INTRODUCTION

1.1 Background of the Study

Mergers and Acquisition (M&A) has been predominately been in the limelight in the
current banking scenario along with some issues like bonus shares and right shares. It
is considered as strategy for firms to strengthen and maintain their position in the
market place. Many of the firms gone through merger have been successful to
strengthen themselves and gain synergy from the merger and acquisition.
Merger is the combination of two or more firms of same product line or different line
when they decide to be one strong and big firm and carry their work simultaneously in
future. Researcher Ganghan (2002) defines “merger as the comparison of two or more
companies in creation of a new entity or formation of a holding company.”
“Acquisition is the purchase of shares or assets of another company to achieve
managerial influence not necessary by mutual agreement.” Another researcher
Ramaiya (1977) defines “A merger or amalgamation results in the combination of two
or more companies in to one, where in the merging entities lose their identities by
being absorbed into the merger entity.” Merger has been perceived as strategy which
could be best described as M=Mixing, E=Entities, R=Recourses for G=Growth,
E=Enrichment, R=Renovation. The history of merger and acquisition in Nepal dates back
to 2004 when the Laxmi Bank Limited and HISEF Finance Limited merged into one to
perform the operations together as one entity. The modern trend of merger and
acquisition started with increase in paid up capital by NRB. The reasons and motive for
the merger and acquisition in Nepalese banking industry could be dominated by the rise
in the paid up 2 capital by NRB but there may be other factors which could be influencing
the merger and acquisitions. The M&A of NIBL and Ace Development Bank could be
different from the present common reason but the advantages of M&A have definitely
attracted the stakeholders to opt for the M&A. Nepal Rastra Bank directed all the BFIs to
increase the paid up capital. The commercial banks were given target of Rs. 8000 million
to be increased from Rs. 2000 million with change around 300% while national level
development banks were given target of Rs. 2500 million which is 290% more than the
present paid up capital. Similarly, other BFIs were also directed to increase paid up
capital with change being around 33.33% to 500%. These
circumstances have changed the status quo of the BFIs in the banking industry and as
a result BFIs had to go for the merger as best alternative to reach the targeted paid up
capital and have sustainability in the industry. The effect of rise in paid up capital has
given the BFIs merger and acquisition as the suitable option due to which the industry
saw a trend in the M&A. This has created a huge decrease in the numbers of BFIs in the
Nepalese banking industry. The banking sector had around 32 commercial banks, 88
development banks and around 80 finance companies around 2012-2013 which have been
reduced to 28 commercial banks, 36 development banks and 26 finance companies as of
2017. The change in the number of BFIs shows that many of the BFIs have been forced
to go for the M&A to be able to raise the capital as set by NRB. The current scenario is
dominating the issue of increase in paid up capital through bonus, right shares as well as
M&A. The stakeholders are in the mind of state to achieve some value of their shares of
BFIs. The success and failure of M&A have
been sometimes decided by the value shareholders get to their shares in the form of
swap ratio. The successful merger of NIC Asia, NCC bank, Kumari Bank, Global
IME Bank, Prabhu Bank, NMB Bank, etc. have shown the stories of successful
merger but the performance after M&A has been considered positive by the
stakeholders leading to the path of many merger process in the future. The aggressive
marketing of the banks and increasing competition has also challenged the BFIs to
become more aggressive as well as stronger in terms of size, branches, products, etc.
This can be seen possible when the banks are able to achieve required paid up capital
and become strong with its size and branches.

NIC ASIA Bank was founded as Nepal Industrial and Commercial Bank on 21 July
1998. It was renamed NIC ASIA Bank on 30 June 2013 after it merged with Bank of
Asia. Nepal witnessed the first merger of two commercial bank in its history. The bank
operates with the vision ' To ensure creation of optimum values for all the stakeholders'
while its mission is ' To be a Bank of 1st Choice for all the stakeholders.' It is one of the
largest private commercial banks in terms of balance sheet size, number of branches,
ATM network and customer base. The Bank has successfully completed its 21 years of
operation. The company has currently the following wholly owned subsidiaries: 1. NIC
Asia Capital Limited 2. NIC Asia Laghubittiya Sanstha limited

The Bank with its 317 branches, 405 ATMs, 95 Extension counters and 44 branchless
banking services is the largest bank in terms of footprint expansion, customer base
including balance sheet size. It has around 2500 plus dedicated staffs. The bank has
received prestigious "Bank of the Year" by The Banker, Financial Times twice, one
before merger on 2007 and other on 2013.