THE IMPACT OF MERGERS AND ACQUISITIONS ON

THE OPERATIONAL PERFORMANCE OF

COMMERCIAL BANKS IN NEPAL

Amit Tandukar

Exam Roll No: 15570004

P.U. Registration No: 2015-2-57-0004

A Graduate Research Project Report Submitted to Ace Institute of

Management Pokhara University

Submitted for the degree of

Master of Business Administration (MBA)

Kathmandu

November 2018
 i

ACKNOWLEDGEMENT

The research entitled “The Impact of mergers and acquisitions on the Operational

Performance of Commercial Banks of Nepal” has been prepared for the partial

fulfillment of degree in Masters in Business Administration.

It is my immense pleasure to complete this research work under the guidance and

supervision of Mr. Kiran Thapa. I extend my gratitude for his guidance, motivation

and support throughout my thesis and it couldn't have been completed without his

constant encouragement, guidance and valuable supervision at every stage of my

work.

I am equally grateful to Mr. Ajay Shah whose help has been instrumental in the

realization of this report. This graduate research report could not have been

completed without his constant encouragement, patient guidance and valuable

supervision at every stage of my work. My sincere appreciation also goes to Ace

Institute of Management and Pokhara University for providing valuable opportunities

and platform for conducting this research.

Lastly, I like to express my thanks to all those who have helped me directly or

indirectly in different point of time to complete this research work.

Sincerely,

Amit Tandukar

November,2018
 ii

CERTIFICATE OF AUTHORSHIP

I hereby declare that this submission is my own work. To the best of my knowledge

and belief, it neither contain any materials previously published or written by other

authors nor materials, which to a substantial extent has been accepted for the award

of any other degree of university or other institution of higher learning.

I also certify that the thesis has been written by me. Any help that I received in my

research work and the preparation of the thesis itself has been acknowledged. In

addition, I certify that all information sources and literature used are indicated in the

thesis in an appropriate manner.

………………………….……

Amit Tandukar

Exam Roll No. 15570004

P.U. Registration No. 2015-2-57-0004

Date: 2018/11/25
 iii

APPROVAL SHEET

Recommendation for Approval

This GRP report prepared and submitted by Amit Tandukar in partial fulfillment of
the requirements for the degree of Master of Business Administration has been
supervised by me and is recommended for acceptance.

Kiran Thapa
Date:
Acceptance of the External Examiner
I approve the GRP submitted by Amit Tandukar. The grade sheet has been
submitted to the Dean, School of Business, and Pokhara University through the
college on a separate evaluation sheet.

External Evaluator
Date:
Viva Examination
The candidate has successfully defended the GRP. We recommend it for
acceptance. The grade sheet has been submitted to the Dean, Pokhara University
through the college on a separate evaluation sheet.

External Examiner……………….
GRP Advisor ………………………
Other members……………………
Date:……………………
 iv

TABLE OF CONTENT

ACKNOWLEDGEMENT..............................................................................................i
CERTIFICATE OF AUTHORSHIP..............................................................................ii
APPROVAL SHEET....................................................................................................iii
TABLE OF CONTENT................................................................................................iv
LIST OF TABLES.........................................................................................................v
LIST OF FIGURES......................................................................................................vi
ABBREVIATIONS.....................................................................................................vii
EXECUTIVE SUMMARY........................................................................................viii
CHAPTER I...................................................................................................................1
INTRODUCTION..........................................................................................................1
Background of the Study............................................................................................1
Statement of the Problem...........................................................................................4
Significance of the Study............................................................................................5
Objectives of the Study..............................................................................................7
Research Hypothesis..................................................................................................7
Limitations of Study...................................................................................................7
Operational Definitions..............................................................................................8
Organization of Study.................................................................................................9
CHAPTER II................................................................................................................10
LITERATURE REVIEW AND THEORETICAL FRAMEWORK...........................10
Literature Review.........................................................................................................10
Research Gap............................................................................................................20
Theoretical Framework............................................................................................21
CHAPTER III...............................................................................................................24
RESEARCH METHODOLOGY.................................................................................24
Research Design and Plan........................................................................................24
Population and Sample Size.....................................................................................24
Data Collection.........................................................................................................25
Instrumentation of Data............................................................................................25
Validity and reliability..............................................................................................25
Data Analysis Tools and Methods............................................................................26
 v

Model Specification..................................................................................................26
CHAPTER IV..............................................................................................................27
RESULT AND DISCUSSION....................................................................................27
Analysis of Secondary data......................................................................................27
Statistical Analysis...................................................................................................32
CHAPTER V................................................................................................................45
SUMMARY AND CONCLUSION.............................................................................45
Summary...................................................................................................................45
Conclusion................................................................................................................46
Recommendations....................................................................................................47
Scope for future research..........................................................................................47
References....................................................................................................................49
 vi

LIST OF TABLES

Table 3. 1: List of sample banks.............................................................................................25

Y

Table 4. 1: Return on assets of commercial bank before and after the merger.......................27

Table 4. 2: Return on Equity of commercial bank before and after the merger......................28

Table 4. 3: Operating profit margin of commercial bank before and after the merger...........29

Table 4. 4: Net Profit Margin of commercial bank before and after the merger.....................29

Table 4. 5: Earning Yield of commercial bank before and after the merger...........................30

Table 4. 6: Earnings per share of commercial bank before and after the merger...................31

Table 4. 7: Paired sample t-test of pre and post-merger operating profit margin..................32

Table 4. 8: Paired sample t-test of pre and post-merger Net Profit........................................33

Table 4. 9: Paired sample t-test of pre and post-merger ROE................................................33

Table 4. 10: Paired sample t-test of pre and post earning yield..............................................34

Table 4. 11: Paired sample t-test of pre and post ROA...........................................................34

Table 4. 12: Paired sample t-test of pre and post earning per share......................................35

Table 4. 13: Paired sample t-test of pre and post-merger operating profit margin................35

Table 4. 14: Paired sample t-test of pre and post-merger Net Profit Margin.........................36

Table 4. 15: Paired sample t-test of pre and post-merger Earning per share.........................37

Table 4. 16: Paired sample t-test of pre and post-merger Earning Yield................................38
 vii

Table 4. 17: Paired sample t-test of pre and post-merger return on asset..............................39

Table 4. 18: Paired sample t-test of pre and post-merger return on equity............................40

Table 4. 19: Correlation among variables..............................................................................41

Table 4. 20: Regression among variables...............................................................................42

 viii

LIST OF FIGURES

YFigure 2. 2: Conceptual framework................................................................................

 ix

ABBREVIATIONS
MBL Machhapuchre Bank Limited

PBL Prabhu Bank Limited

NBBL Nepal Bangladesh Bank

GBL Global Bank Limited

NIC Nepal Industrial & Commercial Asia Bank

OP Operational performance

OPM Operating Profit Margin

NPM Net Profit margin

ROA Return on Assets

ROE Return on Equity

EY Earning Yield

EPS Earning per share

 x

EXECUTIVE SUMMARY

Corporate mergers and acquisitions have become popular across the globe due to
globalization, liberalization, technological development and intensely competitive
business environment. Merger is an integration of two or more firms into one and firm
agrees to share the control of joint business with other owner. An acquisition is a
single or multiple transactions whereby a company purchase the assets or shares of
another company with the intention of obtaining its control.

Nepal Rastra Bank, supervisory and regulatory body of all the BFIs issued merger by-
laws in May 2011. Before that, merger and acquisitions was an entirely alien concept
to the banking and financial institutions of Nepal since there were no separate acts and
decree for a merger implementation. The objective of the merger by-laws was to
strengthen the BFIs position and performance by reducing the number of institutions.
With the arrival of by-laws, bank and financial institutions started merging and
acquisition process. Nepal Rastra Bank, the central monetary authority then through
monetary policy 2015/16 brought a provision that required banks and financial
institutions to raise their minimum paid-up capital to a whopping Rs 8 billion.
To meet this capital requirement of 8 billion mergers and acquisitions became
essential. Due to this, merger transactions are increasing in Nepal over the few years.

Since the data used for the study secondary data, the study is all about comparing the
pre and post financial health of selected bank with the help of annual report being
provided by various institutions and organizations. The research is following the
descriptive design having quantitative data and their analysis. We have used some
popular means of statistical tools such as mean, standard deviation, graph and charts, t
test, etc. For these tools we have used software like SPSS 16.0, MS- excel, MS-word,
etc.

The major recommendations to improve operational performance have been

highlighted. The study observed a positive relationship between return on equity and
operational performance. Therefore merged bank should focus on return on equity in
order to improve operational performance. The study also observed a positive
relationship between return on asset and operational performance. Therefore merged
bank should focus on return on asset in order to improve operational performance.
 1

CHAPTER I

INTRODUCTION
Background of the Study

Mergers and acquisitions are the processes of combining two companies into one, at a
fundamental level. The goal of this process is to stabilize both companies and building
a steady relationship between them. Mergers occur when two companies join forces.
Two businesses will merge when they need to increase their sales, efficiency and
capability.  Acquisitions occur when one company buys another company and folds it
into its operations. Depending on the conditions the acquired company is under an
acquisition, the nature of acquisitions may either be friendly or hostile. Mergers and
acquisitions have become popular across the globe due to globalization, liberalization,
technological development and intensely competitive business environment.

Merger and Acquisition around the world have a success rate of 30%-50% according
to a study. Success rate of merger is even lower in the case of Nepal. The main reason
behind this is the lack sufficient corporate experience in mergers and acquisitions
among the banks and financial institutions in Nepal. It is not necessary that merger
and acquisition always lead to success or to failure. It is very crucial to determine a
proper merger expansion strategy before undergoing the process of merger.

Stones (1930) states, in the context of banking, two banks merged and operated as a
single bank or operated by a single bank is called merger. International mergers and
acquisitions are among the key corporate strategies multinational corporations
(MNCs) use to expand, diversify, or consolidate their businesses. 2006 was a record
year for acquisitions worldwide when, for the first time, the annual value of these
transactions exceeded US$ 4 trillion, and cross-border acquisitions alone amounted to
a record high of US$ 1.3 trillion. This trend continues in 2007, given that the
transaction value of global acquisitions in the first three months of the year reached
US$ 1.13 trillion, setting up a record for the busiest first quarter in acquisition history.
Investor support for large acquisitions and a desire to trump rivals in consolidating
markets have led chief executives to strike big transactions so far in 2014, raising
year-to-date global deal volumes to their highest level in seven years.
 2

Otherwise, it may jeopardize the present situation and even worsen the situation of
Nepalese Banks. We cannot blindly agree that the Nepalese Banking Sector problem
will be best addressed by the M&A strategy. The government should just not rely on
mergers and acquisitions for addressing the problem of banking sector. It should
rather bring appropriate fiscal policies and monetary policies to settle the problem. To
consolidate the financial system, along with the merger process among the BFIs,
acquisition activities have also been encouraged as per the provision of Acquisition
Bylaws (Nepal Rastra Bank – July 2014).

Corporate mergers and acquisitions have become popular across the globe due to
globalization, liberalization, technological development and intensely competitive
business environment. Merger is an integration of two or more firms into one and firm
agrees to share the control of joint business with other owner. An acquisition is a
single or multiple transactions whereby a company purchase the assets or shares of
another company with the intention of obtaining its control.

Nepal Rastra Bank, supervisory and regulatory body of all the BFIs has issued merger
by-laws in May 2011. Before that, merger and acquisitions was an entirely alien
concept to the banking and financial institutions of Nepal since there were no separate
acts and decree for a merger implementation. The objective of the merger by-laws
was to strengthen the BFIs position and performance by reducing the number of
institutions. With the arrival of by-laws, bank and financial institutions started
merging and acquisition process. Nepal Rastra Bank, the central monetary authority
then through monetary policy 2015/16 brought a provision that required banks and
financial institutions to raise their minimum paid-up capital to a whopping Rs 8
billion. To meet this capital requirement of 8 billion mergers and acquisitions became
essential. Due to this, merger transactions are increasing in Nepal over the few years.

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, BAFIA2063
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.
 3

In the last two decades, government following the economic liberalization policies has
encouraged the growth of joint venture business in Nepal especially in initiating the
growth of number of joint venture banks in Nepal. As Nepalese financial market is
characterized by low volume of turnover, high interest rate in lending, high interest
rate spread, inefficient management, lack of practice of project financing, problem of
inadequate working fund and unhealthy competition between the companies in
finance sector may compel the process of merger between the companies in operation
in order to overcome these problem. Merger becomes an urgent need, as Nepal had
already become a member of WTO. Beside the rise in capital base for banking and
financial institutions has also backed up the need for merger in Nepal.

In the context of Nepal, Chapagain (2011) revealed that 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
complexities and problems. The financial indicator had indicated that the Nepalese
financial sector was weak, vulnerable and, at the verge of a collapse. Meanwhile, due
attention is also given to avoid possible contraction in access to finance and
concentration of business risks as a result of the merger process.

According to Shrestha (2012), the concept of M&A was an entirely new thing to the
Banking and Financial Institutions (BFIs) of Nepal when the Nepal Rastra 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 decree for a merger implementation.
The objective 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). Merger transactions are increasing in Nepal
over the few years. Especially with the Central Bank of Nepal’s mandate for the
merger of Bank and Financial Institutions, numbers of Mergers happening in Nepal is
increasing day by day.
 4

Statement of the Problem

The success or failure of M&A can be attributed in part to the behavior of the affected
employees (Appelbaum et al., 2007). This is because the advent of M&A in the
banking sector have created structural changes at the organizational level thereby
leading to restructuring and downsizing processes in order to cope with the dynamic
pressures of globalization and the importance of managing people at work and in
particular planning and managing of their careers (Appelbaum et al., 2007). Arguably,
people are the most valuable resource in contemporary organizations, and providing
them with a long term stable career is a win-win situation for both organizations and
their employees. Thus, when employees are not certain about their career due to
constant change, they tend to experience increased stress, perceived uncertainty and
absenteeism, significant decline in job satisfaction, commitment as well as negative
perception of the organization’s trustworthiness (Schweiger & De-Nisi, 1991).

Mergers and acquisition is a corporate finance strategy has been considered to be one
of the best strategies for firms that desire growth and increased profitability. A
number of studies conducted on accounting data to measure the effect of takeover on
operating performance in long and short run argue that any benefit arising from
acquisition will eventually be reflected on the company’s financial performance
records (Tuch & O’Sullivan, 2007). According to Pilloff & Santomero (1997), there is
little empirical evidence of mergers achieving growth or other important performance
gains. Also, evidence supporting merger and acquisitions to achieve costs saving and
efficiency gains is sparse (Kwan, 1999). Towards this end, Beitel et al. (2003) found
no gain effect due to mergers and acquisitions on the performance of employees.

Ayorinde & Abdul-Ramon (2012) showed that post merger and acquisition period
was more financially improved than the pre merger and acquisition period. The study
recommended that banks should be more proactive in driving for profit for enhanced
financial performance to reap the benefit of mergers and acquisition bid in the Nigeria
banking sector. Abdul-Rahman & Ayorinde (2013) revealed that there is a strong
relationship between bank performance and merger (strategic decisions) – asset
profile, capital structure, operating efficiency, liquidity risk and credit risk. That
strategic decision has positively influenced bank performance. That on average, bank
consolidation resulted into improved performance.
 5

When a bank and financial institution merged with another bank and financial
institutions or purchased by the BFIs who is profitable then it is advantageous to both
the concerned FIs that is why now a day all BFIs are paying attention in corporate
reorganization in the shape of M&A. The question that arises is whether all bank and
financial institutions merged or purchased at the end result in shareholders capital and
operational performance? In some Nepalese BFIs shareholders wealth is reduced after
it will be merged. It has been found in the studies that the Nepalese Banking Industry
had a merger success rate of only 15% which is a great sign of danger for the
stakeholders of the bank. In this paper, we are trying to identify the relevance of these
mergers in the context of Nepalese Banking Industry. We are here to find out the
answer of are these mergers and acquisitions giving any positive outcomes to the
industry or the industry is going on the same track as earlier? We are also trying to
find out what is the present operating performance of the banks and financial
institution that have been merged in Nepal? Are these banks really performing well
after the merger or there is negative impact of merger in the operating performance of
the institution? This paper studies the impact of mergers on the operating
performance of the selected commercial banks by examining some pre and post-
merger financial ratios.

This study therefore deals with the following issues in the context of Nepalese banks.

 Is merger solution for increase in operational performance in Nepalese

commercial banks?
 Is there any difference between the level of pre and post operational performance
of merged banks?
 Has the mergers been successful in improving the operational performance in
Nepalese commercial banks?

Significance of the Study

There are various studies conducted by various authors on merger and acquisition but
most of these studies center on either the effects of merger and acquisition on
operational performance of banks. Also it is only through such a study that the effects
of merger and acquisition on the operational performance will be made manifest as
well as the effects caused by the development to the banks and the Nepalese economy
at large.
 6

Aliyu (2013) revealed that the operational performance is the most important factors
influential organizational efficiency. All facilities organizational will go to waste in
lack of operational performance to utilize these facilities efficiently. Every superior in
the organization must satisfy the employees and motivate its subordinates for the right
types of behavior. The presentation of human beings in the organization is dependent
on the capability in the operational performance. Operational performance measured
by Job satisfaction and security of the employees is a helpful instrument in the hands
of management in exciting the workforce. Job satisfaction and security increases the
willingness of the workers to work, thus increasing effectiveness of the organization
such as: best utilization of resources, reduction in labor problems, sizeable increase in
production and productivity, better image. Operational performance measured by Job
satisfaction and security lied in the tasks that employee achieved, the ambitions
employees fulfilled, opportunities for future advancement, the working environment
and the employee worked (Panchal & Cartwright, 2001).

The report is prepared by discussing with the concerned guide and teachers and by
analyzing the literature review. This report provides information about the impact of
merger on operating performance of selected banks in Nepal. Although a lot of studies
have already been advanced in banking mergers, the researcher feels that there are
only few studies that had been advanced, in particular banking sector of Nepal. So, an
attempt is made to study the operating performance in the Nepalese banking sector in
the pre and post-merger. In this study, we are focusing on the comparison of the
operational impact of the merger on the companies being merged. At the end of the
study we have made an attempt to come up with a conclusion that, either the growing
banking business is backed up by the merger or we need some other activities to be
considered for its growth. Once the operating performance of the bank is compared
with its pre and post-merger era, we have a clear view of the impact of merger on the
bank’s operating performance. Also we have an idea about either merger is doing
good for the growth of the banking industry in Nepal or institutions are following it
blindly to grow the business.
 7

Objectives of the Study

The major purpose of this study is to investigate the impact of merger and acquisition
on operational performance in Nepalese commercial banks. The study has the
following specific objectives:

 To examine the impact of merger on operating performance of the selected

banks.

 To examine the difference between pre and post -merger performance of the
selected commercial banks.

 To analyze the success/failure of mergers in sample Nepalese banks

Research Hypothesis

Based on the objectives of this study following hypothesis have been stated:

H01: There is a significant difference between operating profit margin of pre and post-
merger period of selected commercial bank.

H02: There is a significant difference between net profit margin of pre and post-
merger period of selected commercial bank.

H03: There is a significant difference between return on equity of pre and post-merger
period of selected commercial bank.

H04: There is a significant difference between earning yield ratio of pre and post-
merger period of selected commercial bank.

H05: There is a significant difference between return on Assets of pre and post-merger
period of selected commercial bank.

H06: There is a significant difference between earnings per share pre and post-merger
period of selected commercial bank.

Limitations of Study

As the study is being carried out in a partial fulfillment of the requirement for the

degree, it possesses a number of limitations of its own kind which may be as follows.
 8

 The study will be primarily based on the secondary data and the limitation of
using secondary data may affect the results.

 Since the sample size will be small; it may not provide the real scenario.

 The study will largely be dependent upon the published documents such as
balance sheet, profit and loss account statements etc.

 Statistical and financial technique used for credit risk management analysis so
it may not provide accurate result.

Operational Definitions

This section deals with the operational definition of the variables that have been used
in this study. The study attempts to investigate the essence of operational performance
in Nepalese commercial banks. The brief discussion on how these variables have been
used or interpreted in this study is made below:

Operating Performance: Operating performance is the measure of profitability in

relation to the sales revenue. This is a measure of how well the company is doing.
Many different measures, such as expense ratios, sales performance and policy
terminations are taken into consideration when evaluating operating performance. It
can be identified with the help of various ratios. These can be operating profit margin,
net profit margin, return on net worth, debt equity ratio etc.

Merger and Acquisition: Merger and acquisition plays an important role in external
corporate expansion, acting as a strategy for corporate restructuring and control. It is a
different activity from internal expansion decisions, such as those determined by
investment appraisal techniques. Merger and acquisition can facilitate fast growth for
firms and is also a mechanism for capital market discipline, which improves
management efficiency and maximizes private profits and public welfare. According
to Isiaku, (2003), the strategic business practice by which firms diversify and expand
is mergers and/or acquisitions (M&A). Mergers and acquisitions and other forms of
business combinations have desirable strategic advantages such as hedging against
competition, enhancement of market share and shareholders’ value through
 9

economies of scale and economics of scope. Mergers and acquisitions have become a
key part of many corporate growth strategies (Cocheo, 2008).

Pritchett (1987) warned that the costs of ineffective mergers will be realized in lost
talent, lost productivity, and loss of competitive position as a result of distracted
employees. Mergers, acquisitions, and joint ventures as a negative event, particularly
for the organization that is not the acquiring firm (Bell, 1988; Geber, 1987; Gottlieb &
Conkling, 1995).

Cartwright & Cooper (1995) viewed mergers as a threat, one where communications
plays a key role in preventing this threat in the first place. Gussow (1978) described
the acquired organization as one that is swallowed by the acquiring firm and
potentially destroyed.Grove (1996) suggested that acquisitions are done by companies
as a diversion tactic, something they plunge into to avoid dealing with major changes
their company is facing. In contrast, Nahavandi and Malekzadeh (1993) believed that
what is needed for 1990s and beyond is to rediscover mergers as a strategic alliance
and as a partnership, rather than as a war.

Organization of Study

The study is organized into a total of five chapters. Chapter one contains general
background of the study including statement of the problem, objectives of the study
and organization of the study. The chapter two consists of conceptual review, review
of literature related to studies in global context as well as review of studies in
Nepalese context. Besides, this chapter ends up with concluding remarks associated
with the findings and major ideas of the studies. The chapter three covers the research
design, nature and source of data, selection of enterprise, models used for data
analysis and conclusion along with the limitation of the study. The chapter four
focuses on the systematic presentation, analysis and discussion of the data. The
chapter five provides a summary of overview on all works carried out in the chapter
one through four including major conclusion derived from the study. This chapter also
includes a separate section for recommendation and scope for future research based
on major findings of the study.
 10

CHAPTER II

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

Review of literature is a basic requirement for any research. Review of literature

means reviewing past studies or other relevant proposition in the related area of the
study so that all the past studies, their conclusions and deficiencies may be known and
be incorporated in the research

Literature Review

Liargovas & Repousis (2011) examined the impact of Greek mergers and acquisitions
on the performance of the Greek Banking Sector during the period 1996-2009. The
data is collected from daily bulletin and database of Athens stock exchange and press
releases of financial daily press. The empirical result showed that a merger and
acquisition, shareholders receive considerable and significant positive cumulative
average abnormal returns. The result showed that significant positive CAARs are
gained upon the announcement of horizontal and diversifying bank deals. The overall
results indicated that bank mergers and acquisitions have no impact and do not create
wealth.

Abbas et al. (2014) evaluated the financial performance of banks in Pakistan after
merger and acquisition. Data Envelopment Analysis (DEA) approaches was used to
measure the bank’s efficiency. The empirical result revealed that there is no
significant relationship between merger and acquisition and employee performance.
There is decrease in profitability, efficiency, liquidity, and leverage ratio in most of
the banks. The empirical result showed that there is an increase in their financial
performance after merger and acquisition in most of the ratio(s). In the dimension of
liquidity and leverage, there is no much improvement in the ratio(s) of these banks.
Finally it is concluded that overall there is negative improvement in the financial
performance of banks in Pakistan after merger and acquisition.

Eckbo (1981)conducted and tested a hypothesis that horizontal mergers generate

positive abnormal returns to stockholders of the bidder and target firms as they
increase the probability of successful collusion among rival producers. It basically
 11

examined the proposition that horizontal mergers have collusive, anticompetitive

effects. He tested the assumption that rivals of the merging firms benefit from the
merger since successful collusion limits the output and raises product prices and/or
lower factor prices under this hypothesis. The sample of unchallenged mergers was
drawn from the Federal Trade Commission’s Statistical Report on Mergers and
Acquisitions. This annual publication lists all completed mergers in mining and
manufacturing industries where the target firm has an asset (book) value of $10
million or more. A corresponding sample of challenged mergers was drawn from the
American Bar Associations Merger Case Digest and from the Commerce Clearing
House Trade Regulation Reporter. He found that the antitrust law enforcement
agencies systematically select relatively profitable mergers for prosecution and there
is little evidence indicating that the mergers would have had collusive,
anticompetitive effects. He also finds no significant evidence that proposed horizontal
mergers are expected to reduce the value of the competitors of the merging firms.
Thus, if mergers take place to realize efficiency gains, we cannot conclude that the
synergy effect is expected to produce a significant expansion of the merging firm’s
share of market along with an increase in the industry rate of output.

Powell and Stark (2001) analyzed the operating performance of the firms after
takeover had been done by US takeovers. There were hot discussions about whether
takeovers can help in improving the operating performance of the firms or not. So this
paper attempts to find out the fact that does takeovers actually help in improving
operating performance or not. The sample used in this study includes 191 takeovers
made by UK industrial firms over the period of January 1985 to July 1993. There
were several issues in identifying the appropriate methodology to analyze the
operating performance since performance measures can be manipulated easily and
true result may not be received. So in order to avoid that, they construct the
benchmark for the sample to be studied. It includes, Industry median operating
performance and Firms matched on industry, size & pre-operating performance
characteristics. From the paper it has been found that, using a matching procedure
similar to that deployed by Loughran and Ritter, in which benchmark firms are
selected in the basis of several pre-takeovers characteristics, the median increase in a
post-takeover performance for acquiring firms ranges from 0.13% per annum to a
 12

statistically significant 1.78% per annum, depending on the definition of operating

performance used and choice of deflator.

Cornett, McNutt and Tehranian (2006) conduct a study to evaluate the changes in the
performance of banks after mergers with the help of revenue enhancements and the
cost reductions. The study examined long-term operating performance of bank
mergers involving publicly and non-publicly traded banks over the period 1990
through 2000 in US. All the secondary data required for the study was collected from
the Federal Reserve Board of Chicago website and initial announcement dates were
obtained from Mergerstat. The results are obtained after the analysis of Cash Flow
Measures, Accounting Measures, Regression Analysis and Long Term Stock Returns.
They find that industry-adjusted operating performance of merged banks increases
significantly after the merger, large bank mergers produce greater performance gains
than small bank mergers, activity focusing mergers produce greater performance
gains than activity diversifying mergers, geographically focusing mergers produce
greater performance gains than geographically diversifying mergers, and performance
gains are larger after the implementation of nationwide banking in 1997. Further, they
find improved performance is the result of both revenue enhancements and cost
reduction activities. However, revenue enhancements are most significant in those
mergers that also experience reduced costs. So, the paper concluded that overall
performance of merged banks can be improved by increasing revenue on the first step
and also should be backed by reducing the costs.

Martynova, Oosting and Renneboog (2006) had investigated the long-term

profitability of corporate takeovers of which both the acquiring and target companies
are from Continental Europe or the UK. The sample of European acquisitions that
were completed between 1997 and 2001 is selected from the Mergers and
Acquisitions Database of the Securities Data Company (SDC) and Zephyr. They
employed four different measures of operating performance that allowed them to
overcome a number of measurement limitations of the previous literature, which
yielded inconsistent conclusions. Both acquiring and target companies significantly
outperform the median peers in their industry prior to the takeovers, but the raw
profitability of the combined firm decreases significantly following the takeover.
However, this decrease becomes insignificant after they control for the performance
of the peer companies which are chosen in order to control for industry, size and pre-
 13

event performance. The acquirer’s leverage prior takeover seems to have no impact
on the post-merger performance of the combined firm, whereas the acquirer’s cash
holdings are negatively related to performance. This suggests that companies with
excessive cash holdings suffer from free cash flow problems and are more likely to
make poor acquisitions. Acquisitions of relatively large targets result in better
profitability of the combined firm subsequent to the takeover, whereas acquisitions of
a small target lead to a profitability decline.

Mehta & Kakani (2006) stated that there were multiple reasons for Merger and
Acquisitions in the Indian Banking Sector and still contains to capture the interest of a
research and it simply because of after the strict control regulations had led to a wave
of merger and Acquisitions in the Banking industry and states many reason for merger
in the Indian Banking sector. The paper has attempted to provide the scenario of
international mergers & acquisitions and compared it with the Indian scene. The main
motive of the paper was to provide an idea of the benefits and the urgency of mergers
and acquisitions in the scenario of Indian Banking Sector. The report with the help of
various quantitative figures and financial variables explains about the benefits that can
be obtained from the mergers and acquisitions. By analyzing various data available as
secondary sources, this paper has shown the requirement of merger and acquisition
for various purposes like stability in the Indian Financial System, maintaining a
balance in Returns and Risk to Shareholders, managing appropriate level of Capital
Adequacy Ratio etc. While a fragmented Indian banking structure may be very well
beneficial to the customer because of competition in banks, but at the same time not to
the level of global Banking Industry, and concluded that Merger and Acquisition is an
imperative for the state to create few large Banks.

Ottaviani and Estanol (2006), in their paper formulate a simple modelling framework
to analyze the role of risk and diversification in banking competition and to quantify
the impact of mergers on the welfare of borrowers and depositors. The model has two
main ingredients. First, banks are assumed to be risk averse or behave in risk averse
fashion. Second, banks are imperfect competitors in the markets for loans and
deposits. Following the Monti-Klein framework, this paper model banks as financial
intermediaries that grants loans and collect deposits. They showed that the correlation
between the shocks to the demand for loans and the shocks to the supply of deposits
induces a strategic interdependence between the two sides of the market. They
 14

characterized the role of diversification as a motive for bank mergers and analyze the
consequences of mergers on loan and deposit rates. When the value of diversification
is sufficiently strong, bank mergers generate an increase in the welfare of borrowers
and depositors. If depositors have more correlated shocks than borrowers, bank
mergers are relatively worse for depositors than for borrowers. At last they had
analyzed that a more general analysis is necessary to drive firm conclusions about the
effects of banks mergers on borrowers and depositors welfare and left the problem for
future research.

Pazarskis, Vogiatzogloy, Christodoulu and Drogalas (2006), investigated the impact

of corporate merger over the operating performance of Greece manufacturing
acquiring firms. The data of this study is coming from two different sources for a
sample of fifty acquiring firms. First, from financial statements of those companies
that was received from the databank of the company ICAP (that were used later for
calculation of firms’ financial ratios). Second, from a confidential questionnaire, that
provided primary data, and was promoted for depicturing the type of merger, the
method of payment, and evaluation. In this study a sample of fifty Greek
manufacturing firms are considered that are listed on Athens stock market. The time
period for this study is 1998 to 2002. In this study the financial performance is
evaluated by using financial and non-financial variables. Financial performance
measurement is with financial ratios which are divided into the group namely
profitability, liquidity & solvency. Profitability areas is measured with earning to net
worth, return in asset and gross profit ratios. Liquidity is measured by quick ratios and
solvency is measured by using net worth to total asset & total debt to net worth ratios.
The results of this study concluded the performance of acquiring firms declined after
merger. The main interesting finding of the survey is that there is strong evidence that
the profitability of a firm that performed an M&A is decreased due to the
merger/acquisition event.

Mantravadi & Reddy (2007), in their paper, has aimed at analyzing the post-merger
operating performance for acquiring firms in Indian industry during the post-reform
period, from 1991-2003, which was expected to provide a large sample size across
industries. The post-merger operating performance of acquiring firms for different
relative sizes (of acquiring and acquired firms) was analyzed to see if differences in
sizes of acquiring and acquired firms can cause a different impact on the outcome
 15

compared to general results of merger studies. The research was entirely based on
secondary data collected from the Prowess database of the CMIE. They evaluated the
impact of merger on the operating performance of acquiring firms in different
industries by using pre and post financial ratio to examine the effect of merger on
firms. They selected all mergers involved in public limited and traded companies in
India between 1991 and 2003, result suggested that there were little variation in terms
of impact as operating performance after mergers. In different industries in India
particularly banking and finance industry had a slightly positive impact of
profitability on pharmaceutical, textiles and electrical equipment sector and showed
the marginal negative impact on operative performance. Some of the industries had a
significant decline both in terms of profitability and return on investment and assets
after merger.

Anand & Singh (2008) studied the impact of merger announcements of five banks in
the Indian Banking Sector on the return of the shareholders of the bank. These
mergers were the Times Bank merged with the HDFC Bank, the Bank of Madurai
with the ICICI Bank, the ICICI Ltd with the ICICI Bank, the Global Trust Bank
merged with the Oriental Bank of commerce and the Bank of Punjab merged with the
centurion Bank. The announcement of merger of Bank had positive and significant
impact on shareholder’s wealth. Using the single-factor model, the study finds that the
average cumulative abnormal return (CAR) of the bidder banks is positive and
substantial. These results are also statistically significant. Thus, the bidder banks got
significant positive abnormal returns. The effect on both the acquiring and the target
banks, the result showed that the agreement with the European and the US Banks
Merger and Acquisitions except for the facts the value of shareholder of bidder Banks
have been destroyed in the US context, the market value of weighted Capital
Adequacy Ratio of the combined Bank portfolio as a result of merger announcement
is 4.29% in a three day period (-1, 1) window and 9.71 % in a Eleven days period (-5,
5) event window. The event study is used for proving the positive impact of merger
on the bidder Banks.

Bhaumik and Selarka (2008) discuss the impact of concentration of ownership on firm
performance. On the one hand, concentration of ownership that, in turn, concentrates
management control in the hands of a strategic investor, eliminates agency problems
associated with dispersed ownership. On the other hand, it may lead to entrenchment
 16

of upper management which may be inconsistent with the objective of profit (or
value) maximization. Their paper examines the impact of M&A on profitability of
firms in India, where the corporate landscape is dominated by family-owned and
group-affiliated businesses, such that alignment of management and ownership
coexists with management entrenchment, and draws conclusions about the impact of
concentrated ownership and entrenchment of owner managers on firm performance.
Their results indicate that, during the 1995-2002 period, M&A in India led to
deterioration in firm performance. They also found that neither the investors in the
equity market nor the debt holders can be relied upon to discipline errant (and
entrenched) management. In other words, on balance, negative effects of
entrenchment of owner manager strums the positive effects of reduction in owner-vs.-
manager agency problems. Their findings are consistent with bulk of the existing
literature on family-owned and group affiliated firms in India.

Dewan (2008), in his paper had studied merger as a source of corporate growth. The
main objective of the study was to evaluate the post-merger operating performance of
the acquirer companies in India. The study had further attempted to investigate and
test if there are any significant deviations in the results achieved by mergers in
different industry sectors in India, by analyzing sub-samples representing industry
sectors. The merger cases for the year 2003 have been taken for the analysis. The
financial data has been collected for six years from 2000-06. Pre-merger and post-
merger financial ratios have been examined using paired sample t test. The results of
the analysis reveal that there is significant difference between the financial
performance of the companies before and after the merger. Further, it has been found
that the type of industry does seem to make a difference to the post-merger operating
performance of acquiring firms. The results from the analysis of pre- and post-merger
operating performance ratios for the acquiring firms in the sample showed that there
was a differential impact of mergers, for different industry sectors in India. The
results of this study show that management can’t take it for granted that synergy will
be generated and profits will increase simply by going for mergers and acquisitions.

Hijzen, (2008) studied the impact of cross border Merger and Acquisitions (M&As)
and analyzed the role of trade cost, and explained the increased in the number of cross
border Merger and Acquisitions (M&As) and used industry data of 23 OECD
countries over a period of 1990 -2001. The role of trade costs in determining
 17

international exchanges of capital and goods is far from negligible despite an

increasingly globalized world. Hence, an analysis of the impact of trade costs on
international merger activity is interesting not only from an academic point of view,
but may also provide valuable information for policy makers. So this paper is an
attempt to benefit those policy makers by providing an insight of the impact of trade
costs on international merger. Using a simple theoretical set-up that trade costs may
affect horizontal and non-horizontal mergers in different ways, the report also
presents the empirical model, describe the variables and the data sources used for the
analysis, and discuss the econometric methodology. The result suggested that
aggregate trade cost affects cross border merger activity negatively, its impact differ
importantly across horizontal and non-horizontal mergers. They also indicated that the
less negative effects on horizontal merger, which is consistent with the tariff jumping
agreement, put forward in literature on the determinant of horizontal FDI.

Lehto & Bockerman (2008) evaluated the employment effects of Merger and
Acquisitions on target by using match establishment level data from Finland over the
period of 1989-2003. Their basic focus was, identifying the impact of Merger and
Acquisitions on the level of employment. They try to find out either the level of
employment increase or it declines after Mergers and Acquisitions in manufacturing
as well as non-manufacturing companies. The data required for it are originated from
the magazine Talouselämä, which is published on a weekly basis. The number of
establishments that were targets of M&As was 7923 over the period 1989–2003. Most
of the establishments purchased were part of a domestic M&A, with 5369 such cases.
In this total, 285 were cases in which a purchaser was a domestic (i.e. located in
Finland) but the firm was foreign-owned. The number of cross-border M&As was 765
(roughly 10 percent of all M&As). The fact that domestic M&As are so much more
numerous than cross-border M&As is interesting. It is not necessarily, however,
typical only of Finland. This phenomenon becomes revealed in the data because it
registers practically almost all M&As, not only major M&As. They evaluated that the
cross border Merger and Acquisitions lead to downsizing the manufacturing
employment and the effects of cross border Merger and Acquisitions on employment
in non- manufacturing are much weaker and change in ownership associated with
domestic Merger and Acquisitions and internally restructuring also typically causes
employment losses.
 18

Rani, Yadav and Jain (2008) where they examine the short run abnormal returns to
India based mergers by using event study methodology. This paper compares the
impact of domestic acquisitions and cross-border acquisitions on Indian acquirer
shareholders’ wealth. The sample for this study is collected from Thomson SDC
Platinum Mergers and Acquisitions Database. The sample consists of the
announcements of mergers and acquisitions by Indian companies listed on Bombay
stock exchange consisting of 255 cross-border acquisitions and 268 domestic
acquisitions during the period January 2003 to December 2008. Event study
methodology has been conducted to analyses the share price performance of Indian
acquirers in short-term. The short term effects are of interest because of the immediate
trading opportunities that they create. They start by discussing the present state of the
Indian Pharmaceutical Industry and go on to explore some specific cases of
acquisitions of foreign companies by Indian Parma majors. They calculated the
abnormal returns and cumulative abnormal returns for foreign based acquisitions,
mergers and Indian based acquisitions separately and conclude that abnormal returns
are highest in case of foreign based acquisitions and lowest (negative) for India based
mergers. The findings suggest that the positive abnormal returns don’t sustain in post-
event window period for the cross-border as well as domestic acquisitions. Another
notable finding of the study is that the acquirers experience higher return for
partial/majority control domestic acquisitions.

Ramachandran & Thangavelu (2012), has carried out this paper with the objective of
studying what shift-in-structure is experienced especially in the operating
performance after merger and acquisitions by studying 39 selected acquiring
manufacturing firms in India. Besides that, they have also analyzed the effect of
merger and acquisitions on the attributes of operating performance vs. gross earnings,
liquidity, financial risk (financial leverage), cost of utilization, turnover, growth, and
operating leverage of acquiring manufacturing firms in India. The firms, which had
gone in to the process during the financial year 2006–2007 are only considered for the
study. The study used secondary sources of data, which were collected from the
capital market database called Centre for Monitoring Indian Economy Private
Limited. Factor analysis, correlation matrix, multiple regression, and chow test are
applied to study the op of these firms in the pre-and post-merger periods. The study
reveals that the merger and acquisitions process has significant (positive
 19

improvement) effect on operating performance of the acquiring manufacturing firms

in India after merger and acquisitions over the study period. It has been found that
sales has a direct relationship with the performance of the firms. Therefore the
acquiring manufacturing firms were advised to use their physical resources to their
maximum extent.

Rani, Yadav & Jain (2013), in their paper investigated the impact of mergers and
acquisitions (M&A) on corporate performance. It compares performance of the
corporates involved in M&A before and after M&A. The sample for this study
consists of acquiring companies involved in merger and acquisitions during January
2003 to December 2008. The secondary data required for the study are collected from
Capitaline, Prowess database of Center for Monitoring Indian Economy (CMIE),
websites of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The
results pertaining to operating cash flow ratios show that there is an improvement in
performance of the acquiring firms in the post-M&A period. The analysis in terms of
Du Pont shows improvement in the long-term operating profit margin of the acquiring
firms. This indicates that the acquiring firms earn higher profits per unit net sales after
M&A. The higher cash flows are generated primarily due to the better operating
margins. The assets of the acquirer company were not able to generate higher sales\
revenue after M&A. Reasons behind it might be the recessionary condition in the
global economy after 2008. From the paper, it may be concluded that acquiring firms
in India appear to have performed better after M&A in comparison to their
performance before M&A, primarily due to reduced cost, economies of scale and
operational synergies.

Adhikari (2014) studied financial sector of Nepal to investigate the impact of ongoing
M&As on Nepali BFIs and to assess the empirical results whether the M&A’s play an
important role in strengthening the Nepalese banks and financial institutions. Web-
based online survey tool is used to identify the impact of M&A’s on the employees
and service consumers of merged entities. The result revealed that very less of the
sampled financial institutions is technically efficient in generating more returns to
share owners. However, the post-merger trend shows that the sampled bank can
produce more return to its shareholders in the days to come.
 20

Shrestha (2014) investigated the merger and acquisitions are based on the assumption
that it creates a synergistic value for the potential stakeholders involved and in the
hope of realizing an economic gain. The empirical result showed that merger and
acquisition have positive and significant relationship to financial benefits and career
growth and advancement as well. The benefits of the merger and acquisition is not
only limited to one side of the organization rather it develops all the aspect of the
organization if conducted with proper guidance and supervision.

Biswakarma (2015) observed increasing trend in merger and acquisition in banking

and financial institutions (BFIs) of Nepal. This study focused on the post-merger
impact to the employees, customers and shareholders of the merged bank. The
research method used in this study was descriptive research which implies the results
based on the survey and the analysis. The impact on employees and customers were
analyzed through questionnaires whereas the impact on shareholders was observed
through analysis of financial data of merged bank in 2years of pre and post-merger
phase. The results showed that employees were satisfied with work, wages, working
conditions etc. but they were intensely worried about the HR issues like cultural clash,
positions issues, socialization, favoritism 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 post-merger phase
hence increasing the shareholder’s wealth.

Research Gap

Merger and Acquisition is one of the most important diversification tool for any
business in today’s world.In 2011, NRB has also decided to merge the Nepalese
Financial Institution for healthy financial market by directive of M&A bylaws to
compete in global market allowing foreign bank branches in Nepal. As observed from
the above studies, most of the works have been done on trends, policies and their
framework. Few research papers were found regarding the Indian Banking Industry.
However, it can be clearly seen that, we cannot find much of the concerns or research
being done on Nepalese Banking Industry. Subjective analysis was mostly found in
case of analyzing the impact of merger on banking industry. Secondary analysis has
not been done much in past due to unavailability of data. But in this paper we will
 21

attempt to analyze the impact (pre and post analysis) of merger with the help of
secondary data.

So, this paper will investigate the details of Mergers with a great focus on Nepalese
Banking Industry and analyze the pre and post-merger operating performance of the
selected banks in terms of various ratios such as, operating profit margin, net profit
margin, return on assets, return on equity etc. We will also evaluate the need and
importance of merger in the Nepalese Banking Industry and try to find out whether it
is going good for banks in Nepal or is deteriorating the environment of banking
industry through unethical mergers.

Theoretical Framework

Among the above mentioned reviews of the papers by various authors,Viverita

(2008)’s paper seems more similar to the research we are going to conduct in this
paper. This paper had compared the pre and post-merger financial performance of
various banks on the basis of some variables like profitability ratios, solvency ratios
and capital adequacy ratios. They had compared the level of significance between the
pre and post-merger financial health of the selected banks using paired sample t-test
and found that banking sector had shown some positive impact on profitability and
other sector were either in same condition or have negative impact on operating
performance. But they also mentioned that, in the initial stage, after merging, there
may not be a significant improvement due to teething problems but later they may
improve upon.

The schematic diagram showing the relationship of selected merger and acquisitions
has been constructed in the Figure 2.1.
 22

Operating profit Margin

Net Profit Margin
Return on Asset
Return on equity
Earning Yield ratio Operational performance
Earning per share

Merger and
acquisition

Merger and acquisition

Figure 2. 1: Conceptual framework

For analyzing the pre and post-merger financial state of selected banks, we will be
using some variables under the category of Operating Performance and will be
analyzing the state on the grounds which will be backed up by the variables under the
category. These are:

Operating Profit Margin: Operating Profit Margin is a measurement of what

proportion of a company's revenue is left over after paying for variable costs of
production such as wages, raw materials, etc. A healthy operating margin is required
for a company to be able to pay for its fixed costs, such as interest on debt.

Operating Profit Margin = Operating Income / Net Sales

Net Profit Margin: The ratio of net profits to revenues for a company or business
segment - typically expressed as a percentage – that shows how much of each dollar
earned by the company is translated into profits. Net margins can be calculated as:
 23

Net Profit Margin = Net Profit / Revenue

Return on Assets (ROA): An indicator of how profitable a company is relative to its

total assets. ROA gives an idea as to how efficient management is at using its assets to
generate earnings. Calculated by dividing a company's annual earnings by its total
assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on
investment".

ROA = Net Income/ Total Assets

Return on Equity (ROE): It measures the rate of return for ownership interest
(shareholders' equity) of common stock owners. Return on equity measures a
corporation's profitability by revealing how much profit a company generates with the
money shareholders have invested.

ROE = Net Income/ Shareholder’s Equity

Earning Yield Ratio: It is basically the quotient of earnings per share divided by the
share price. It is the reciprocal of the P/E ratio. It can be calculated as:

Earning Yield Ratio = Earnings per share/ Share price

Earnings per Share: It is basically the portion of a bank’s profit to each outstanding
share of common stock. It can be calculated as:

Earnings per share = Net Income/ Average outstanding common shares

 24

CHAPTER III

RESEARCH METHODOLOGY

Research Methodology is a way to find out the result of a given problem on a specific
matter or problem that is also referred as a research problem. This chapter pictures the
whole idea of how the research has be conducted.
This research paper has tried to search the given question systematically in our own
way and find out all the answers to a conclusion. This research plan covers the
research design and plan, population and sample size determination, data collection
procedure, instrumentation of data, data analysis method, reliability and validity of
data.

Research Design and Plan

Research design adopted in the study is descriptive and causal comparative research
designs to deal with the fundamental issues associated with the impact of merger and
acquisition on operational performance in Nepalese commercial banks. This study
adopts descriptive research design for fact finding and to identify the impact of
merger and acquisition on operational performance in Nepalese commercial banks.

This study also used the causal comparative research design to establish the cause and
effect relationship between merger and acquisition with operational performance.
Causal-comparative research design attempts to determine the cause or consequences
of differences that already exist between the variables and the relationship between
independent and dependent variables.

Population and Sample Size

In the study only ‘A’ class commercial banks were taken as sample where as other
financial institutions were excluded like development bank, finance companies and
micro credit institution. The total commercial banks operating in Nepal are 28.
Among those, 5 Nepalese commercial banks were taken as sample. Hence, the study
has been undertaken on the basis of secondary data of merged banks.
 25

Table 3. 1: List of sample banks

S.N Category Commercial banks

.
1 Global IME Bank Limited
2 Prabhu Bank Limited
3 Merged Banks NIC Asia Bank Limited
4 Nepal Bangladesh Bank Limited
5   Machhapuchhre Bank Limited
Thus, the study is based on 5 banks which consist of 50 observations.

Data Collection

This section elaborates on data collection procedure which includes nature and
sources of data and also time frame for the study. The study had used secondary data
of 10 years for merged and no merged bank. The financial and accounting data of
banks was collected from the quarterly report of the select Banks to examine the
impact of Mergers on the performance of the selected banks

Instrumentation of Data

Instrumentation is basically explained as the tools used in data collection and analysis.
In this research data was collected through various sources i.e. quarterly reports of
various banks of several periods that has arranged and managed in Ms-Word and
Excel so that it can be further used in SPSS for analyzing the data. The data in the
excel sheet is presented in the percentage or ratio form rather than in exact figures
because the figures may vary according to the size and operations of the company.
Secondary data has been analyzed with the help of Paired Sample t-test in SPSS.

Validity and reliability

The data needed for conducting this study basically includes the data already refined
and published by the respective banks taken under the study. Since the data required
for our study was available entirely in the quarterly reports of the companies and
those quarterly reports are verified by the government appointed auditors, there is
strong believe that the data is totally reliable and valid. Also, all the data were
collected from the official websites of the selected banks which eliminates the
chances of data being manipulated.
 26

Data Analysis Tools and Methods

Since the data used for the study secondary data. The study is all about comparing the
pre and post financial health of selected bank with the help of annual report being
provided by various institutions and organizations. The research is following the
descriptive design having quantitative data and their analysis. We were using some
popular means of statistical tools such as mean, , standard deviation, graph and charts,
t test, etc. For these tools we were using software like SPSS 16.0, MS- excel, MS-
word, etc.

Model Specification

The econometric models used in this study tries to analyze the relationship of merger
and acquisition with operational performance of organization. The following
regression model is used in this study to examine the empirical relationship of merger
and acquisition with operational performance of Nepalese commercial Bank.
Therefore, the following model equation is designed to test the hypothesis.

Model

OP= β0+β1OPM+β2NPM+β3ROA+β4ROE+β5EY+ β6EPS

Where,
OP= Operational performance
OPM= operating profit margin
NPM = Net Profit margin
ROA= Return on Equity
ROE= Return on Equity
EY= Earning Yield Ratio
EPS= Earnings per share
β1, β2 ............. β6 = Coefficient of selected bank variables
β0 = Regression Constant
 27

CHAPTER IV

RESULT AND DISCUSSION

This chapter includes the presentation and analysis of the relevant data for the
achievement of the objectives of the study. This chapter has been divided and
explained into two sections. First section deals with analysis of secondary data that
have been collected from various commercial banks that have been merged.

Analysis of Secondary data

In this analysis, the performance of five sampled commercial bank is analyzed by

using the key financial indicators of operating profit margin, net profit margin, return
on asset, return on equity, debt equity ratio, earning yield and earnings per share. The
comparison of pre and post financial indicators is shown with the help of figures. The
annual data of five sampled commercial bank from where the table, figures were
generated and analysis is done are shown in Annex.

Table 4. 1: Return on assets of commercial bank before and after the merger

Name of Post
bank Pre Merger Merger Differences Remarks
GIBL 0.85 1.01 0.16 Increased
PBL 1.31 0.83 -0.48 Decreased
NIC 1.89 1.51 -0.38 Decreased
NBB 13.09 1.51 -11.58 Decreased
MBL 0.2 0.32 0.12 Increased

The Table 4.1 shows return on assets of commercial banks before and after merger
which is major indicator of operational performance of Nepalese commercial bank..
From the table we can see that Global IME bank had return of assets 0.8 percent
before merger and 1.01 percent after merger. Therefore there is remarkable increase in
ROA of Global IME bank in operational performance before and after merger.
Similarly, Prabhu bank had return of assets 1.31 percent before merger and 0.83
percent after merger. Therefore there is decrease in ROA of Prabhu bank in
operational performance before and after merger. NIC Asia bank had return of assets
1.89 percent before merger and 1.51 percent after merger. Therefore there is decrease
 28

in ROA of NIC Asia bank in operational performance before and after merger. NBB
bank had return of assets 13.09 percent before merger and 1.01 percent after merger.
Therefore there is decrease in ROA of NBB bank in operational performance before
and after merger. MBL bank had return of assets 0.2 percent before merger and 0.32
percent after merger. Therefore there is increase in ROA of MBL bank in operational
performance before and after merger.

Table 4. 2: Return on Equity of commercial bank before and after the merger

Name of bank Pre Merger Post Merger Differences Remarks

GIBL 8.99 12.18 3.19 Increased
PBL 18.51 8.69 -9.82 Decreased
NIC 21.9 15.85 -6.05 Decreased
NBB 77.73 83.41 5.68 Increased
MBL 2.32 3.38 1.06 Increased

The Table 4.2 shows return on equity of commercial banks before and after merger
which is major indicator of operational performance of Nepalese commercial bank.
From the table we can see that Global IME bank had return of Equity 8.99 percent
before merger and 12.18 percent after merger. Therefore there is remarkable increase
in ROE of Global IME bank in operational performance before and after merger.
Similarly, Prabhu bank had return of equity18.51 percent before merger and 8.69
percent after merger. Therefore there is decrease in ROE of Prabhu bank in
operational performance before and after merger. NIC Asia bank had return of equity
21.19 percent before merger and 15.85 percent after merger. Therefore there is
decrease in ROE of NIC Asia bank in operational performance before and after
merger. NBB bank had return of equity 77.73 percent before merger and 83.14
percent after merger. Therefore there is increase in ROE of NBB bank in operational
performance before and after merger. MBL bank had return of equity 2.32percent
before merger and 3.38 percent after merger. Therefore there is increase in ROE of
MBL bank in operational performance before and after merger.
 29

Table 4. 3: Operating profit margin of commercial bank before and after the merger

Name of bank Pre Merger Post Merger Differences Remarks

GIBL 29.94 35.58 5.64 Increased
PBL 17.51 7.69 -5.82 Decreased
NIC 63 59.04 -3.96 Decreased
NBB -254.05 38.97 293.02 Increased
MBL 7.17 14.94 7.77 Increased

The Table 4.3 shows operating profit margin of commercial banks before and after
merger which is major indicator of operational performance of Nepalese commercial
bank. From the table we can see that Global IME bank had operating profit margin
29.94 percent before merger and 35.58 percent after merger. Therefore there is
remarkable increase in operating profit margin of Global IME bank in operational
performance before and after merger. Similarly, Prabhu bank had return of
equity17.51 percent before merger and 7.69 percent after merger. Therefore there is
decrease in operating profit margin of Prabhu bank in operational performance before
and after merger. NIC Asia bank had operating profit margin 63 percent before
merger and 59.04 percent after merger. Therefore there is decrease in operating profit
margin of NIC Asia bank in operational performance before and after merger. NBB
bank had return of equity -254.05 percent before merger and 38.97 percent after
merger. Therefore there is increase in operating profit margin of NBB bank in
operational performance before and after merger. MBL bank had operating profit
margin 7.17 before merger and 14.94 percent after merger. Therefore there is increase
in operating profit margin of MBL bank in operational performance before and after
merger.

Table 4. 4: Net Profit Margin of commercial bank before and after the merger

Name of bank Pre Merger Post Merger Differences Remarks

GIBL 27.58 32.78 5.2 Increased
PBL 18.51 8.69 -9.82 Decreased
NIC 40.61 39.51 -1.1 Decreased
NBB -272.42 122.49 394.91 Increased
MBL 5.92 9.48 3.56 Increased
 30

The Table 4.4 shows net profit margin of commercial banks before and after merger
which is major indicator of operational performance of Nepalese commercial bank.
From the table we can see that Global IME bank had net profit margin 27.58 percent
before merger and 32.78 percent after merger. Therefore there is remarkable increase
in net profit margin of Global IME bank in operational performance before and after
merger. Similarly, Prabhu bank had return of equity18.51 percent before merger and
8.69 percent after merger. Therefore there is decrease in net profit margin of Prabhu
bank in operational performance before and after merger. NIC Asia bank had net
profit margin 40.61 percent before merger and 39.51 percent after merger. Therefore
there is decrease in net profit margin of NIC Asia bank in operational performance
before and after merger. NBB bank had return of equity -272.42 percent before
merger and 122.49 percent after merger. Therefore there is increase in net profit
margin of NBB bank in operational performance before and after merger. MBL bank
had net profit margin 5.92 percent before merger and 9.48 percent after merger.
Therefore there is increase in net profit margin of MBL bank in operational
performance before and after merger.

Table 4. 5: Earning Yield of commercial bank before and after the merger

Name of bank Pre Merger Post Merger Differences Remarks

GIBL 7.27 3.42 -3.85 Decreased
PBL 12.37 6.48 -5.89 Decreased
NIC 6.83 4.36 -2.47 Decreased
NBB -76.13 24.72 100.85 Increased
MBL 1 2.14 1.14 Increased

The Table 4.5 shows earning yield of commercial banks before and after merger
which is major indicator of operational performance of Nepalese commercial bank.
From the table we can see that Global IME bank had earning yield 7.27 percent before
merger and 3.42 percent after merger. Therefore there is decrease in earning yield of
Global IME bank in operational performance before and after merger. Similarly,
Prabhu bank had earning yield 12.37 percent before merger and 6.48 percent after
merger. Therefore there is decrease in earning yield of Prabhu bank in operational
performance before and after merger. NIC Asia bank had earning yield 6.83 percent
before merger and 4.36 percent after merger. Therefore there is decrease in earning
yield of NIC Asia bank in operational performance before and after merger. NBB
 31

bank had earning yield -76.13 percent before merger and 24.72 percent after merger.
Therefore there is increase in net profit margin of NBB bank in operational
performance before and after merger. MBL bank had earning yield 1 percent before
merger and 2.14 percent after merger. Therefore there is increase in earning yield of
MBL bank in operational performance before and after merger.

Table 4. 6: Earnings per share of commercial bank before and after the merger

    EPS ( RS.)    
Name of bank Pre Merger Post Merger Differences Remarks
GIBL 13.39 17.98 4.59 Increased
PBL 20.47 10.99 -9.48 Decreased
NIC 33.83 31.88 -1.95 Decreased
NBB -198.56 98.08 296.64 Increased
MBL 2.53 3.77 1.24 Increased

The Table 4.6 shows earning per share of commercial banks before and after merger
which is major indicator of operational performance of Nepalese commercial bank.
From the table we can see that Global IME bank had earning per share Rs. 13.39
before merger and Rs. 17.98 after merger. Therefore there is increase in earnings per
share of Global IME bank in operational performance before and after merger.
Similarly, Prabhu bank had earning yield Rs. 20.47 before merger and Rs. 10.99 after
merger. Therefore there is decrease in earnings per share of Prabhu bank in
operational performance before and after merger. NIC Asia bank had earning per
share R. 33.83 before merger and Rs. 31.88 after merger. Therefore there is decrease
in ea earning per share of NIC Asia bank in operational performance before and after
merger. NBB bank had earning per share Rs. -198.56 before merger and Rs. 98.08
after merger. Therefore there is increase in ne earning per share of NBB bank in
operational performance before and after merger. MBL bank had earning per share
Rs. 2.53 before merger and Rs. 3.77 after merger. Therefore there is increase in
earning per share of MBL bank in operational performance before and after merger.
 32

Statistical Analysis

Descriptive statistics are used to describe the basic features in the study. This section
presents the descriptive statistics of the pooled data of all five banks included in the
sample. The table below gives the mean values and the standard deviation for each
variable in the study. For inferential analysis, paired sample t- test is used which
compares the mean scores of two groups on a given variable.

Paired sample t- test: The paired sample t-test is usually based on groups of
individual, who experience both conditions of variables of interest. In the paired
sample t-test the null hypothesis is that the average of differences between the paired
observations in the two samples is zero. If the calculated P value is less than 0.05, the
conclusion is that, statistically, the mean difference between paired observations is
significantly difference from zero. As the objective of this research is to evaluate the
impact of mergers on the operating performance of the selected five banks, paired
sample t-test was chosen as a best statistical tool for the analysis according to the
nature of data available from various banks’ financial highlights.

Nepal Bangladesh Bank

Table 4. 7: Paired sample t-test of pre and post-merger operating profit margin

  Mean Std. Deviation P-value

Pre OPM 1.57 2.18
0.083
Post OPM .91 1.13

From the Table 4.7, it was found that the mean of OPM was slightly higher in Pre-
merger period. It means that the bank was doing well before merger in terms of OPM,
in comparison to that of after merger.

Also the result of paired sample t-test shows that, P-value (0.083) is greater than 0.05,
which signifies that OPM has no significant difference in pre and post-merger period.
Hence our null hypothesis is accepted, (H01) which means that the merge has not been
proven effective in terms of OPM.
 33

Table 4. 8: Paired sample t-test of pre and post-merger Net Profit

  Mean Std. Deviation P-value

Pre NPM 4.30 5.82
0.059
Post NPM 1.31 0.99

From the Table 4.8 shows that the mean of NPM in Pre-merger period is better than
that of post-merger period. It shows that the bank was doing well before merger in
terms of NPM but was also having higher variations in its outcomes.

Also the result of paired sample t-test shows that, P-value (0.059) is greater than 0.05,
which signifies that NPM has no significant difference in pre and post-merger period.
Hence our null hypothesis (H02) is accepted, which means that the merger has not
been proven effective for NB Bank in terms of NPM.

Table 4. 9: Paired sample t-test of pre and post-merger ROE

  Mean Std. Deviation P-value

Pre ROE 24.43 22.08
0.081
Post ROE 9.32 7.73

Table 4.9 shows that shareholders were enjoying higher return on their equity before
merger took place and were also facing more variation on return over the period in
pre-merger era compared to post-merger period. It means that the bank was doing
well before merger in terms of ROE, in comparison to that of after merger.

Also the higher P-value (0.081) obtained from paired sample t-test shows that ROE
has no significant difference in pre and post-merger period. Hence our null hypothesis
(H03) accepted, which means that the merger has not been proven effective in terms of
ROE.
 34

Table 4. 10: Paired sample t-test of pre and post earning yield

  Mean Std. Deviation P-value

Pre D/E 0.44 1.26
0.84
Post D/E 0.59 2.10

Table 4.10 shows that the mean of earning yield was lower in Pre-merger period than
that of post-merger period whereas variation was found more in post-merger period
with a higher degree of variation. It means that bank was having lesser amount of
earning yield in pre-merger period with almost same amount over the period of time.
Whereas, after merger bank was having slightly higher earning yield with twice the
variation compared with pre-merger period.

Also the higher P-value (0.84) signifies that earning yield has no significant
difference in pre and post-merger period. Hence our null hypothesis (H04) is accepted.
It shows that, proportion to debt over equity was more favorable in pre-merger period
than that of post-merger.

Table 4. 11: Paired sample t-test of pre and post ROA

  Mean Std. Deviation P-value

Pre ROA 2.45 3.78
0.089
Post ROA 0.58 0.33

Table 4.11 shows that the mean of ROA was higher in Pre-merger period than that of
post-merger period whereas variation was found more in pre-merger period. It means
that the bank was utilizing its assets more effectively and gaining more profit in pre-
merger period than that of post-merger period.

Also the result of paired sample t-test shows that, P-value (0.089) is greater than 0.05,
which signifies that ROA has no significant difference in pre and post-merger period.
Hence our null hypothesis (H05) is accepted, which means that the merge has not been
proven effective in terms of ROA. It can be seen the average ROA was greater in pre-
merger period with higher degree of variations. Bank has managed to reduce the
variation in ROA but also resulted in lower return on assets. Hence it can be said that,
ROA has no significant impact or a negative impact of merger on it.
 35

Table 4. 12: Paired sample t-test of pre and post earning per share

  Mean Std. Deviation P-value

Pre ROSE 678.00 657.00
0.056
Post ROSE 195.71 114.27

From the table 4.12, it was found that the mean of earning per share was higher in
Pre-merger period than that of post-merger period whereas variation was found much
higher in pre-merger period. It means that the bank was earning higher return to
earning per share in pre-merger period experiencing a higher level of variation
compared to lesser mean and much lower variation in post-merger period.

Also the result of paired sample t-test shows that, P-value (0.056) is greater than 0.05,
which signifies that earning per share has no significant difference in pre and post-
merger period. Hence our null hypothesis (H06) is accepted, which means that the
merge has not been proven effective in terms of earning per share

Table 4. 13: Paired sample t-test of pre and post-merger operating profit margin

Bank Mean Std Deviation P-Value

Global IME Pre OPM 0.49 0.55 0.027
Post OPM 0.78 0.67
Bank
Prabhu Bank Pre OPM 0.67 0.75 0.03
Post OPM 0.77 0.57
NIC Asia Pre OPM 0.23 0.45 0.032
Post OPM 0.67 0.76
Machhapuchre Pre OPM 0.14 0.34 0.662
Post OPM -0.005 0.84
bank

From the Table 4.13, it was found that the mean of OPM was slightly higher in Pre-
merger period. It means that the bank was doing well before merger in terms of OPM,
in comparison to that of after merger for Global IME bank, Prabhu Bank and NIC asia
bank whereas Machhapuchre bank have got lower OPM

Also the result of paired sample t-test shows that, P-value (0.083) is greater than 0.05,
which signifies that OPM has no significant difference in pre and post-merger period.
Hence our null hypothesis is accepted, (H01) which means that the merge has not been
 36

proven effective in terms of OPM for Global IME bank, Prabhu Bank and NIC asia
and P-value (0.662) is less than 0.05, which signifies that OPM has significant
difference in pre and post-merger period. Hence our null hypothesis is rejected, (H01)
which means that the merge has been proven effective in terms of OPM for
Machhapuchhre bank

Table 4. 14: Paired sample t-test of pre and post-merger Net Profit Margin

Bank Mean Std Deviation P-Value

Global IME Pre NPM 0.77 0.69 0.045
Post NPM 0.99 0.87
Bank
Prabhu Bank Pre NPM 0.56 0.65 0.04
Post NPM 0.67 0.86
NIC Asia Pre NPM 0.68 0.89 0.044
Post NPM 0.75 0.67
Machhapuchre Pre NPM 0.13 0.17 0.008
Post NPM 0.12 0.14
bank

From the Table 4.14, it was found that the mean of NPM was slightly higher in Pre-
merger period. It means that the bank was doing well before merger in terms of OPM,
in comparison to that of after merger for Global IME bank, Prabhu Bank and NIC asia
bank whereas Machhapuchre bank have got lower NPM

Also the result of paired sample t-test shows that, P-value is greater than 0.05, which
signifies that NPM has no significant difference in pre and post-merger period. Hence
our null hypothesis is accepted, (H01) which means that the merge has not been proven
effective in terms of NPM for Global IME bank, Prabhu Bank and NIC asia and
Machhapuchhre bank.

Table 4. 15: Paired sample t-test of pre and post-merger Earning per share

Bank Mean Std Deviation P-Value

Global IME Pre EPS 101.79 117.72 0.016
Post EPS 209.05 68.99
Bank
Prabhu Bank Pre EPS 122.7 129.2 0.018
Post EPS 218.5 101.9
NIC Asia Pre EPS 1110.9 127.7 0.02
Post EPS 219.5 102.9
Machhapuchre Pre EPS 63.34 75.37 0.702
Post EPS 92.16 90.54
bank
 37

From the Table 4.15, it was found that the mean of earning per share was slightly
higher in Pre-merger period. It means that the bank was doing well before merger in
terms of earning per share, in comparison to that of after merger for Global IME bank,
Prabhu Bank and NIC asia bank whereas Machhapuchre bank have got lower earning
per share

Also the result of paired sample t-test shows that, P-value is greater than 0.05, which
signifies that earning per share has no significant difference in pre and post-merger
period. Hence our null hypothesis is accepted, (H01) which means that the merge has
not been proven effective in terms of earning per share for Global IME bank, Prabhu
Bank and NIC asia.

Table 4. 16: Paired sample t-test of pre and post-merger Earning Yield

Bank Mean Std Deviation P-Value

Global IME Pre EY 22.20 19.21 0.0003
Post EY 13.05 8.21
Bank
Prabhu Bank Pre EY 42.2 52.8 0.04
Post EY 5.25 14.73
NIC Asia Pre EY 33.8 54.8 0.044
Post EY 6.7 12.6
Machhapuchre Pre EY 32.78 43.78 0.030
Post EY 6.65 11.76
bank
 38

From the Table 4.16, it was found that the mean of Earning Yield was slightly higher
in Pre-merger period. It means that the bank was doing well before merger in terms of
Earning Yield, in comparison to that of after merger for Global IME bank, Prabhu
Bank and NIC asia bank whereas Machhapuchre bank have got lower Earning Yield

Also the result of paired sample t-test shows that, P-value is greater than 0.05, which
signifies that Earning Yield has no significant difference in pre and post-merger
period. Hence our null hypothesis is accepted, (H01) which means that the merge has
not been proven effective in terms of Earning Yield for Global IME bank, Prabhu
Bank and NIC asia.
 39

Table 4. 17: Paired sample t-test of pre and post-merger return on asset

Bank Mean Std Deviation P-Value

Global IME Pre ROA 0.19 0.20 0.015
Post ROA 0.42 0.14
Bank
Prabhu Bank Pre ROA 0.30 0.33 0.310
Post ROA 0.31 0.35
NIC Asia Pre ROA 0.40 0.23 0.520
Post ROA 0.41 0.25
Machhapuchre Pre ROA 0.20 0.13 0.510
Post ROA 0.21 0.15
bank

From the Table 4.17, it was found that the mean of return on asset was slightly higher
in Pre-merger period. It means that the bank was doing well before merger in terms of
return on asset, in comparison to that of after merger for Global IME bank, Prabhu
Bank and NIC asia bank whereas Machhapuchre bank have got lower return on asset

Also the result of paired sample t-test shows that, P-value is greater than 0.05, which
signifies that return on asset has no significant difference in pre and post-merger
period. Hence our null hypothesis is accepted, (H01) which means that the merge has
not been proven effective in terms of return on asset for Global IME bank, Prabhu
Bank and NIC asia.
 40

Table 4. 18: Paired sample t-test of pre and post-merger return on equity

Bank Mean Std Deviation P-Value

Global IME Pre ROE 2.31 3.5 0.03
Post ROE 6.67 2.7
Bank
Prabhu Bank Pre ROE 0.50 0.53 0.60
Post ROE 0.61 0.35
NIC Asia Pre ROE 0.40 0.43 0.67
Post ROE 0.24 0.45
Machhapuchre Pre ROE 1.33 1.67 0.03
Post ROE 0.96 0.99
bank

From the table 4.18, it was found that the mean of return on equity was slightly higher
in Pre-merger period. It means that the bank was doing well before merger in terms of
return on equity, in comparison to that of after merger for Global IME bank, Prabhu
Bank and NIC asia bank whereas Machhapuchre bank have got lower return on equity

Also the result of paired sample t-test shows that, P-value is greater than 0.05, which
signifies that return on equity has no significant difference in pre and post-merger
period. Hence our null hypothesis is accepted, (H01) which means that the merge has
not been proven effective in terms of return on equity for Global IME bank, Prabhu
Bank and NIC asia.
 41

Table 4. 19: Correlation among variables

Std.

Variable Mean Deviation OP ROE ROA EPS EY NPM OPM

OP 3.82 0.69 1
ROE 3.63 0.78 0.72** 1
ROA 3.44 0.89 0.71** 0.68** 1
EPS 3.62 0.63 0.76** 0.67** 0.71** 1
EY 3.65 0.85 0.73** 0.69** 0.68** 0.76** 1
NPM 3.66 0.64 0.66** 0.64** 0.78** 0.64** 0.76** 1
OPM 3.89 0.84 0.79** 0.73** 0.93** 0.75** 0.74** 0.66** 1
Notes: **. Correlation is significant at the 0.01 level (2-tailed).

The Table 4.19 shows that there is positive correlation between return on asset and
operational performance which means that higher the return on asset higher would be
operational performance of merged bank. Similarly there is positive correlation
between return on equity and operational performance which means that higher the
return on equity higher would be operational performance of merged bank.

Earning per share is also positively related to operational performance indicating that
better the Earning per share, higher would be operational performance. There is a
positive correlation between earning yield and operational performance. It means that
higher the earning yield higher would be operational performance.

Net profit margin is also positively related to operational performance indicating that
better the Net profit margin, higher would be operational performance. There is a
positive correlation between operating profit margin and operational performance. It
means that higher the operating profit margin higher would be operational
performance.

Table 4. 20: Regression among variables

Regression coefficients of SE
Mode Intercep R2 F
E
l t
ROE ROA EPS EY NPM OPM
1. 1.323 0.83 0.5 0.56 352.4
(10.33)* (19.78)* 5 5
 42

* *
0.87
0.7 616.2
2. 0.66 (23.60)* 0.39
8 8
(5.78)** *
0.87
0.7 445.1
3. 0.78 (20.63)* 0.53
9 8
(7.43)** *
1.36 0.69
0.5 276.2
4. (10.32)* (15.90)* 0.31
9 6
* *
0.85
0.8 745.2
5. 0.24 (26.61)* 0.55
2 1
(1.12) *
2.21 0.61
0.2
6. (11.43)* (8.19)* 0.69 50.69
3
* *
0.72 0.11 0.31 0.33 0.9 223.2
7. 0.25
(5.45)** (4.26)** (5.06)** (4.89)** 0 4
0.69 0.33 0.51 0.20 0.24 0.9 267.5
8. 0.44
(5.24)** (3.80)** (5.32)** (2.37) (3.34)** 2 3

1. Figures in parentheses are t-values.

2. the asterisk (**), (*) sign indicates that the results are significant at 0.01 and 0.05 level of
significance respectively.

TheTable 4.20 represents the regression of merger and acquisition in operational

performance. The regression of return on equity variables on operational performance
is positive. The results hence indicate that higher the return on equity, higher would
be operational performance. However, the coefficient is significant at 5 percent level
of significance. The beta coefficient for return on asset is positive with operational
performance. The coefficients are significant for operational performance. The results
hence indicate that higher the return on asset, higher would be the operational
performance.

The beta coefficient for earning per share is positive with operational performance.
The coefficients are significant for earning per share. The results hence indicate the
higher the earning per share higher would be the operational performance. The beta
coefficient for earning yield is positive with operational performance. The coefficients
are significant for earning yield. The results hence indicate that higher the earning
yield, higher would be the operational performance.

The beta coefficient for net profit margin is positive with operational performance.
The coefficients are significant for net profit margin. The results hence indicate the
 43

higher the net profit margin higher would be the operational performance. The beta
coefficient for operating profit margin is positive with operational performance. The
coefficients are significant for operating profit margin. The results hence indicate that
higher the operating profit margin, higher would be the operational performance.

Table 4.19: Summary of hypothesis testing

Hypothesi Statement Remark

s s
Ho1 There is no significant difference between operating profit margin of Accepted
pre and post-merger period
H02 There is no significant difference between net profit margin of pre and Accepted
post-merger period
H03 There is no significant difference between ROE of pre and post-merger Accepted
period
H04 There is no significant difference between earning yield of pre and Accepted
post-merger period
H05 There is no significant difference between ROA of pre and post-merger Accepted
period
H06 There is no significant difference between earning per share of pre and Accepted
post-merger period

This study has mainly focused on relationship between merger and acquisition and
operational performance in Nepalese commercial bank. This study has used variables
like return on asset, return on equity, net profit margin, operating profit margin,
earning per share and earning yield as independent variable and dependent variable is
operational performance.

The result of correlation analysis indicates that earning per share is also positively
related to operational performance indicating that better the Earning per share, higher
would be operational performance. There is a positive correlation between earning
yield and operational performance. It means that higher the earning yield higher
would be operational performance. Net profit margin is also positively related to
operational performance indicating that better the Net profit margin, higher would be
operational performance. There is a positive correlation between operating profit
margin and operational performance. It means that higher the operating profit margin
higher would be operational performance.

The result of regression analysis shows that, the beta coefficient for earning per share
is positive with operational performance. The coefficients are significant for earning
per share. The results hence indicate the higher the earning per share higher would be
 44

the operational performance. The beta coefficient for earning yield is positive with
operational performance. The coefficients are significant for earning yield. The results
hence indicate that higher the earning yield, higher would be the operational
performance.
 45

CHAPTER V

SUMMARY AND CONCLUSION

Summary

Mergers and acquisition is a corporate finance strategy has been considered to be one
of the best strategies for firms that desire growth and increased profitability. A
number of studies conducted on accounting data to measure the effect of takeover on
operating performance in long and short run argue that any benefit arising from
acquisition will eventually be reflected on the company’s financial performance
records (Tuch & O’Sullivan, 2007). According to Pilloff & Santomero (1997), there is
little empirical evidence of mergers achieving growth or other important performance
gains. Also, evidence supporting merger and acquisitions to achieve costs saving and
efficiency gains is sparse (Kwan, 1999). Towards this end, Beitel et al. (2003) found
no gain effect due to mergers and acquisitions on the performance of employees.

The success or failure of M&A can be attributed in part to the behavior of the affected
employees (Appelbaum et al., 2007). This is because the advent of M&A in the
banking sector have created structural changes at the organizational level thereby
leading to restructuring and downsizing processes in order to cope with the dynamic
pressures of globalization and the importance of managing people at work and in
particular planning and managing of their careers (Appelbaum et al., 2007). Arguably,
people are the most valuable resource in contemporary organizations, and providing
them with a long term stable career is a win-win situation for both organizations and
their employees. Thus, when employees are not certain about their career due to
constant change, they tend to experience increased stress, perceived uncertainty and
absenteeism, significant decline in job satisfaction, commitment as well as negative
perception of the organization’s trustworthiness (Schweiger & De-Nisi, 1991).

The major purpose of this study is to investigate the impact of merger and acquisition
on operational performance in Nepalese commercial banks. The study has the
following specific objectives: to identify whether merger is a solution to a problem of
Nepalese Banking and Financial Institution or not, to analyze the impact of merger on
operating performance of the selected banks, to understand the views of professionals
 46

on different aspects of merger in context of Nepal and to scrutinize the success/failure

of mergers in Nepalese Banking Industry.
Based on the analysis of data, the result shows that there is positive correlation
between return on asset and operational performance which means that higher the
return on asset higher would be operational performance of merged bank. There is
positive correlation between return on equity and operational performance which
means that higher the return on equity higher would be operational performance of
merged bank. The beta coefficient for return on asset is positive with operational
performance. The coefficients are significant for operational performance. The results
hence indicate that higher the return on asset, higher would be the operational
performance. The beta coefficient for net profit margin is positive with operational
performance. The coefficients are significant for net profit margin. The results hence
indicate the higher the net profit margin higher would be the operational performance.
The beta coefficient for operating profit margin is positive with operational
performance. The coefficients are significant for operating profit margin. The results
hence indicate that higher the operating profit margin, higher would be the operational
performance.

Conclusion

The major conclusion of this study is that there is significant difference between
merger and acquisition and operational performance in merged and non-merged
banks. There is positive correlation between return on equity and operational
performance which means that higher the return on equity higher would be
operational performance of merged bank. Earning per share is also positively related
to operational performance indicating that better the Earning per share, higher would
be operational performance. There is a positive correlation between earning yield and
operational performance. It means that higher the earning yield higher would be
operational performance.

The beta coefficient for return on asset is positive with operational performance. The
coefficients are significant for operational performance. The results hence indicate
that higher the return on asset, higher would be the operational performance. The beta
coefficient for earning per share is positive with operational performance. The
coefficients are significant for earning per share. The results hence indicate the higher
 47

the earning per share higher would be the operational performance. The beta
coefficient for earning yield is positive with operational performance. The coefficients
are significant for earning yield. The results hence indicate that higher the earning
yield, higher would be the operational performance.

Recommendations

The major recommendations to improve operational performance from merger and

acquisition in Nepalese commercial banks are explained below:

 The study observed a positive relationship between return on equity and

operational performance. Therefore merged bank should focus on return on
equity in order to improve operational performance.
 The study observed a positive relationship between return on asset and
operational performance. Therefore merged bank should focus on return on asset
in order to improve operational performance.
 The study observed a positive relationship between net profit margin and
operational performance. Therefore merged bank should focus on net profit
margin in order to improve operational performance.
 The study observed a positive relationship between earning yield and operational
performance. Therefore merged bank should focus on earning yield in order to
improve operational performance.
 The study observed a positive relationship between earning per share and
operational performance. Therefore merged bank should focus on earning per
share in order to improve operational performance.
 The study observed a positive relationship between operating profit margin and
operational performance. Therefore merged bank should focus on operating profit
margin in order to improve operational performance.

Scope for future research

This study can be regarded as the preliminary steps in investigating the relation
between factors affecting operational performance from merger and acquisition in
context of Nepalese commercial banks. The study remains enough ground for future
researchers which are listed below:
 48

 This study can be done using primary data as sample. Academicians are
suggested to take secondary data as a sample for more convenient result.
 The future studies can be carried out by selecting other financial institutions like
development banks and finance companies to grab wider view of factors affecting
operational performance.
 This study is based on the survey of commercial bank’s branches inside the
Kathmandu valley. Therefore, the further studies can be carried out by extending
the survey outside the Kathmandu valley.
 Future research may explore other constructs that relate to merger and acquisition
factors.
 49

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