paired t test used to conclude the result
which found no improvement and benefit in acquiring firm (KFA) after merger, as
well no significant result shown in return on equity and earning per share.

J.K Raju, Manjunath B.R and Hema Dhakal, August 2015-Vol.4 Issue [Link] the
Nepal Rastra Bank implemented the Merger Bylaws Policy in 2011, Nepalese Market
was able to observe increasing trend in Merger and Acquisition in Banking and
Financial Institutions (BFIs) of Nepal. Therefore, this paper presents the reasons for
opting merger activities among BFIs and also focuses on the post-merger impact to
the employees, customers and shareholders of the merged bank. The research method
used in this paper was descriptive research, which implies the results based on the
survey and the analysis. The impact on employees and customers were analysed
through questionnaires whereas the impact on shareholders were observed through
analysis of financial data of merged bank in 2 years of pre and post-merger phase. The
results showed that employees were satisfied with work, wages, working conditions
etc. but they were intensely impacted in the HR issues like cultural clash, positions
issues, socialization, favouritism etc. The customers felt the changes in value, product
and service in post-merger phase but required more innovative service. The overall
financial data showed that bank had improved a lot in postmerger phase hence
increasing the shareholder’s wealth. The challenges were observed in swap ratio,
formation of BOD, structure of management team, HR issues, IT issues etc.
Therefore, M&A was a must in Nepalese market for changing the poor performing
BFIs into strong and credible institutions. The BFIs should consider the socio-cultural
factors along with procedural and physical factors for merger. They should also
 15

involve with expert or investment banks for full-fledged merger advisory service to
avoid the delay and cumbersome process of merger observed in Nepal.

Azhagaiah & Satish (2011). Evaluated the impact of corporate restructuring on

financial results of Indian manufacturing firms’ undergone merger and acquisitions
from 2004-2010. The study selected 12 manufacturing firms across India, a short run
analysis of two period i.e. three years before and after three years the performance of
acquiring firms. Authors used accounting ratios (liquid ratio, working capital ratio,
operating ratio) as well as statistical tool parametric t test used to attain the study’s
objectives. Study revealed that a significant increase in liquidity, profitability,
financial position found. Further inferred that efficiency performance of acquirer
firms also improved after merger. Liargovas (2011) examined the Greek Bank post-
merger financial performance of 1996-2008. To conduct the study, secondary data
collected from Database of Athens Stock Exchange, daily bulletin, published annual
financial reports. Financial ratios, statistical tools as ordinary least regression analysis,
t test applied in the study. Researcher found that there was no significant.

Abbas & Hunjra (2014) [12] conducted a research study on the impact of merger and
acquisitions on financial performance of banks in Pakistan. Study made on selected
10 banks gone under merger and acquisitions strategy. To achieve the objectives
secondary data collected from Financial Statement Analysis from period 2006-2011.
Accounting ratios and paired t test used in the study to analyze the data. Authors
found in the study that there is insignificant difference between pre and post-merger
financial performance.

2.1.2 Review of Previous Thesis

Mailanya Paul Muiti (2013). “Effect of merger and acquisition on the financial
performance of oil companies in Kenya” .The study was carried out with an objective
of establishing the effect of merger and acquisition on the financial performance of oil
companies in Kenya. The research design adopted was causal research design. The
study focused on the mergers and acquisitions that have occurred between year 2003
and 2013 within the industry. The population of this study was the oil companies in
 16

Kenya that have merged between 2003 and 2013. Secondary data was used from the
financial statements of the companies involved in the merger/acquisition process. A
comparison was made between three years pre-merger/acquisition and three years’
post-merger/acquisition period using the financial ratios. Analysis of the data acquired
was performed through use of the SPSS software (version 16).

Regression analysis was conducted to establish the relationship between financial

performance and the independent variables that is the liquidity, solvency, debt to
equity ratio, profitability and efficiency of the merged/acquired oil companies in
Kenya. The study findings indicate that the goodness of fit model was adequate
reported by r squared of 0.553 which means that 55.3% of the variation in financial
performance is explained by changes in liquidity, solvency, profitability and
efficiency. The correlation coefficient of 74.4% means that the dependent variables
have a strong correlation the independent variable. Analysis of the ANOVA results
showed that there is a significant joint relationship between financial performance and
liquidity, solvency, profitability and efficiency of p-value 0.003 at 5% level of
significance. The study concludes that there is decrease of financial performance of
oil companies in Kenya following a merger or acquisition process.

The study recommends that the management should not only undertake mergers and
acquisitions in order to improve operation and sustain failing businesses but also
improve their competitiveness and financial standing. Management should come up
with a sound strategy towards asset and liability management so as to avert the
problem of mismatching investments and also the quality of assets should be
enhanced. Management should put into consideration the degree of transferability and
marketability of assets invested in so that these assets can provide liquidity to the firm
with ease.

Mboroto Stephen Njuguna 2012. “The effect of merger and acquisitions on the
financial performance of petroleum firms in Kenya”. The objective of this research
project is to establish the effect of mergers and acquisitions on the financial
performance of petroleum firms in Kenya. This is by conducting an industry analysis
of the petroleum sector in Kenya. The study is limited to a sample of pair companies
 17

listed on the Kenyan market that merged/acquired between the years 2002-2012. Data
were collected from the NSE Annual Statement of Accounts and Financial Reports of
the firms. Comparisons are made between the mean of 3-years premerger/acquisition
and 3- years post-merger and acquisition financial ratios, while the year of
merging/acquisition is exempted. Using financial ratio analysis and paired “t” test, the
study reveals that mergers/acquisitions have insignificant effect on the overall
financial performance of petroleum firms in Kenya. Also, there is improvement in the
firms‟ performance after the merging/acquisition takes place. It recommends that
merging and acquisition should not be used to keep failing business alive but to
increase competitiveness and financial standing and management should also instill
discipline upon itself so that the continued existence of the firm is not jeopardized.

The analysis and results show that petroleum firms performed better in the post-
merger/acquisition era as compared to the pre-merger/acquisition era. This is
supported by the fact that merging/acquisition had a significant impact on the ROA,
which is the overall standard measure of financial performance due to the statistical
significance it has on ROA as well as total asset ratio. On the other hand,
merger/acquisition was seen to have an insignificant positive effect on the liquidity
and solvency of the petroleum firms. This suggests that there was a significant
improvement on the financial performance as reflected by the significant increase in
ROA. It is therefore recommended that management should not only undertake
mergers and acquisitions in order to improve operation and sustain failing businesses
but also improve their competitiveness and financial standing. Management should
come up with a sound strategy towards asset and liability management so as to avert
the problem of mismatching investments and also the quality of assets should be
enhanced.

2.1.3 Major Provisions of Merger Bylaws 2011

According to the New Business Age (2013), the major provisions of Merger Bylaws
laid by the NRB are:-
 18

1. A, B, C, class financial institutions can merge with each other but the
D class financial institutions can merge only with another same class
financial institution.
2. BFIs that want to merge should delegate separate merger committees
from their annual general meetings and sign a memorandum of
understanding (MOU).
3. The due process including a MOU should be endorsed with an action
plan before applying to the Nepal Rastra Bank for a Letter of Intent
(LOI). The NRB should hold a meeting within 15 days of receiving the
LOI application.
4. The NRB has a right to grant whether to approve the LOI or not after
meeting discussion and detailed study of the concerned financial
institution.
5. After receiving a LOI from the central bank a due diligence audit
should be completed within six months.
6. The detailed evaluation comprising assets, liabilities and transactions
of the concerned institutions should be submitted to the NRB.
7. An agreement copy of the final decision regarding name, address and
share ratio of concerned the BFIs should be submitted to the NRB.
8. An action plan of the concerned financial institution including date of
operation after merger is completed should be submitted to the NRB.

2.1.4 List of Merged BFIs

When the Nepal Rastra Bank first introduced the Merger Bylaw 2011, the law had
failed to create immediate effects on the BFIs (Singh 2013). However, over the past
two years the merger activity had gained acceleration in the Nepali financial sector.
According to the Bank Supervision Report of Nepal Rastra Bank (2012, 1-3), the
Nepalese financial sector has witnesses 43 different sets of consolidations among the
BFIs which are shown in the table below:
 19

Table: 2.1 list of Merged BFIs (Nepal Rastra Bank 2016)

S. M Merger BFIS Institution name Integrated
no. &A and class after Transactio
merger n
1 M Laxmi Bank HISEF Finance Laxmi Bank 4/11/2061
Limited (A) Limited ( C) Limited (A)
2 M Nepal Nepal Bangladesh Nepal Bangladesh 6/1/2064
Bangladesh Finance Limited (C) Bank Limited(A)
Bank Limited
(A)
3 M Narayani National Finance Narayani national 7/15/2067
Finance Limited (C) Finance limited (C)
Limited (C)
4 M Nepal Nepal Srilanka Nepal Bangladesh 10/9/2067
Bangladesh Marchent Finance Bank Limited (A)*
Bank Limited limited (C)
(A)*
5 M Himchuli Birgunj Finance H&B Development 3/1/2068
Bikas Bank limited (C) Bank limited (B)
limited (B)
6 M Kasthamandap Shikhar Finance Kasthamandap 1/1/2069
Development limited (C) Development bank
Bank Limited limited (B)
(B)
7 M Infrastructure Swastik Merchant Infrastructure 3/26/2069
Development Finance limited (C) Development Bank
Bank limited Limited (B)
(B)
8 M Business Universal Finance Business Universal 12/22/2068
Development limited (C) Development Bank
Bank Limited limited (B)
(B)
9 M Annapurna Suryadarshan Supreme 3/29/2069
Bikas Bank finance limited (C) Development Bank
limited (B) limited (B)
10 M Machhapuchhr Standard finance Machhapuchhre 3/25/2069
e Bank limited limited (C) Bank limited (A)
(A)
 20

11 M Global Bank Lord Buddha finance Global IME Bank 3/25/2069

limited (A) limited (C) limited (A)
IME Finance limited
(C)
12 M Pasupati Uddham Bikas Bank Axis Development 3/29/2069
Development limited (B) Bank limited (B)
Bank limited
(B)
13 M Vibor Bikas Banjuranta finance Vibor Bikas Bank 5/17/2069
Bank limited limited (C) limited (B)
(B)
14 M Butwal Alpic Everest Synergy finance 8/21/2069
finance limited finance limited (C) limited (C)
(C) CMB finance limited
(C)
15 M Shine Resunga Bikas Bank Shine Resunga 12/4/2069
Development limited (B-1) Development Bank
Bank limited limited (B-10)
(B)
16 M Predential Gorkha finance Predential finance 12/5/2069
finance limited limited (C) company limited
(C) (C)
17 M NIC Bank Bank of Asia limited NIC Asia Bank 3/16/2070
Limited (A) (A) limited (A)
18 M Diyalo Bikas Professional Bikas Professional Diyalo 3/16/2070
Bank limited Bank limited (B) Bikas Bank
(B) Limited (B)
19 M Araniko Surya Development Araniko 3/30/2070
Development Bank (C) Development Bank
Bank limited Limited (B)
(D)
20 M Royal Rara Bikas Bank Apex Development 3/31/2070
Merchant limited (C) Bank (B)
Banking and Api finance limited
finance (C) (C)
21 M Global IME Social Development Global IME Bank 3/30/2070
Bank limited Bank limited (B) limited (A)*
(A)* Gulami Bikas Bank
 21

limited ( B-1)
22 M Prabhu finance Sambridhi Bikas Prabhu Bikash 3/30/2070
limited (C) Bank limited (B) Bank limited (B)
Baibav finance
limited (C)
23 M Manakamana Yeti finance limited Yet Development 3/31/2070
development (C) bank limited (B)
Bank limited Valley finance
(B) limited (C)
24 M Global IME Commerz & Trust Global IME bank 12/26/2070
Bank limited Bank limited (A) limited (A**)
(A)*
25 M Reliable Subhalaxmi finance Reliable 1/3/2071
finance limited limited (C) Development Bank
(C) Nepal consumer limited (B)
development Bank
limited (B)
26 M Reliance Lotus investment Reliance lotus 1/25/2071
finance finance limited (C) finance limited (C)
limited (C)
27 M Siddhartha Imperial finance Siddhartha finance 1/19/2071
finance limited limited (C) limited (C)
(C)
28 M Civil Bank Axis Development Civil Bank limited 1/1/2071
limited (A) Bank limited (B) (A)
Civil Merchant
Bittiya Santha
limited (C)
29 M Biratlaxmi Khandbari Biratlaxmi 2/3/2071
Bikas bank Development bank Development Bank
limited (B-3) limited (B-1) limited (B-10)
30 M Shangrilla Bageshwori Bikas Sangrilla 3/29/2071
Development bank limited (B-10) Development Bank
Bank limited limited (B)
(B)
31 M Lumbini Bank Navadurga finance Lumbini Bank 3/15/2071
limited (A) company limited (C) limited (A)
32 M Purwanchal Madhyamnchal Nepal Grameen 4/30/2071
 22

Grameen Grameen Bikas Bank Bikas Bank

Bikas bank limited (D) Limited (D)
limited (D) Pachimanchal
Grameen Bikas Bank
limited (D)
Madhyapachimancha
l Grameen Bikas
Bank limited (D)
Sudurpachimanchal
Grameen Bikas Bank
limited (D)
33 M Kist Bank Prabhu Bikas bank Prabhu Bank 5/30/2071
limited (A) limited (B)* limited (A)
Gaurishankar
Development Bank
limited (C)
Zenith finance
limited (C)
34 M Citizen’s Bank Nepal Housing & Citizens’ Bank 1/25/2072
international Merchant finance international
limited (A) limited (C) limited (A)
Peoples’ finance
limited (C)
35 M Triveni Bikas Public Development Triveni Bikas Bank 2/18/2072
Bank limited Bank limited (B-3) limited (A)
(B-10) Bright Development
Bank limited (B-3)
36 M NDEP Rising Development NDEP 3/25/2072
Development bank limited (B-3) Development Bank
Bank limited limited (B)
(B)
37 M Biswo Bikas Fewa finance limited Fewa Bikas Bank 3/28/2072
bank limited (C) limited (B)
(B-10)
38 M Garima Bikas Nilgiri Bikas Bank Garima Bikas bank 3/29/2072
Bank limited limited (B-3) limited (B)
(B-10)
39 A Muktinath Civic Development Muktinath Bikas 3/30/2072
 23

Bikas Bank Bank limited (B-1) bank limited (B)

limited (B-10)
40 M Sagarmatha Palate finance Sagarmatha finance 3/31/2072
Merchant & limited (C) limited (C)
finance co.
limited (C)
41 M NMB Bank Pathibhara Bikas NMB Bank limited 7/1/2072
limited (A) Bank limited (B-3) (A)
Bhrikuti Bikas Bank
limited (B-10)
Clean Energy
Development Bank
limited (B)
Prudential finance
Co. limited (C)
42 M Prabhu Bank Grand Bank Nepal Prabhu Bank 10/29/2072
limited (A)* limited (A) limited (A)*
43 M City Om finance limited Om Development 12/22/2072
Development (C) Bank limited (B)
bank limited
(B-10)
44 M Gorkha Bikas Kathmandu finance Gorkha finance 1/3/2073
Bank (Nepal) limited (C) limited (C)
limited (B)
45 M Mega Bank Pachimanchal Mega bank Nepal 1/3/2073
Nepal limited Development Bank limited (A)
(A) limited (B-10)
46 M Kailas Bikas Metro Development Kailas Bikas Bank 2/17/2073
bank limited Bank limited (B-3) limited (B)
(B) Nepal Express
finance limited (C)
47 M Siddhartha Ekata Bikas Bank Siddhartha 2/28/2073
Development limited (B-10) Development Bank
Bank limited Nepal Awas finance limited (C)
(B) limited (C)
48 M Shine Resunga Ghodhuli Bikas Shine Resunga 2/29/2073
Development Bank Limited (B-1) Development bank
Bank limited limited (B-10)*
 24

(B-10)
49 M Kamana Bikas Kaski finance Kamana Bikas 3/6/2073
Bank limited limited (C) bank limited (B)
(B-10)
50 M Siddhartha Business universal Siddhartha Bank 3/7/2073
Bank limited Development Bank limited (A)
(A) limited (B)*
51 A Sunrise Bank Narayani National Sunrise Bank 3/30/2073
limited (A) fianance limited (C)*limited (A)
52 M Bank of Lumbini bankBank of 3/30/2073
Kathmandu limited (A)* Kathmandu
limited (A) Lumbini Bank
limited (A)
53 A Citizens Bank Primier finance Citizens Bank 4/2/2073
International limited (C) International
limited (A)* limited (B)
54 M Jyoti Bikas Jhimruk Bikas Bank Jyoti Bikas Bank 4/28/2073
Bank limited limited (B-1) limited (B)
(B)
55 M Malika Bikas Mahalaxmi finance Mahalaxmi Bikas 5/19/2073
Bank limited limited (C) Bank limited (B)
(B-10) Siddhartha finance
limited (C)*
56 M Vibor Bikas Society Vibor Society 5/17/2073
Bank limited Development Bank Bikas Bank limited
(B)* limited (B)* (B)*
57 M Garima Bikas Subekshya Bikas Garima Bikas Bank 6/4/2073
Bank limited Bank limited (B-3) limited (B)*
(B)*
58 M Civil Bank Inter. Leas. & Civil Bank limited 7/1/2073
limited (A)* Finance Company (A)
Limited (C)

Source: NRB, Bank & Financial Institution Regulation Department, 207

 25

2.1.5 History of Merger and acquisition

M&A has been around since the late 1800’s driven by prevailing business growth

Table: 2. 2 Wave of merger in global context

Waves Period Facet
Frist Wave 1893-1904 Horizontal mergers
Second Wave 1919-1929 Vertical mergers
Third Wave 1955-1970 Diversified conglomerate mergers
Fourth Wave 1974-1989 Co-generic mergers, hostile
takeovers, corporate raiders
Fifth Wave 1993-2000 Cross border, mega merger
Sixth Wave 2003-2008 Globalization, Private equity,
shareholder activism
Seventh Wave 2009- to till the date The rise of the BRICS

Source: York University, 2014

The first waves was one of major horizontal mergers, creating the principal steel,
telephone, oil, mining, railroad and other giants of the manufacturing and
transportation industries in the united states (US). The wave ended due to the start of
World War I.

The second wave saw further consolidation in the principal industries formed by the
first wave. This second wave saw the rise of major automobile Manufactures such as
ford and FIAT. The 1929 crash and great depression ended this era.

The third wave was one of expansion and diversification, where US corporate
management is obsessed with entering new markets. These conglomerates then
experienced a crash in their share prices during the early 1970’s which consequently
ended this era.

The fourth wave was an era of highly leveraged takeovers. Large investment banks
facilitated a number of “holtile takeovers’ on behalf of their corporate raiding clients.
 26

This era ended with the ‘collapse of banks’ capital structures, due to aggressive
lending activity to fund these types of transactions.

The fifth wave was the era of the ‘mega deal’. This era emphasized appetite for larger
economies of scale and created multinational conglomerates of unprecedented sizes,
under the assumption that competitive advantage was achieved through size. From a
upward to US$3.3 trillion worldwide in 2000. Six of the 10 largest deals in M&A
history took place from 1998 to 2001, this era ended with the bursting of the
millennium bubble and the great scandals of companies like Enron and world com.

The six Wave saw the introduction of globalization as established corporate

companies emphasized the need to create a multi-national reach. Private equity
boomed as shareholders looked to spread ownership of their companies between
themselves, day-to-day management and institutional investors.

The seventh wave from 2008 to till the date, M&A activity sank to its lowest levels
since 2004, due to the economic downturn. South Africa’s recent acceptance into the
cite league of the world’s best remerging economics was received with both praise
and criticism. There are various opinions that Africa as a continent is better placed for
membership to the BRICS (Brazil, Russia, India, and China) versus South Africa as a
single country. However, the inclusion of South Africa, or Africa as a whole, is
expected to boost incoming investment and supercharge the M&A sector in Africa.

2.2 Conceptual Review.

The conceptual framework for this study focuses on understanding financial

performance due to impact of merger and acquisition. After mergers due to the
profitability, shareholders value, liquidity, leverage impact of financial institution of
Nepal. It identifies the relationship between the merger and acquisition and
relationship between research variables (questioner or hypothesis) based on a review
of relevant literature related to impact of merger and acquisition on financial
performance. More, specially, the conceptual framework contained, independent
variables, dependent variables and intervening variables. Independent variables were
the variables which affect others variables to change and the researcher had control
 27

over them. The variables included shareholders value, profitability, liquidity,

Leverage, market prospect ratios, operational and managerial efficiency and market
share. The dependent variable showed the effect of manipulating the independent
variables. From the framework, the dependent variable was financial performance.

Independent Variable Dependent Variable

Shareholder’s value

Profitability
Financial Performance
- ROE & ROA
Liquidity ratio

Leverage

Figure: 2.1 Conceptual Framework

Source: Author, 2014

Figure shows the theoretical framework of study by depicting the impact of merger
and acquisitions of banks performance. This framework indicates liquidity,
profitability, leverage and shareholder’s value Independent variable and firms
financial ‘performance as dependent variable. The objectives of this study is the
investigate whether the performance of financial institutions is significantly impact by
merger. Therefore, we formulate the following hypotheses.
H1: Merger has a significant effect on liquidity ratios of financial institution in Nepal.
H2: Mergers has a significant effect on profitability ratios of financial institution in
Nepal.
H3: Mergers has a significant effect on financial leverage ratios of financial institution
in Nepal.
H4: Mergers has a significant effect on shareholder’s value of financial institution in
Nepal.
 28

Mergers and Acquisitions is an important financial tool that enables companies to

grow faster and provide returns to owners and investors (Sherman ─Hart 2006, 1).
According to Ross−Westfield−Jordan (2003), “A merger is the complete absorption
of one firm by another, wherein the acquiring firm retains the identity and the
acquired firm ceases to exist as a separate entity”.

A merger is a corporate strategy usually done between two or more than two
companies where acquiring firm and acquired firm stand on a merger agreement. The
terms merger and consolidation have been used synonymously. However, the two
have different legal identities after the merger deal. In a consolidation, two firms
come together to create an entirely new firm. Both the acquiring firm and the acquired
firm dissolve their previous names and identity (Ross [Link] 2003a,). In practice, a
merger between company A + company B= company A.

Bowman and Singh (1999) classified mergers and acquisitions activities into three
categories namely portfolio mergers and acquisitions, financial mergers and
acquisitions and organizational mergers and acquisitions. Portfolio mergers and
acquisitions: it entails significant changes in the asset mix of a firm or the lines of
business which a firm operates, including liquidation, divestitures, asset sales and
spin-offs. Financial mergers and acquisitions: It includes changes in the capital
structure of a firm, including leverage buyouts, leveraged recapitalization and debt
equity swaps. A common way for financial mergers and acquisitions is increasing
equity through issuing of new shares. Organizational mergers and acquisitions: It
involves significant changes in the organizational structure of the firm, including
redrawing of divisional boundaries, flattening of hierarchic levels, spreading of the
span of control, reducing product diversification revising compensation, reforming
corporate governance and downsizing employment. Other categories commonly
accepted include;

Horizontal Merger

This is a merger between companies in the same industry and shares the same product
lines and markets. Horizontal mergers are common in industries with fewer firms, as
 29

competition tends to be higher and potential gains in market share are much greater
for merging firms in such an industry. For instance; The ICEA LION Group was
formed as a result of a merger between Insurance Company of East Africa Limited
(ICEA) and Lion of Kenya Insurance Company Limited (LOK). The two companies
are well known Insurance and financial services market in Kenya and Eastern Africa
region. Horizontal M&A has grown rapidly over recent years due to global
restructuring of many industries in response to technological charge and in addition,
M&A could also be classified as “friendly” or ‘hostile’ ( Chunlai, then and Findlay,
2003). When M&A transaction is undertaken in a friendly manner, the board of the
target company agrees to the transactions. On the contrary, a hostile deal s one that
pits the offer against the wishes of the target, since the board of the target refuses the
offer. The merger has resulted in the creation of one of the largest insurance groups in
the region. Also a merger between Coca-Cola and the Pepsi beverage division, for
example, would be horizontal in nature. This would increase the market share as well
as reduce costs.

Vertical Merger

A merger between two companies producing different goods or services for one
specific finished product. “A vertical merger is a merger between companies
operating at different levels of the supply chain. Addressing competitive concerns, the
European commission following its approach in the Horizontal merger Guidelines
now distinguishes between coordinated and non-coordinated effects” (Chunlai, then
and Findlay, 2003). The latter can arise in foreclosure or when accessing
commercially sensitive information. Coordinate their behavior or if it makes stable or
more effective. The adoption of the previously unused terms “coordinated effects”
and “non- coordinated effects” for non- horizontal practice, harmonized the analysis
of Horizontal mergers, rather than indicating a change in the commission’s
enforcement practice, harmonized the analysis of horizontal and non-horizontal
mergers.
 30

Conglomerate Merger

This is a merger between firms that have no common business areas. There are two
types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve
firms with nothing in common, while mixed conglomerate mergers involve firms that
are looking for product extensions or market extensions. An example of a
conglomerate merger is Citigroup's acquisition of Travelers Insurance. While both
were in the financial services industry, they had different product lines. Although
there are many advantages organization may not always seek the right ones. For
example, cost reduction, although often sought, is a major motivator (NCNB, 1998).
The type of strategic benefits non- profits should seek include improvements in the
quality and efficiency of existing and new relationship with funders, development of
new skills such as programmatic expertise, entry into new geographic markets and the
ability to make the best use of resources.( The Bridgespan Grou…, 2009).

“An acquisition is a transaction in which an individual or company, known as the

offeror (or acquirer) gains control of the management and assets of another company,
known as the offeree (or target), either by becoming the owner of these assets or
indirectly by obtaining control of the management of the company, or by acquiring
the shares” (Firer-Ross-Westerfield-Jordan 2004,). Acquisition can be done either by
purchasing the stock and/or assets of the target company. A takeover is another form
of acquisition which can be used interchangeably. Typically, a takeover is unfriendly
and hostile in nature and without the will of target firms. Acquisitions are friendlier
where both corporations mutually agree to become a part of one to another. (Ross [Link]
2003b, 843-845; Firer-Ross-Westerfield-Jordan 2004. In practice, an acquisition
between company A+ company B= company A.

Types of acquisition:
i. Stock Acquisition: The acquirer buys the target’s stock of from the selling
shareholders. In a stock purchase, all of the assets and liabilities of the seller
are sold upon transfer of the seller's stock to the acquirer. As such, no tedious
valuation of the seller's individual assets and liabilities is required and the
transaction is mechanically simple. The acquirer does not receive a stepped-up
 31

tax basis in the acquired net assets but, rather, a carryover basis. Any goodwill
created in a stock acquisition is not tax- deductible (Asset and Stock Deals,

retrieved 2016).

ii. Asset Acquisition: The acquirer buys some or all of the target’s
assets/liabilities directly from the seller. If all assets are acquired, the target is
liquidated. The acquirer can choose ("cherry pick") which specific assets and
liabilities it wants to purchase, avoiding unwanted assets and liabilities for
which it does not want to assume responsibility. The asset purchase agreement
between the buyer and seller will list or describe and assign values to each
asset (or liability) to be acquired, including every asset from office supplies to
goodwill (Asset and Stock Deals, retrieved 2016).

Takeovers can be friendly or hostile. As per Hanks (retrieved 2016), a friendly

acquisition occurs when the acquiring company gives information to the target
company's Board of Directors that it plans to purchase a controlling interest. The
proposed buyout is then voted upon by the Board of Directors. The votes would
decide whether the proposal should be accepted or not. If they voted in favor of
proposal, then the acquiring company then takes control of the target company's
operations. However, the acquiring company may or may not choose to keep the
target company's board of directors in place. A hostile acquisition happens when the
target company's board of directors do not vote in favor of the stock sale to the
acquiring company. Agents of the acquiring company then will try to buy the target
company's stock from other available sources, gain a controlling interest and force out
the board members who voted against the acquisition. When this happens, the
acquiring company will aggressively go after shares of the target firm, while the
target's board of directors prepares to fight for survival (Hanks, retrieved 2016).
Though merger and acquisition term is used interchangeably, there are some
differences between them. S.S (2015) has indicated following as the types of
differences between merger and acquisition: (Baniya Dinesh)

Mergers & acquisitions (M&A), in the broad sense, may imply a number of different
transactions ranging from the purchase and sales of undertakings, concentration
 32

between undertakings, alliances, cooperation and joint ventures to the formation of

companies, corporate succession/ ensuring the independence of businesses,
management buy-out and buy-in, change of legal form, initial public offerings and
even restructuring (Picot, 2002, p.15). However, Nakamura (2005) explains that using
a broad definition of M&A could lead to confusion and misunderstanding as it entails
everything from pure mergers to strategic alliance. Therefore, this thesis adopts the
definition of M&A in a narrower sense as clarified below.

In addition, the model developed by Nakamura (2005) is employed to provide clear

understanding about the definition of M&A in a narrow concept, as shown in Figure:
 33

Figure No 2.2: The definition of merger & acquisition

Absorption
merger
Merger
Equal merger
(1.1 type merger)
Complete
takeover

M&A Majority
(Narrow Stock
concept) actuation
Minority

Capital injection/
asset Purchase,
Acquisition Business Transfers

Minority cross-
Asset ownership
Cooperation
Founding of
M&A holding
(Board companies
concept)

Franchising

Management
outsourcing
Business
Cooperation
Joint Venture

Cooperation
Source: Adapted from Nakamura (2005, p. 18) manufacturing,
sales or R&D
 34

Mergers are commonly referred to as either ‘merger by absorption’ or ‘merger by

establishment’ (Chunlai Chen and Findlay, 2003, Nakamura, 2005). Merger by
absorption is the situation in which one company buys all stocks of one or more
companies (i.e., absorbing) and the absorbed companies cease to exist whereas merger
by establishment refers to the case where two or more firms are merged into a newly
created one and the combining firms in the merger are dissolved (Chunlai Chen and
Findlay, 2003). According to Nakamura (2005) merger by absorption could be
considered as a de facto acquisition. Besides, the term ‘consolidation’ could be used
to imply a merger by establishment (Gaughan, 2002).

In the view of M&A transactions from the perspective of the value chain, M&A can
be classified as horizontal, vertical or conglomerate (Gaughan, 2002, Chunlai Chen
and Findlay, 2003). In horizontal M&A, the acquiring and the target companies are
competing firms in the same industry. According to Chunlai Chen and Findlay (2003),
horizontal M&A has grown rapidly over recent years due to global restructuring of
many industries in response to technological change and liberalization. This trend is
observed in such industries as pharmaceuticals, automobile and petroleum. The
merger of US$76 billion transaction value between the two giant pharmaceutical
companies, Glaxo and SmithKline Beecham, is a good example for M&A under this
category (MANDA, 2007). As Jan Leschly, the former CEO of SmithKline Beecham,
said, the aim of the two parties was R&D synergies to drive revenues since in this
particular industry new technologies result in enormous opportunities for revenue
creation (Carey, 2000 in Harvard Business Review, 2001). Vertical M&A are
combinations of firms in client-supplier or buyer-seller relationships. The firms
involved seek to reduce uncertainty and transaction costs by upstream and
downstream linkages in the value chain and to benefit from economies of scope
(Chunlai Chen and Findlay, 2003). Lastly, a company may attempt to diversify risks
and attain economies of scope by engaging in conglomerate M&A transactions where
involving companies operate in unrelated businesses. An example of conglomerate
M&A is Philip Morris, a tobacco company, which acquired General Foods in 1985 for
US$5.6 billion (Gaughan, 2002).
 35

In addition, M&A could also be classified as ‘friendly’ or ‘hostile’ (Chunlai Chen and
Findlay, 2003). When an M&A transaction is undertaken in a friendly manner, the
board of the target company agrees to the transaction. On the contrary, a hostile deal
is one that pits the offer against the wishes of the target, since the board of the target
refuses the offer.

Last but not least, M&A transactions could be either domestic or cross-border with
regards to where the companies involved base and operate. A cross-border M&A
transaction involves two firms located in different economies, or two firms operating
within one economy but belonging to two different countries (Chunlai Chen and
Findlay, 2003). Accordingly, in domestic M&A transactions, the firms involved
originate from one country and operate in that economy-country. The classification of
M&A could then be summarized in the table below:

Table 2.3: Classification of merger & acquisition transactions

M&A Classification in terms
Value chain Relationship Economic area
Horizontal M&A Friendly M&A Domestic M&A
Vertical M&A Hostile M&A Cross-border M&A
Conglomerate M&A

Source: Thapa K. Rana S.B (2011)

There have been many studies regarding various factors that lead to the activity of
merger and acquisition in banking sector. There are various factors affecting merger
and acquisition activities and decision that have been derived from the theories
described above. However, is very hard to find previous quantitative analysis of such
factors. In the studies conducted by Smirnova (2014), he has drafted a model in which
internal and external motives of merger and acquisitions in banking sector are
explained.

Internal motives:
1. To increase shareholder’s equity
2. To increase research and development capability
 36

3. To increase number of clients

4. To innovate products and services
5. To strengthen position in market

External motives:
1. Economic: To give response to changing market or economic
conditions in bank’s environment
2. Legal and political: To get support from government, to obtain tax
benefits, getting forced by government
3. Technological : To obtain superior technology and new knowledge
4. Competitive: To achieve strategic advantages through synergies, to
improve product and service quality and quantitySource: Motives of
merger and acquisition as obtained from smirnova(2014).

The Nepal Rastra Bank had identified three conditions based on which it can force the
BFIs to for immediate merger. As per the first condition, the BFIs operated and
owned by the same business family, relatives, and groups will be considered to
amalgamate. The central bank will order to those BFIs to merge if they are owned by
the same family, relatives and groups. The Merger Bylaws policy by the central bank
also states that it can persuade the BFIs to merge if they are operated by a single
family group. Similarly, as per the second condition, the central bank will force such
BFIs to go for a merger if there is a shortfall of capital. As per NRB banking and
financial institution regulations,- commercial banks are required to maintain a
minimum capital adequacy ratio (CAR) of 10 percent and development banks a CAR
of 11 percent. A CAR is required to determine the capacity of the bank in meeting
time liabilities and other risks such as the credit risk and the operational risk. If the
BFIs fail to maintain a CAR imposed by the NRB, it will force them to merge which
will help to strengthen their capital and increase competitive performance. (Subedi
2012).
 37

2.3 Research Gap

Merger and Acquisition is the important policy for banks and financial institutions to
make Quantitative to Qualitative banks and financial institutions. Make the Major
Provisions of merger 2068 that after bank and financial institution is goes on merging.
In this merger provisions is not proper implemented by banks and financial
institutions that after According to monetary policy 2072 increased 4 multiple of
paidup capital in commercial banks. That after most of the banks and financial
institutions are going on forcefully merging. In previous research study shows the
policy of merging impact on BFIs. In this research study is shows on forcefully
merged impact the BFIs. According to monetary policy 2072 that after A class banks
are 28 and B class banks are 39 and C class banks are 28 and D class banks are 53. In
total 148. In this 148 banks and financial institutions 58 banks and financial are
merger and acquisitions.

This study was mainly used secondary data, on previous studies were not calculated
leverage and other ratios. However, in this study were focused. The previous study
has used both method primary & secondary data. This study differential the sample
size and methodology as compare to previous thesis.
 CHAPTER THREE
RESEARCH METHODOLOGY

3.1 Research Design

Research design is a master plan specifying the methods and procedures for collecting
and analyzing the needed information. The aim of the study is to find out the
relationship between the event of merger and acquisitions and impact of this strategy
on the financial performance of banks. So it is a causal Comparative research design.
Being a causal research, it determined whether the change in the company’s
profitability is caused by business combination, on the other hand, as a comparative
research, the study seeks to know the relationship of merger and acquisitions to the
banks financial performance.

The findings of this research were based on secondary data. The data has been
collected from audited published annual financial statement and investment sites for
the period covering from certain period.

3.2 Population and Sample

According to NRB report alltogether 58 merger and acquisition transactions were

occurred on Nepalese Banks and financial institution up-to 2073/7/[Link] the 58
transactions only 4 of them were gone on acquisition and the rest all 54 of them gone
through merger process that had taken place in the banking industry in Nepal. Six
sample banks they are Global IME Bank limited, NIC Asia Bank limited,
Machhapuchhre Bank limited, Sangrilla Development Bank limited, NMB bank
limited, & Siddhartha Bank limited.

This study is based on Causal Comparative research design. The research design that
is used to show the causes of the problem is known as causal comparative research
design. It observes the position of causes that impact on certain works. It explains the
relationship of two variables after the study of the problems. It is also known as Ex-
post facto research design.
 39

NIC Asia Bank limited was formed after merging NIC Bank ltd. And Bank of Asia
Nepal Ltd. in 2070/03/16. NIC Asia Bank’s merger is the first merger between two
‘A’ class commercial banks in the history of Nepal. Global IME Bank ltd. was formed
after the merger process with different BFIs. Firstly, Global Bank Ltd. and two
financial entities namely IME Finance ltd. and Lord Buddha Finance Ltd. merged in
2069/03/25 and became Global IME Bank Ltd. Then this Global IME Bank Ltd. and
two other Development Banks social development Bank ltd. and Gulmi bikas bank
ltd. merged in 2070/03/30 and became Global IME bank ltd. finally, again this Global
IME bank ltd. and Commerze and Trust Bank ltd. were merged in 2070/12/26 and
became Global IME bank [Link] bank limited is merged with Standard
finance limited in 2069/03/25. Sangrilla Development Bank Ltd. was formed after the
merger process between two financial entities namely sangrilla development bank ltd.
and Bageshori Development Bank ltd. these two banks were merged on B. S.
2071/03/29. The financial position of these three BFIs before merged and after
merged are analyzed in this [Link] bank limited is merged with Pathibhara
bikas bank limited, Bhrikuti bikas bank limited, Clean Energy development bank
limited & Prudential financial company limited in 2072/01/07. Siddhartha Bank
limited is merged with Business universal Development bank limited in 2073/03/07.
The six financial institutions are selected for study impact on performance of after
merged define as the sample population.

For the purpose of data collection is non-probability sampling method is used. The
finding of such sampling cannot be generalized because samples are selected with
specific purpose or separating the area in advance.

3.3 Data Collection & processing procedure

The study depend on secondary data was collected through annual financial statement
reviews of selected banks. To analyze the data, financial ratios as liquidity ratio,
leverage ratio, profitability ratio and investment valuations ratios used in the study
that concluded impact of merger and acquisition on the financial performance. The
study was made on secondary data collected from various sources as news report,
 40

various articles, books, audited published annual financial statement and investment
sites, magazines & money control websites.

Books’ annual report: the annual reports will be collected from the respective banks
financial performance the respective banks annual report. Text books: the books
related to the research topic will be referred for secondary data. Internet: As internet is
the huge source of secondary data, many websites and data related to the topic will be
experienced to evaluate the collected data financial ratios used in the study.

3.4 Data analysis tools and techniques

This selection reflects how analyze have been carried out in chapter four. It is
procedures in analyzing data in order to understand the results and generalize the
findings. Pre and post-merger average ratios are determined of each company selected
in the sample size. Using by financial tools like Profitability, liquidity, leverage,
position of each firm is separately analyzed in prior and post-merger of six banking
industry.

For presentation of data, several graphical tool such as tables would use. Through the
excel calculate the liquidity ratio, profit margin, leverage ratio, Earning per share,
price Earning ratio, Return on Equity (ROE), Return on Assets(ROA),& Market
Value Per share (MVPS) are used to see the position of financial performance in
financial institutions in Nepal.
 41

CHAPTER IV
RESULTS

4.1 Impact of M&A on Shareholders’ Value

The impact of merger and acquisition on shareholders’ value is the research work
compare and analyze the pre and post-merger financial performance of six sample
banks. The sample Banks are Global IME Bank limited, NIC ASIA bank limited,
Machhapuchhre Bank limited, Sangrilla Dev. Bank limited, NMB Bank limited and
Siddhartha Bank limited. The Shareholders’ value are such as Earning per share
(EPS), Market Value per share (MVPS) and Price Earning (P/E) Ratio calculate the
by using formula are as below.

4.1.1 Earning per share (EPS)

Net profit available to equity shareholders

𝐸𝑃𝑆 =
Number of ordinary share outstanding

The Earning per share (EPS) of three sample banks are as listed below in table.

Table: 4.1
Impact of M&A on Earning per Share(EPS) of three sample banks.
Fiscal year Name of Banks & EPS
Global IME NIC Asia Bank Machhapuchhre Bank ltd.
Bank ltd. ltd.
2066/067 4.95 13.86 4.96
2067/068 14.06 10.49 0.55
2068/069 11.79 8.63 1.54
2069/070 16.15 47.41 5.98
2070/071 19.57 35.98 18.34
2071/072 15.58 25.59 22.2
2072/073 19.33 28.31 25.04

Source: Annual Report of three sample banks

 42

The Earning per share measure the profit earn to equity stakeholders on per share
basis. It is calculated by dividing the net profit by number of outstanding share.
However, EPS does not show how much to be paid to the shareholder’s as a divided
nor how much of the net profit will be allocated as a retain earnings. It gives an
overall figure of net earning belong to the ordinary shareholders on per share basis.
(khan-Jain)

The above information is presented in the figure below.

Figure: 4.1
Impact of M&A on Earning per share of three sample banks.

50
45
40
35
30
25 1 Global IME Bank ltd.
20 2 NIC ASIA Bank ltd.
15 3 Machhapuchhre Bank ltd.
10
5
0

Source: Annual report of three sample Banks.

The EPS of Global IME bank limited is decreasing trend after merger. Before merger
Global IME Bank limited is increasing trend of growth. The highest EPS of Global
IME Bank limited is Rs. 19.57 in fiscal year 2070/071 and the Lowest EPS is Rs. 4.95
in fiscal year 2066/067. The average EPS of Global IME bank limited is Rs.14.49.
The EPS of NIC ASIA bank limited is decreasing trend before merger and highly
increase in merged year. Thereafter NIC ASIA Bank ltd is going on increasing trend
 43

in this final year. The highest EPS of NIC ASIA Bank limited is Rs. 47.41 in merged
year. And the lowest EPS is Rs. 8.63 in fiscal year 2068/069. The average EPS of NIC
ASIA Bank limited is Rs. 24.32. The EPS of Machhapuchhre bank ltd is also
increasing trend in after merger rather than before merger. And there after
Machhapuchhre Bank ltd. is started to increase. The highest EPS of Machhapuchhre
Bank limited is Rs.25.04 in fiscal year 2072/073 and the lowest EPS is Rs.0.55 in
2067/068. And the average EPS of Machhapuchhre Bank limited is Rs. 11.23.

4.1.1Earning Per Share (EPS)

Net profit Available to equity sharholders

𝐸𝑃𝑆 =
Number of ordinary share outstanding

The Earning per share of three sample banks over the fiscal 2066/067- 2072/072 year
is shown in the below table in Rupee.

Table: 4.2
Impact of M&A on EPS of three sample Banks.
Fiscal year Name of Banks & EPS
Sangrilla Dev. Bank ltd. NMB Bank ltd. Siddhartha Bank ltd.
2066/067 27.89 10.65 21.99
2067/068 43.6 11.08 19.82
2068/069 35.68 2.61 20.41
2069/070 33.92 18.02 29.8
2070/071 11.57 20.5 38.63
2071/072 24.19 25.05 37.77
2072/073 22.06 27.78 41.53

Source: Annual report of three sample banks

The table shows that the EPS of three sample banks. In comparison to three banks the
higher the EPS is Sangrila Dev. Bank limited there is 43.6 in fiscal year 2066/067.
And lower the EPS is Rs. 2.61 in fiscal year 2068/069. The overall EPS is increasing
trend.
 44

The Above information presented in the figure below.

Figure: 4.2
Impact of M&A on Earning per share (EPS) on three sample bank ltd.

45
40
35
30
25
20 1 Sangrila Dev. Bank ltd.
15 2 NMB Bank ltd.
10
5 3 Siddhartha Bank ltd.
0

Source: Annual report of three sample Banks.

The figure shows that EPS of sangrila Dev. Bank limited is increase in the before
merger but when the time of merged EPS going on decreasing trend. The highest EPS
is Sangrilla Dev. Bank limited is Rs. 43.6 in fiscal year 2067/068 and the lowest EPS
is Rs. 11.57 in fiscal year 2070/071. The Average EPS of Sangrilla dev. Bank limited
is Rs.28.42. The highest EPS of NMB bank limited is 27.78 in fiscal year 2072/073
and lowest EPS is Rs. 2.61 in fiscal year 2068/069. And the average EPS of NMB
Bank limited is Rs.16.53. The highest EPS of Siddhartha bank limited is Rs. 41.53 in
fiscal year 2072/073 and lowest EPS is Rs. 19.82in fiscal year 2067/[Link] NMB
bank limited is the increasing trend of after merger. The Siddhartha bank limited is
also increasing trend of before merger and after merger there is on impact of M&A on
Siddhartha bank limited. And the average EPS of Siddhartha Bank limited is Rs.
29.99.

4.1.2 Market Value per share (MVPS)

The price of the share at the secondary market is known as the market value per share.
In other words the closing price on Ashadh last of each fiscal year at Nepal stock
 45

Exchange (NEPSE), the only secondary market in Nepal for listed companies is called
market Value per share (MVPS). The three sampled banks shown in MVPS in
rupees.
Table: 4.3
Impact of M&A on MVPS of three sample banks.
Fiscal year Name of banks & MVPS in Rs.
Global IME NIC Asia Bank Machhapuchhre Bank ltd.
Bank ltd. ltd.
2066/067 260 270 282
2067/068 209 192 133
2068/069 160 228 107
2069/070 432 554 203
2070/071 640 970 576
2071/072 479 617 564
2072/073 515 798 680

Source: Annual report of three sample banks

The table shows that six sample banks market value per share. In the overall three
banks has highest MVPS of NIC ASIA Bank limited is Rs. 970 in fiscal year
2070/071 the lowest MVPS of Machhapuchhre Bank limited is Rs. 107 in fiscal year
2068/069. All three banks MVPS is increasing trend in before merger & after merger.
The NIC ASIA bank limited has higher the MVPS in after merger time in Rupee 798
in fiscal year 2072/073. All three banks has performance is good.
 46

The above information presented below in figure.

Figure: 4.3
Impact of M&A on MVPS of three sample banks.

1000
900
800
700
600
500 1 Global IME Bank ltd.
400
300 2 NIC ASIA Bank ltd.
200 3 Machhapuchhre Bank ltd.
100
0

Source: Annual report of three sample banks.

The figure shows that MVPS of Global IME bank limited is increasing trend of after
merger. It is the positive impact of the merger on Global IME bank limited. The
highest MVPS of Global IME Bank limited is Rs.640 in fiscal year 2070/071 lowest
MVPS is Rs. 160 in fiscal year 2068/[Link] Average MVPS of Global IME bank
limited is Rs. 385. NIC ASIA bank limited has also increasing trend of the after
merger. When the time of before merger the bank has MVPS is decreasing. The
highest MVPS of NIC ASIA bank limited is Rs. 970 in 2070/071 and lowest MVPS is
192 in 2067/068. And the average MVPS of NIC ASIA bank limited is Rs.518. The In
the case of Machhapuchhre bank limited is also Market Value per share is increasing
trend of after merger. The highest MVPS of Machhapucchre bank limited is Rs.680 in
2072/073 and lowest MVPS is Rs.107 in 2068/069. And average is Rs. 363.57.

4.1.2 Market value per share (MVPS)

The MVPS of three sample banks over the fiscal 2066/067-2072/073 year is shown in
table in rupees. Market Value measure the shareholder’ value in financial
performance.
 47

Table: 4.4
Impact of M&A on MVPS of three sample Banks.
Fiscal year Name of banks & MVPS in Rs.
Sangrila Dev. Bank ltd. NMB Bank ltd. Siddhartha Bank ltd.
2066/067 495 295 444
2067/068 316 195 270
2068/069 232 180 345
2069/070 147 252 300
2070/071 147 515 810
2071/072 314 507 678
2072/073 425 810 869

Source: Annual report of three sample banks

The table shows that the three banks MVPS. The Siddhartha bank has the higher than
other banks MVPS there is 869 in merged time fiscal year 2072/073. The lowest
MVPS is the Sangrilla Dev. Bank ltd is Rs 147 in fiscal year 2069/070 and 071. All
three banks MVPS is increasing trend.

The above information is presented figure in below.

Figure: 4.4
Impact of M&A on MVPS of three sample Banks.

900
800
700
600
500
400 1 Sangrila Dev. Bank ltd.
300 2 NMB Bank ltd.
200
100 3 Siddhartha Bank ltd.
0

Source: Annual report of three sample banks.

 48

The MVPS of sangrila Dev. Bank limited is U shaped increased. It means that the
MVPS is before merger starting the increase and at the time of merged the MVPS is
decreased. That after the sangrila Dev. Bank ltd is merged. Thereafter MVPS is going
on increasing trend at yet. The highest MVPS of Sangrilla Dev. Bank limited is
Rs.495 in fiscal year 2066/06 and the lowest is Rs. 147 in fiscal year 2069/070/071.
The average MVPS is Rs. 296.57. The MVPS of NMB Bank limited is positive
impact of merger. After the merger MVPS is increasing trend. The highest MVPS of
NMB bank limited is Rs. 810 in fiscal year 2072/073 and lowest is Rs. 195 in fiscal
year in 1067/067. The average MVPS is Rs. 393.43. In the case of Siddhartha bank
limited the market value per share is increasing trend. The highest MVPS is Rs. 869
in fiscal year 2072/073 and lowest is Rs. 270 in fiscal year 2067/068. The average
MVPS is Rs. 530.86.

4.1.3 Price Earning ratio (P/E)

It is the ratio between Market value per share (MVPS) and Earning per share (EPS).
Its ratio is calculated by using formula.

Market Value Per share (MVPS)

𝑃𝑟𝑖𝑐𝑒 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑅𝑎𝑡𝑖𝑜 =
Earning per share (EPS)

The P/E ratio of three sampled banks over the fiscal 2066/067-2072/073 year are
presented in the table below.
 49

Table: 4.5
Impact of M&A on P/E Ratio of three sample banks
Fiscal Name of banks $ P/E Ratio
year Global IME Bank ltd. NIC Asia Bank ltd. Machhapuchhre
Bank ltd.
2066/067 52.47 19.48 56.9
2067/068 14.86 18.3 242.54
2068/069 13.57 26.42 69.41
2069/070 26.74 11.69 33.96
2070/071 32.7 26.96 31.4
2071/072 30.74 24.11 25.4
2072/073 26.64 28.19 27.15

Source: Annual report of three sample Banks.

The table shows that the Machhapuchhre bank limited P/E ratio is higher than other
banks there is Rupee 242.54. The lowest P/E ratio is Rs. 11.69 in NIC Asia bank
limited. All three banks have randomly increase and decrease.

Above the information presented the figure in below.

Figure: 4.5
Impact of P/E ratio on three sample banks.

250

200

150
1 Global IME Bank ltd.
100
2 NIC ASIA Bank ltd.
50 3 Machhapuchhre bank ltd.

Source: Annual report of three sample Banks.

 50

From the above figure shows that the P/E ratio of Global IME bank limited is constant
growth both before and after merger. The highest P/E ratio is 52.47 in fiscal year
2066/067 and the lowest P/E ratio is 13.57 in the fiscal year 2068/069. The average
P/E ratio is 28.25. The highest P/E ratio of NIC Asia bank limited is 28.19 in fiscal
year 2072/073 and lowest is the 11.69 in fiscal year 2069/070. The NIC ASIA bank
limited is also constant growth. The average P/E ratio of NIC ASIA bank limited is
Rs. 22.16. The Machhapuchhre bank limited is highly increased in FY 2067/068 that
is 242.54 and the lowest is 25.4in fiscal year 2071/072 and thereafter same as constant
growth. And the average ratio is Rs. 69.54.

C, b) Price Earning ratio (P/E)

It is the ratio between Market value per share (MVPS) and Earning per share (EPS).
Its ratio is calculated by using formula.

Market Value Per Share (MVPS)

𝑃𝑟𝑖𝑐𝑒 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑅𝑎𝑡𝑖𝑜 =
Earning per share (EPS)

The P/E ratio of three sampled banks over the fiscal 2066/067-2072/073 year are
presented in the table below.
Table: 4.6
Impact of M&A of Price Earning ratio three sample banks.
Fiscal Name of banks $ P/E Ratio
year Sangrilla Dev. Bank ltd. NMB Bank ltd. Siddhartha Bank ltd.
2066/067 17.75 27.71 20.19
2067/068 7.25 17.61 13.62
2068/069 6.5 68.93 16.91
2069/070 4.33 13.98 10.07
2070/071 12.7 25.13 20.97
2071/072 12.98 20.24 17.95
2072/073 19.27 29.15 20.93

Source: Annual report of three sample banks

 51

The table shows that all three banks P/E ratio. All banks has P/E ratio is increasing
trend. The highest P/E ratio is the bank of NMB bank limited is 68.93 in fiscal year
2068/069 and the lowest ratio is 4.33 ratio of Sangrilla Dev. Bank limited in fiscal
year 2069/070.

The above information presented in the figure below

Figure: 4.6
Impact of M&A of pricing Earning ratio of three sample banks.

70
60
50
40
1 Sangrila Dev. Bank ltd
30
2 NMB Bank ltd.
20
3 Siddhartha Bank ltd.
10
0

Source: Annual report of three sample banks

The P/E ratio of sangrilla dev. Bank limited is increasing trend after merger. The
average P/E ratio of Sangrilla Dev. Bank limited is 11.54. The NMB bank limited P/E
ratio is increasing trend. The FY of 2068/069 P/E ratio is highly increased. The
average P/E ratio is 28.96. The P/E ratio of Siddhartha bank limited is continued
increasing growth. The average P/E ratio is 17.23.

4.2 Impact of M&A on Profitability Ratio

The impact of merger and acquisition on profitability ratio in bank and financial
institutions analyze the pre and post-merger financial performance of six sample
banks. The profitability ratio analyze the profit margin and liquidity ratio, where
calculated the by using formula are as follows.
 52

4.2.1 Impact of M&A on profitability ratio on Global IME bank limited.

Net Profit After tax

𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛(𝑃𝑀) =
Operatin Income

a) Liquidity Ratio

Liquidity ratio is directly given in annual report .Liquidity is another factor that
determines the level of a company’s financial performance. Liquidity refers to the
ability of the bank to fulfill its obligations, mainly of depositors. According to (Dang,
2011) adequate level of liquidity is positively related with bank profitability. The
most common financial ratios that reflect the liquidity position of a bank according to
the above author are customer deposit to total asset and total loan to customer
deposits. Other scholars use different financial ratio to measure liquidity. However,
the study conducted in China and Malaysia found that liquidity level of banks has no
relationship with the performances of banks (Said and Tumin, 2011).

Table: 4.7
Impact of M&A on Profitability ratio of Global IME bank limited
Fiscal year Liquidity ratio Profit Margin Ratio
2066/067 30 10.92
2067/068 27.23 26.19
2068/069 34.13 28.97
2069/070 32.25 24.4
2070/071 31.11 41.05
2071/072 30.12 30.32
2072/073 35.14 35.03

Source: Annual report of Global IME bank limited

The table shows that only Global IME bank limited profit margin and liquidity ratio.
In fiscal year 2070/071 the profit margin ratio is higher than other fiscal year. In that
time the profit margin ratio is 41.05. In the overall fiscal year the profit margin is
 53

increasing trend. In the case of liquidity ratio 2067/068 is minimum of liquidity ratio.
The liquidity ratio is minimize the better for the bank.

Above the information is presented in figure below.

Figure: 4.7
Impact of M&A on Profitability Ratio of Global IME bank limited

45
40
35
30
25
20 1 liquidity ratio
15
10 2 Profit margin
5
0

Source: Annual report of Global IME bank limited.

The figure shows that profitability ratio of Global IME bank limited is increasing
trend. When the time of Global IME Bank limited merge with IME finance & Lord
Buddha Finance limited in 2069 the ratio of profitability is going on increasing trend.
The highest liquidity Ratio is 35.14 in fiscal year 2072/073 and lowest is 27.23 in
fiscal year 2067/068 and the highest profit margin is 41.05 in fiscal year 2070/073 and
the lowest is 10.92 in fiscal year 2066/067. And the average liquidity ratio is 31.43
and average profitability ratio is 28.13%.

4.2.2 Impact of M&A on profitability of NIC ASIA bank limited.

The profitability ratio is calculated by using formula are below.

Net profit After tax

𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 (𝑃𝑀) =
Operating Income
Liquidity Ratio is directly given in annual report
 54

Table: 4.8
Impact of M&A on profitability ratio of NIC ASIA bank limited
Fiscal year Liquidity ratio Profit Margin Ratio
2066/067 7.54 46.76
2067/068 5.77 28.75
2068/069 13.84 23.64
2069/070 29.27 41.87
2070/071 28.68 37.14
2071/072 28.91 32.36
2072/073 23.79 40.83

Source: Annual report of NIC ASIA bank limited

The table shows that the profitability ratio and liquidity ratio of NIC Asia Bank
limited. The bank has higher the profit margin ratio is 46.76. And the lowest is 5.77 in
fiscal year 2067/068.

Above information presented in figure below;

Figure: 4.8
Impact of M&A on profitability ratio of NIC ASIA bank limited

50
45
40
35
30
25 1 liquidity ratio
20
2 Profit Margin
15
10
5
0
FY FY FY FY FY FY FY
2066/067 2067/068 2068/069 2069/070 2070/071 2071/072 2072/073

Source: Annual Report of NIC ASIA bank limited

 55

From the figure shows that profit margin ratio of NIC ASIA bank limited is increasing
trend. The NIC Bank limited is merged with Bank of ASIA in 2070. The highest
profit Margin ratio is 46.76% in fiscal year 2066/067 and the lowest is 23.64% in
fiscal year is 2068/069. And the lowest liquidity ratio is 5.77 in fiscal year 2067/068.
After the merged the bank liquidity ratio and profit margin ratio is highly increased.
The average liquidity ratio is 19.69 and the average profit margin ratio is 35.91%.

4.2.3 Impact of M&A on profitability ratio on Machhapuchhre Bank limited.

The profitability ratio is calculated by using formula are below.

Net profit After tax

𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 (𝑃𝑀) =
Operating Income

Liquidity Ratio is directly given in annual report

Table: 4.9
Impact of M&A on profitability ratio of Machhapuchhre bank limited
Fiscal year Liquidity ratio Profit Margin Ratio
2066/067 5.89 10.52
2067/068 10.85 1.32
2068/069 15.04 6.476
2069/070 11.07 12.49
2070/071 9.24 32.26
2071/072 11.02 36.127
2072/073 6.84 39.165

Source: Annual report of Machhapuchhre Bank limited

The table shows that the profitability ratio of Machhapuchhre Bank limited is 39.17%
in fiscal year 2072/073 and the lowest is 1.32% in fiscal year 2067/068. The lowest
liquidity is 5.89.

Above the information presented below the figure.

 56

Figure: 4.9
Impact of M&A on Profitability ratio of Machhapuchhre bank limited

40
35
30
25
20
15 1 liquidity Ratio
10 2 Profit margin
5
0

Source: Annual report of Machhapuchhre bank limited.

The figure shows that the profit margin ratio of Machhapuchhre bank limited is
increasing the after merger. When the time of merged the profit margin ratio is some
increase that after highly increased. The highest profit margin ratio is 39.17% in fiscal
year 2072/073 and the lowest is 1.32% in fiscal year 2067/068. The liquidity ratio is
the lowest in fiscal year 2066/067 in 5.89. The average liquidity ratio is 9.99 and
profit margin ratio is 19.77%.

4.2.4 Impact of M&A on Profitability ratio of Sangrila Dev. Bank limited.

The profitability ratio is calculated by using formula are below.

Net profit After tax

𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 (𝑃𝑀) =
Operating Income

Liquidity ratio is directly given in Annual report.

 57

Table: 4.10

Impact of M&A on profitability ratio of Sangrila Dev. Bank limited

Fiscal year Liquidity ratio Profit Margin Ratio
2066/067 18 18.17
2067/068 31 26.04
2068/069 37 30.39
2069/070 32 38.82
2070/071 32.83 42.13
2071/072 31.24 36.39
2072/073 25.75 38.41

Source: annual report of Sangrila Dev. Bank limited.

The table shows that the profitability ratio of Sangrila development bank limited. The
highest profitability is 42.13% and lowest Liquidity ratio is 18. In 2070/071 the bank
has higher profitability ratio.

The above the information presented below the figure.

Figure: 4.10
Impact of M&A on profitability ratio of Sangrila Dev. Bank limited

45
40
35
30
25
20 1 Liquidity Ratio
15
10 2 Profit Margin
5
0

Source: Annual report of Sangrila Dev. Bank limited

 58

The profitability ratio of Sangrila Dev. Bank limited is increasing trend. Above figure
shows that liquidity ratio of this bank is negative performance or reducing the
leverage ratio when the after merger. Before the merger liquidity ratio is increasing.
The profit margin is going on increasing trend. The average liquidity ratio is 29.69
and profit margin ratio is 32.91%.

4.2.5 Impact of M&A on profitability ratio of NMB Bank limited.

The profitability ratio is calculated by using formula are below.

Net profit After tax

𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 (𝑃𝑀) =
Operating Income

Liquidity ratio is directly given in annual report

Table: 4. 11
Impact of M&A on profitability ratio of NMB bank limited.
Fiscal year Liquidity ratio Profit Margin Ratio
2066/067 6.02 35.84
2067/068 6.85 38.62
2068/069 18.91 8.83
2069/070 23.35 38.88
2070/071 13.72 38.46
2071/072 13.32 38.19
2072/073 10.81 43.06

Source: Annual report of NMB Bank limited

The table shows that the profitability ratio of NMB bank limited. In 2072/073 the
bank has higher profitability there is 43.06 the lowest Liquidity ratio is 6.02 in fiscal
year 2066/067. Lowest liquidity ratio is the best for bank performance.

Above the data is presented in the figure below.

 59

Figure: 4. 11
Impact of M&A on Profitability ratio on NMB Bank limited.

50

40

30
1 Liquidity Ratio
20
2 Profit Margin
10

0
FY FY FY FY FY FY FY
2066/067 2067/068 2068/069 2069/070 2070/071 2071/072 2072/073

Source: Annual report of NMB bank limited

The figure shows that th profitability ratio of NMB bank limited is increasing trend.
There is no difference between the before merger and after merger in profit margin
ratio. The liquidity ratio is equally for the increase and decrease. The highest profit
margin ratio is 43.06% in fiscal year 2072/073 and the lowest profit margin is the
8.83% in fiscal year 2068/069. The highest Liquidity ratio is the 23.35 in fiscal year
2069/070 and the lowest liquidity ratio is the 6.02 in fiscal year 2066/067. The
average liquidity ratio is 13.28 and profit margin ratio is 34.55%.

4.2.6 Impact of M&A on profitability ratio on Siddhartha bank limited

The profitability ratio is calculated by using formula are below.

Net profit After tax

𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 (𝑃𝑀) =
Operating Income

Liquidity ratio is directly given in annual report

 60

Table: 4. 12
Impact of M&A on profitability ratio of Siddhartha bank limited
Fiscal year Liquidity ratio Profit Margin Ratio
2066/067 50.66 33.57
2067/068 5.61 33.34
2068/069 11.86 28.06
2069/070 9.6 30.02
2070/071 17.22 38
2071/072 8.63 38.17
2072/073 6 45.22

Source: Annual report of Siddhartha bank limited.

The table shows that the profitability ratio of Siddharha bank limited. In this banks
has higher profitability ratio in 2072/073 there is 45.22% and the lowest profit
margin ratio is 28.06% in fiscal year 2068/069.

Above the data presented in the below figure.

Figure:4.12
Impact of M&A profitability ratio of Siddhartha bank limited

60
50
40
30
1 Liquidity Ratio
20
2 Profit Margin
10
0

Source: Annual report of Siddhartha bank limited

 61

The figure shows the increasing trend of profit margin in Siddhartha bank limited.
The liquidity ratio is decreasing trend in this bank. The highest profit margin ratio is
45.22% in fiscal year 2072/073 and the lowest profit margin ratio is 28.06% in fiscal
year 2068/069. The highest liquidity ratio is 50.66 in fiscal year 2066/067 and lowest
liquidity ratio is 5.61 in fiscal year 2067/068. The average liquidity ratio is 15.65 and
profit margin ratio is 35.20%.

4.3 Impact of M&A on leverage ratio

The leverage ratio is represented the financial performance of bank and financial
institution in Nepal. When the pre- merger and post-merger impact of leverage ratio
of six sample banks. Leverage ratio is calculated by using formula.

Core Capital (Tire 1)

𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 (𝐿𝑅) =
Total book value of Assets

If LR>5% = Well Capitalized

If LR>3% = Adequately capitalized
If LR>3<4% = Under capitalized
If LR>2<3% = Significantly under capitalized
If LR<2% = Critically under capitalized

4.3.1 Impact of M&A on leverage ratio of Global IME bank limited.

The leverage ratio of Global IME bank limited over the FY 2066/067-2072/07 are
presented in the table below.
 62

Table: 4.13
Impact of M&A on Leverage ratio of Global IME bank limited.
Fiscal year Leverage ratio
2066/067 6.77
2067/068 7.32
2068/069 6.14
2069/070 6.27
2070/071 7.49
2071/072 7.82
2072/073 7.33

Source: Annual report of Global IME bank limited.

The table shows that the leverage ratio of Global IME bank limited is all are well
capitalized. In 2071/072 the leverage ratio is well capitalized. All LR are is >5%.

The data presented below in figure

Figure: 4.13
Impact of M&A on leverage ratio of Global IME bank limited.

Leverage Ratio of Global IME Bank ltd

1 Leverage Ratio of Global IME

Bank ltd

Source: Annual report of Global IME bank limited.

The figure shows that the Global IME bank limited leverage ratios are well
capitalized. The highest LR is the 7.82 % in fiscal year 2071/072 and the lowest LR is
the 6.14% in fiscal year 2068/069. And average leverage ratio is 7.02%.
 63

4.3.2 Impact of M&A on leverage ratio of NIC ASIA bank limited.

Table: 4.14
Impact of M&A on Leverage ratio of NIC ASIA bank limited
Fiscal year Leverage ratio
2066/067 6.81
2067/068 10.87
2068/069 10.58
2069/070 7.91
2070/071 8.4
2071/072 7.13
2072/073 7.59

Source: Annual report of NIC ASIA bank ltd.

The table shows that the leverage ratio of NIC ASIA bank limited. The bank has all
leverage ratios are well capitalized.

Above the data presented figure in below.

Figure: 4.14
Impact of M&A on leverage ratio of NIC ASIA bank limited

Leverage Rato of NIC ASIA Bank ltd.

12
10
8
6
4 1 Leverage Rato of NIC ASIA
2 Bank ltd.
0

Source: Annual report of NIC ASIA bank limited.

 64

The figure shows that the highest LR is the 10.87% in fiscal year 2067/068 and the
lowest LR is the 6.81% in fiscal year 2066/[Link] NIC ASIA bank limited leverage
ratio is well capitalized. All LR are >5%. And the average Leverage ratio is 8.47%.

4.3.3. Impact of M&A on leverage ratio of Machhapuchhre bank limited.

Table : 4.15
Fiscal year Leverage ratio
2066/067 5.9
2067/068 11.29
2068/069 8.92
2069/070 7.59
2070/071 6.47
2071/072 7.08
2072/073 7.75

Source: Annual report of Machhapuchhre bank limited.

The table shows that the leverage ratio of Machhapuchhre bank limired. All leverage
ratios are well capitalized.

Above the data presented figure in below.

Figure: 4.15

Leverage Ratio of Machhapuchhre Bank ltd.

12
10
8
6
4 1 Leverage Ratio of
2 Machhapuchhre Bank ltd.
0

Source: Annual report of Machhapuchhre Bank limited.

 65

The figure shows the better performance of the before merger and after merger. The
leverage ratios are well capitalized. The highest LR is the 11.29% in fiscal year
2067/068 and the lowest LR is the 5.9% in fiscal year 2066/067. And the average
Leverage ratio is 7.86%.

4.3.4 Impact of M&A on Leverage ratio of Sangrilla Dev. Bank limited.

Table: 4. 16
Impact of M&A on leverage ratio of Sangrilla Dev. Bank limited.
Fiscal year Leverage ratio
2066/067 8.6
2067/068 15.51
2068/069 11.22
2069/070 9.98
2070/071 11.16
2071/072 11.12
2072/073 11.04

Source: Annual report of Sangrila Dev. Bank limited.

The table shows that the leverage ratio of sangrila dev. Bank [Link] leverage
ratios are well capitalized.
 66

Above the data presented figure in below

Figure: 4. 16
Impact of M&A on leverage ratio of Sangrilla dev. Bank limited.

Leverage Ratio of Sangrila Dev. Bank ltd.

18
16
14
12
10
8
6 1 Leverage Ratio of Sangrila
4 Dev. Bank ltd.
2
0

Source: Annual report of Sangrila Dev. Bank limited.

The Sangrila Dev. Bank limited bank has leverage ratios are well capitalized. The
highest LR is the 15.51% in fiscal year 2067/068 and the lowest LR is the 8.6% in
fiscal year 2066/067. And the average leverage ratio is 11.23%.

4.3.5 Impact of M&A on leverage ratio of NMB bank limited.

Table: 4.17
Impact of M&A on leverage ratio of NMB bank limited.
Fiscal year Leverage ratio
2066/067 11.77
2067/068 12.16
2068/069 9.85
2069/070 6.93
2070/071 6.76
2071/072 5.73
2072/073 6.57

Source: Annual report of NMB bank limited.

 67

The table shows that the leverage ratio of NMB bank limited. All fiscal year leverage
ratios are well capitalized.

Above the data presented figure in below.

Figure:4. 17

Impact of M&A on leverage ratio of NMB Bank limited .

Leverage Ratio of NMB Bank ltd.

14
12
10
8
6
4 1 Leverage Ratio of NMB
2 Bank ltd.
0

Source: Annual report of NMB Bank limited.

The leverage ratio of NMB bank limited is well capitalized. The highest LR is the
12.16% in fiscal year 2067/068 and the lowest LR is the 5.73% in fiscal year
2071/072. And average leverage ratio is 8.54%.
 68

4.3.6 Impact of M&A on leverage ratio of Siddhartha bank limited.

Table: 4.18
Impact of M&A on leverage ratio of Siddhartha Bank limited.
Fiscal year Leverage ratio
2066/067 6.02
2067/068 6.58
2068/069 5.89
2069/070 6.24
2070/071 5.91
2071/072 5.69
2072/073 6.75

Source: Annual report of Siddhartha Bank limited.

The table shows that the leverage ratio of Siddhartha bank limited. All fiscal year
leverage ratio is well capitalized.

Above the data presented figure in below.

Figure: 4.18
Impact of M&A on leverage ratio of Siddhartha Bank limited.

Leverage Ratio of Siddhartha Bank ltd.

7
6.5
6
5.5 1 Leverage Ratio of
5 Siddhartha Bank ltd.

Source: annual report of Siddhartha bank limited.

 69

The figure shows the leverage ratio of Siddhartha bank limited. The bank has well
capitalized. The highest LR is the 6.75% in fiscal year 2072/073 and the lowest LR is
the 5.69% in fiscal year 2071/072. And the leverage ratio is 6.15%.

4.4 Impact of M&A on financial performance

The performance of banks and financial institutions analyzing by using the ROA and
ROE. Higher the ROA and ROE better performance for the bank. The six sample
banks are using the financial performance of banks.

By using the formula.

Net profit After taxes

𝑅𝑂𝐴 =
Total assets

The return on assets provides information on how efficiently a bank is being run,
Because it indicates how much profit are generated on average by each of assets.

Net profit after taxes

𝑅𝑂𝐸 =
Equity

The banks owners care about most is how much the bank is earning on their equity
investment. Total equity is the sum of preferred stock, surplus and paid in capital,
retained earning and other equity capital. There is direct relationship between the
return on assets and return on equity which measure how well the owners are doing
on their investment. The relationship determine by the equity multiplier. Higher the
ROA and Higher the ROE is better performance of bank.
 70

4.4.1 Impact of M&A on financial performance of Global IME bank limited.

Table: 4.19
Financial Performance Global IME Bank ltd
Fiscal year ROA ROE
2066/067 0.42 4.79
2067/068 1.28 13.17
2068/069 0.86 10.46
2069/070 1.15 13.9
2070/071 1.62 15.89
2071/072 1.39 13.12
2072/073 1.58 15.88

Source: Annual report of Global IME bank limited

The table shows that the financial performance of Global IME bank limited. All the
financial performance are increasing trend.

Figure: 4. 19
Financial performance of Global IME bank limited.

20

15

10 1 ROA

5 2 ROE

0
FY FY FY FY FY FY FY
2066/067 2067/068 2068/069 2069/070 2070/071 2071/072 2072/073

Source: annual report of Global IME bank limited.

The Global IME bank limited has ROE is the highly increase rather than ROA. The
highest ROA is the 1.62% in fiscal year 2070/071 and the lowest ROA is the 042% in
fiscal year 2066/[Link] bank has after the merge than after starting increase the
 71

financial performance. It’s impact is positive. From the analyzed the bank in strong,
it is most profitability and well capitalized. The highest ROE is the 15.89% in fiscal
year 2070/071 and the lowest is the 4.79% in fiscal year 2066/067. The average ROA
is 1.19% and average ROE is 12.46%.

4.4.2 Impact of M&A on financial performance of NIC ASIA bank limited.

Table: 4.20
Impact of M&A on financial performance of NIC ASIA Bank ltd.
Fiscal year ROA ROE
2066/067 2.21 25.49
2067/068 1.18 9.74
2068/069 0.96 7.92
2069/070 1.34 14.63
2070/071 1.65 17.065
2071/072 1.12 12.37
2072/073 1.33 14.45

Source: Annual report of NIC ASIA bank limited.

The table shows that the financial performance of NIC ASIA bank limited. All fiscal
year performance are increasing trend. The highest Financial performance is the
17.065% in fiscal year 2070/071.
 72

Figure: 4. 20
Financial performance of NIC ASIA bank limited.

30

25

20

15 1 ROA

10 2 ROE

0
FY FY FY FY FY FY FY
2066/067 2067/068 2068/069 2069/070 2070/071 2071/072 2072/073

Source: Annual report of NIC ASIA bank limited.

The ROE is better performer of this bank. It is very highly increased. After merger
ROE is the going on increasing trend. The ROA is not impact before and after merger
ROA is constant growth. The highest ROA is the 2.21% in fiscal year 2066/067 and
the lowest is the 0.96 in fiscal year 2068/069. The highest ROE is the 17.065% in
fiscal year 2070/071 and the lowest ROE is the 7.92% in fiscal year 2068/069. And
the average ROA is 1.40% and average ROE is 14.52%.
 73

4.4.3 Impact of M&A on financial performance of Machhapuchhre bank

limited
Table: 4.21
Financial performance of Machhapuchhre bank limited.
Fiscal year ROA ROE
2066/067 0.35 4.13
2067/068 0.053 0.5
2068/069 0.15 1.44
2069/070 0.49 5.31
2070/071 1.11 14.05
2071/072 1.26 15.44
2072/073 1.51 16.82

Source: Annual report of Machhapuchhre Bank limited.

The table shows the increasing trend of financial performance in Machhpuchhre bank
limited. The higher finncial performance is the 16.82% in fiscal year 2072/073.

Figure: 4.21
Financial performance of Machhapuchhre bank limited.

18
16
14
12
10
8 1 ROA

6 2 ROE

4
2
0
FY FY FY FY FY FY FY
2066/067 2067/068 2068/069 2069/070 2070/071 2071/072 2072/073

Source: Annual report of Machhapuchhre bank limited.

 74

The figure shows that the financial performance of Machhapuchhre bank limited. The
highest ROA is the 1.51% in fiscal year 2072/073 and the lowest is the 0.053% in
fiscal year 2067/068. The highest ROE is the 16.82% in fiscal year 2072/073 and the
lowest is the 0.5% in fiscal year 2067/[Link] financial performance of this bank is
after merger that after growth of both ROA and ROE. Before the time of merger there
is no performance of the banks .when the time or merged that after increasing trend of
financial performance. And the average ROA is 0.70% and average ROE is 8.24%.

4.4.4 Impact of M&A on financial performance of Sangrilla Dev. Bank limited.

Table: 4.22
Financial Performance of Sangrila Dev. Bank ltd.
Fiscal year ROA ROE
2066/067 0.83 9.36
2067/068 1.36 8.7
2068/069 1.58 14.64
2069/070 2.32 22.66
2070/071 0.99 8.68
2071/072 1.94 17.27
2072/073 1.8 15.95

Source: Annual report of Sangrila dev. Bank limited.

The table shows that the financial performance of Sangrilla Dev. Bank limited. The
bank has ROA & ROE both increasing trend in after merger. The highest financial
performance is the 22.66% in fiscal year 2069/070.
 75

Figure: : 4.22
Financial performance of Sangrila dev. Bank limited.

25

20

15

10 1 ROA
5 2 ROE
0

Source: annual report of Sangrila dev. Bank limited.

The figure shows that the financial performance of Sangrilla Dev. Bank limited. The
highest ROA is the 2.32% in fiscal year 2069/070 and the lowest ROA is the 0.83% in
fiscal year 2066/067. The highest ROE is the 22.66% in fiscal year 2069/070 and the
lowest is the 8.68% in fiscal year 2070/071. Before merger the ROE is the better
performer. After the merger ROE is the decrease. At the time of merged period also
decrease the ROE than after increasing trend. In the case of ROA is the before and
after merger constant growth. And average ROA is 1.55% and average ROE is
13.89%.
 76

4.4.5 Impact of M&A on financial performance of NMB bank limited.

Table: 4.23
Financial performance of NMB Bank Ltd.
Fiscal year ROA ROE
2066/067 1.21 8.83
2067/068 1.39 10.02
2068/069 0.28 2.31
2069/070 1.43 14.87
2070/071 1.36 14.57
2071/072 1.21 17.96
2072/073 14.94 16.25

Source: Annual report of NMB bank limited.

The table shows that the financial performance of NMB bank limited. The bank has
increasing trend in financial performance. The highest financial performance is the
17.96% in fiscal year 2071/072.
Figure: 4.23
Financial performance of the NMB bank limited .

20
18
16
14
12
10 1 ROA
8
6 1 ROE
4
2
0
FY FY FY FY FY FY FY
2066/067 2067/068 2068/069 2069/070 2070/071 2071/072 2072/073

Source: Annual report of NMB Bank limited.

The figure shows that The financial performance of NMB bank limited is better
performance. Before the merger highly increased the ROE and at the time of merged
also increased the ROE. The merged period of FY 2072/073 the ROA is unexpected
 77

increased. The highest ROA is the 14.94% in fiscal year 2072/073 and lowest ROA is
the 028% in fiscal year 2068/069. The highest ROE is the 17.96% in fiscal year
2071/072 and lowest is the 2.31% in fiscal year 2068/069. And the average ROA is
3.12% and average ROE is 12.12%.

4.4.6 Impact of M&A on financial performance of Siddhartha bank limited.

Table: 4.24
Financial performance of Siddhartha bank limited.
Fiscal year ROA ROE
2066/067 1.06 15.02
2067/068 1.28 15.66
2068/069 1.11 15.11
2069/070 1.43 19.29
2070/071 1.74 23.35
2071/072 1.51 20.48
2072/073 1.69 20.11

Source: Annual report of Siddhartha bank limited

The table shows that the financial performance of Siddhartha bank limited. The banks
performance is good. It is going on increasing trend. The highest financial
performance is the 23.35% in fiscal year 2071/072.
 78

Figure: 4.24
Financial performance of Siddhartha bank limited.

25

20

15

1 ROA
10 2 ROE

0
FY FY FY FY FY FY FY
2066/067 2067/068 2068/069 2069/070 2070/071 2071/072 2072/073

Source: Annual report of Siddhartha bank limited.

The figure shows that the financial performance of Siddhartha bank limited. The
highest ROA is the 1.74% in fiscal year 2070/071 and the lowest is the1.06% in fiscal
year 2066/067. The highest ROE is the 23.35% in fiscal year 2070/071 and the lowest
is 15.02% in fiscal year 2066/067. The ROA is the constant increasing trend and ROE
is the highly increased. The Siddhartha bank financial performance is better to all.
And average ROA is 1.40% and average ROE is 18.43%.

4.5 Findings

The purpose of this thesis is to research the impact of merger and acquisition trend in
Nepalese banks and financial instiutions. This chapter entails the data presentation,
analysis and interpretation of the findings of the thesis. The excel software was used
to perform the analysis. Descriptive and regression analysis has been utilized to
analyze the findings in this study. Data was collected from audited financial reported
for the selected banks and financial institutions. From the research of merger and
 79

acquisition, its impact on Nepalese BFs reaction of the six banks and financial
institutions following major findings.

1) The Global IME bank limited is merged with Lord Buddha finance limited and
IME finance Limited in 3/25/2069. After merging the Global IME bank
limited different time period of FY 2066/067 – FY 2072/073.
a) The EPS are in rupees: 4.95, 14.06, 11.79, 16.15, 19.57, 15.58 &
19.33. And average EPS is Rs. 14.49. The MVPS are rupee 260, 209,
160, 432, 640, 479 & 515. And average MVPS is Rs. 385. The P/E
ratio in rupees: 52.47, 14.86, 13.57, 26.74, 32.70, 30.74 & 26.64. And
average P/E ratio is [Link] Global IME bank has positive
relationship between the M&A when the time of merged that after
EPS, MVPS & P/E ratio are increasing trend.
b) The Global IME bank limited profitability ratio is also highly increased
when the time of merger. Increase net profit after taxes and total
operating income. But some indicators are not improved satisfactory
due to economic recession, increase in inflation high liquidity and
some other problems. And average profitability ratio is 28.13%. And
average liquidity ratio is 31.43%.
c) The average leverage ratio of Global IME bank limited is well
capitalized i.e. 7.02%. There is no impact of before and after merger.
d) The financial performance of Global IME bank limited is constant
growth. The average ROA is 1.19% and average ROE is 12.46%.

2) NIC ASIA bank limited is Merger with Bank of Asia In3/6/2070. All data are
input the FY 2066/067- FY 2072/073.
a) After merger the bank increase the EPS, MVPS & P/E ratio. The
average EPS is Rs. 24.32, average MVPS is Rs. 518 and average P/E
ratio is [Link] the merger period EPS is highly increase. EPS
also highly increase in merged period.
b) In compare to before merger and after the profitability ratio is also
increasing trend after merger. But some profitability ratio is not
improved satisfactory due to the recession in economy of the nation,
 80

increase in inflation high liquidity and some other market problem.

The average profitability ratio is 35.91% and liquidity ratio is 19.68.
c) The average leverage ratio is well capitalized i.e 8.47%.
d) The financial performance of this bank is increasing trend after merger.
The ROE in increasing trend and ROA is constant growth. And
average ROA is 1.40% and average ROE is 14.52%.

3) The Machhapucchre bank limited is merged with standard finance limited in

3/25/2069. The bank has all indicators are increasing trend. But some
indicators are not satisfactory due to high liquidity.
a) The EPS & MVPS is increasing trend after merger. There is no
significant between before and after merger. In the case of P/E ratio
there is difference between before and after merger. After merger the
P/E ratio is decreasing trend. And the average EPS is Rs. 11.23,
average MVPS is Rs. 363.57 & average P/E ratio is 69.54.
b) The profitability ratio is highly increased rather than before merger.
After merger there is positive impact. After merger the liquidity ratio is
decrease than the profit margin is increase. Liquidity ratio is increased
the bad for the banks. The average profitability ratio is 19.77% and
liquidity ratio is 9.99.
c) After merger the bank the leverage ratio is increased. There is positive
relationship of the merger. The average leverage ratio is well
capitalized i.e. 7.86%.
d) The financial performance of this bank is highly increased the ROA &
ROE. After the merger the bank performance is better performer. The
average ROA is 0.70% and average ROE is 8.24%.

4) The Sangrilla Dev bank limited is merged with Bageshwori Bikas bank
limited in 3/29/2071.
a) The bank has EPS decreasing trend after merger before merger this
bank has EPS is increased. The relationship between the merged is
negative. The MVPS is increasing trend of the merger. In the case of
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P/E ratio is also increasing trend of after merger. The average EPS is
Rs. 28.42, average MVPS is Rs. 296.57 & average P/E ratio is 11.54.
b) The profitability ratio of this bank is highly increased due to decrease
of liquidity ratio. The average profitability ratio is 32.91% and
liquidity ratio is 29.69.
c) The average leverage ratio of this bank is well capitalized i.e. 11.23%.
d) The financial performance of this bank is increasing trend of after
merger. When the time of merged the bank has ROA & ROE is
decreased than after increasing. The average ROA is 1.55% & average
ROE is 13.89%.

5) The NMB Bank limited is merged with Pathibhara Bikas bank limited,
Bhrikuti Bikas bank limited, Clean Energy Development Bank limited and
Predential finance company limited in 7/1/2072.
a) The EPS, MVPS and P/E ratio is increasing trend. After merger the
indictors are highly increased. The average EPS is Rs. 16.53, average
MVPS is Rs. 393.43 & average P/E ratio is 28.96.
b) The profitability ratio of this bank is increasing trend before and after
merger. The liquidity ratio is decreasing trend. It is the good news for
the banks. The average profotability ratio is 34.55% & average
liquidity ratio is 13.28.
c) The average leverage ratio of this bank is well capitalized i.e. 8.54%.
Some indicators are not satisfactory due to inflation.
d) The financial performance of this bank is highly increased after merger
rather than before merger. The time of merged period unexpected
increased by ROA. The average ROA is 3.12% & average ROE is
12.12%.

6) The Siddhartha bank limited is merged with Business universal Development

bank limited in 3/7/2073.
a) The EPS, MVPS & P/E ratio are increasing trend of merger. Due to
increase the all indicators decrease the liquidity ratio. The average EPS
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is Rs. 29.99, average MVPS is Rs. 530.86 % average P/E ratio is

17.23.
b) The profitability ratio is also going on increasing trend. The average
profitability ratio is 35.20% & liquidity ratio is 16.65.
c) The average leverage ratio of this bank is well capitalized i.e. 6.15%.
Some years LR not satisfactory due to increase in inflation and
increase liquidity.
d) The financial performance of increasing trend. Before and after merger
the ROA & ROE is increasing. The average ROA is the 1.40% &
average ROE is 18.43%.
 83

CHAPTER V

CONCLUSIONS

5.1 Summary

The main purpose of this study is to impact of M&A in financial performance in

Nepalese financial institutions. In order to achieve this purpose, this study raised what
is the impact of M&A in shareholders’ value, what is the impact of profitability ratio,
what is the impact of leverage ratio, what is the impact of liquidity ratio, and financial
performance are the research questions. They were consolidated under to examine the
impact of M&A shareholders’ value, to examine the impact of M&A on profitability
ratio, to examine the leverage ratio, to examine the financial performance are the
specific objectives.

This study uses the financial tools and techniques there are earning per share, Market
Value per share, Price earning ratio, profit margin ratio, leverage ratio, liquidity ratio,
ROA & ROE in order to attain research objectives. To this end, data obtained from
internet and through the annual reports of six sample banks namely Global IME bank
ltd. NIC Asia Bank ltd, Machhapuchhre bank ltd, Sangrila dev. Bank ltd, NMB Bank
ltd & Siddhartha bank ltd.

The analysis of the data the shareholders’ value (EPS) is the NIC Asia bank limited is
higher than all six sample banks there is 47.41 in the time of merger in 2069/070. It
shows the trend of merger and acquisition is rapidly increasing day by day. The
profitability ratio of the Siddhartha bank limited is the higher than all sample banks
there is 45.22 in fiscal year in the merged time 2072/073. The leverage ratio of
Sangrila dev. Bank limited is the higher than all sample banks there is 15.51 in the
before merger fiscal year 2067/068. The liquidity ratio is the Siddhartha bank limited
is lowest then other all sample banks there is 5.61 in fiscal year 2067/068 before the
merger period. The liquidity ratio minimum is the best for the every bank. The
financial performance of the better performance in the case of ROA is NMB Bank
limited there is 14.94 in fiscal year 2072/073. The financial performance of the better
performer in the case of ROE is the NIC ASIA bank limited there is 25.49 in fiscal
 84

year 2066/067 it is the before merger time. The sample banks have improved that
performance after merging is increasing trend.

5.2 Conclusions

The findings of the study present valuable insight into the research questions raised by
this study the impact of merge and acquisitions on Nepalese banks and financial
institutions (BFIs). The sample banks were NIC ASIA Bank ltd., Global IME bank
ltd, Machhapuchhre bank ltd., Sangrilla Dev. Bank ltd., NMB Bank ltd., & Siddhartha
bank ltd. The Global IME bank ltd. has before merged EPS, MVPS, & P/E ratio are
less than standard average and after merger EPS, MVPS, & P/E are higher than
standard average. Global IME bank limited Liquidity ratio, Profit margin ratio,
Leverage ratio, ROA, & ROE are higher than standard average after merging with
different BFIs in different time period. The NIC ASIA bank limited EPS & MVPS are
higher than standard average after merger and P/E ratio is fluctuating in comparision
to standard average. The Liquidity ratio & Profit margin ratio are higher thn standard
average after merger. Leverage ratio & ROA are lower than standard average the
ROE is higher than standard average. Machhapuchhre bank limited EPS, MVPS,
Profit margin ratios. ROA & ROE are higher than standard average after merger. And
P/E ratio & Leverage ratio are lower than standard average. Liquidity ratio is
fluctuating the after merger. The Sangrilla Dev. Bank limited is merged with
Bageshori Development Bank ltd. This bank MVPS, P/E ratio, Liquidity ratio, profit
margin ratio, ROA & ROE are higher than after merger. And EPS & Leverage ratio
are lower than standard average after merged. The NMB Bank limited EPS & Profit
margin ratios are higher than standard average. MVPS, P/E ratio and ROE are
fluctuating and Liquidity ratio, leverage ratio & ROA are lower than standard average
after merged. Some indicators are not increase in satisfactory due to inflation. The
Siddhartha bank limited all indictors are higher than standard average after merging
with Business universal Development bank limited.

The research conclude that the sample banks are producing more return to their
shareholders after merger and also can return more in coming days. The Nepal Rastra
Bank has successfully implemented the merger bylaws policy in Nepali BFIs and
 85

transformed the weak and unstable financial institutions into strong, stable and
creditable financial institutions.

The initial merger was forceful. It took certain time to Nepalese BFIs to understand,
analyzed and implementation this policy. Gradually, BFIs took this policy in a
positive way and as a golden opportunity to enhance their performance and be strong
in the competitive market. It is difficult to analyze exactly whether the impact is
positive or negative. After the merger process, the employee of previous BFIs must be
continued. The branch officers and Automated Tailoring Machine (ATM)s must not
be cut off but can be replace as required. Through the merger process, the BFIs should
increase their overall performance regarding share capital, Balance Sheet Volume,
Net Profit after Tax, Return on Equity & Return on Assets.

Merger and Acquisition leads to efficient use of shared resources and exploitation of
the learning and experience due to increased scale of production. After going on
merger and acquisition banks and financial institutions are must strong in financial
capability, human resources and technology and area coverage. Thus, banks and
financial institution investment are grown-up highly with coverage on more and more
diverted are and they earn higher profit. So banks are currently secure from crisis.

It is beneficial for banks to minimize cost and it is more beneficial for shareholders
and investor also. A lot of speculations have been going on in the financial sector
whether the merger policy will be fruitful to strengthen the Nepalese bank and
financial institutions. Some of positive signals have been visible in financial
institutions that must of financial institutions including commercial banks,
Development Banks and finance companies have been merged. So for and few BFIs
are in pipelines and some of intent it gives the positive way for Nepalese banks and
financial institution. The main difficulties faced by the banks in terms of merger are
swap ratio, composition of BOD, management team structure, the socio-culture
factors like cultural complexity, informal relationship, nepotism, favoritism, corporate
cultural clash, position issues, managerial level, Fear of losing the current job,
adjustment problems, Socialization and so on. Some of the Chief Executive Officer
(CEO)s, Branch Manager (BM)s and other top level officers of pre-merger banks can
 86

leave the job after merging the banks by not gaining the previous level position in the
bank after merging.

Nepal Rastra Bank has successfully implemented its merger and Acquisition policy,
Nepalese BFIs are interested and exercising this policy day by day. BFIs are taking
this tool as a golden opportunity to enhance their poor performance and become a
strong, branded and competitive in the market. However, this policy is not an one and
only solution to improve the poor BFIs.
 87

5.3 Implications

This study also has several implications pointing to interesting avenues for future
research. The author implementation some suggestions for further research as there
are many areas will need to be discovered in relation to the merger and acquisition in
Nepal and its impact on author implements future researches to adopt better research
techniques and method and cover. The research can be helpful for Nepal Rastra Bank
and BFIs of Nepal on develop new policy and strategy in future. The researcher futher
suggests the followings.
1. Some of the banks indictors are fluctuating conditdions. So, after
merger and acquisition of BFIs, Nepal Rastra Bank also should watch,
observe and follow those BFIs regularly either those BFIs are securing
good result or not after the merger exercise.
2. Related institutions should focus on developing strong controlling,
regulatory and evaluating policies and mechanism should be formed to
cover all the financial sector.
3. P/E ratio of the MBL has lower than standard average after the merger
of the Bank. Management of the Bank should focus on Market price.
Internal strength and strong Management team will trust by the
customer and that is why MVPS will rose-up and P/E ratio will go
higher.
4. EPS of the Sangrilla Dev. Bank has lower than standard average. Bank
gradually improving such a problem. To balance the EPS Bank should
attention towards increase the net income and reduction of net
expenses items.
5. Banks should intensify training and retraining programmes for all staff,
particularly the management efficiency.
6. Before merger and after merger of commercial bank is fluctuating
situation in the given year.

7. This shows that commercial bank force to take the bank and financial
institutions under them for raising their paid up capital.
 88

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