CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE

BANKING INDUSTRY

BY
Amrit Kharel
Dikshya Munankarmi
Mahima Karki
Punam Mahat
Somesh Lal Joshi

A Research article Report

Submitted to
Prof. Dhurba Lal Pandey

at the
School of Management
Tribhuvan University

Kathmandu
Nov, 2019
 Abstract
This study examines the current state of Mergers and Acquisitions in Nepalese banking
Industry. This study shows how effective the mergers and acquisition have been. Results of
this study shows that there is no significant mean difference in reward and compensation for
extra work for different job position. Along with this, the study tells that there is no significant
relationship between Risk Involved in M&A and the success rate of M&A in Nepalese
Banking Industry. The level of risk in M&A does not exactly determines the success level of
M&A. Finally, this result shows that there is negative correlation between the way company
policies are put into practices and recent merger is the result of bad economic condition of
the bank.
Keywords: Shareholders, Mergers and Acquisitions (M&A), Return on Equity (ROE),
Earning Per Share (EPS)
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

Background
Two companies together are more valuable than two separate companies, this constitute the
motive behind mergers and acquisitions of companies while tracking the history of merger
and acquisition. M&As can add value to a company and can maximize its market share and
profitability in three main ways: through size (economies of scale), through market control
(higher market share, lower dependency) (Appelbaum et al., 2000) and through geographic
and product diversification (KPMG, 2003). Moreover, the 2003 KPMG survey supports the
view that ‘a higher proportion of deals now enhance value for the acquirer’s shareholders, . . .
with more successful deals being identified in advance and fewer coming about as a result of
opportunism’.

Although plenty of attention is paid to the legal, financial, and operational elements of
mergers and acquisitions, those of human resource management (HRM) are the most
neglected. Many researchers have found that negative employee reactions to a merger or
acquisition may lead to other negative outcomes such as lower levels of job security, lower
levels of job satisfaction and less favorable attitudes toward management (e.g. Buono &
Bowditch 1989, Nemanich & Keller 2007); lower commitment (Fulmer & Gilkey 1988); a
high level of anxiety and stress, fear of a decline in status or career prospects and feelings of
being “sold out” (Blake & Mouton 1985, Ivancevich, Schweiger & Power 1987); employee
resistance preventing synergy realization (Larsson & Finkelstein 1999).

Specifically, we believe that scholars have failed to adequately study how employees and
managers view this impact of merger and acquisition on a personal level. So, this study
investigated the impact that an merger and acquisition had on the employees of the company
and focusing on the effects resulting from changes in management practices, personal
circumstances and the organizational environment.

Similarly Mergers and acquisition has always been an issue for strategic managers and
financial analysis, which due to the high competition arising from the fast-changing global
market, it has significantly resulted in a condition where firms are finding it gradually difficult
to remain competitive. So, another objective is to analyze the financial performance of NMB
bank before and after merger and acquisition.
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

Merger and Acquisition is a relatively new concept to the Nepali Banking and Financial
Institutions (BFIs). Nepal Rastra Bank introduced the Merger Bylaw 2068 (B.S) grounded on
the Company Act 2063(B.S) article 177, BAFIA 2063 (B.S) article 68 and 69, and
encouraged all the BFIs to undergo merger as a consolidation. Laxmi Bank, Nepal
Bangladesh Bank, and Narayani National Finance were among the few institutions to have
undergone merger process before the announcement of the bylaws. Through the 2015
monetary policy, NRB announced a four-fold hike in the minimum paid up capital of the
commercial banks and up to twenty-four-fold increment in the same for the development
banks. This required the commercial banks to increase their paid-up capital to Rs. 8 billion
while the national level development bank would have to increase to Rs. 2.5 billion. The
requirement imposed by the banking regulator has further enhanced the conditions to foster
the merger and acquisition process; the wave of M&A, that started as early as 2011, has hit
Nepali BFI sector. As of June 2016, 96 BFIs have taken part in the merger process to become
35 (NRB, 2016).

Literature Review

A merger is defined as a strategy that combining two companies and occurs when two
businesses join or merge to one single company with a new name. As Coffey et al. (2002)
perceptively state, M&A represent a “marriage”. Machiraju (2007) has stated that merge take
place when two companies differ significantly in size. “Acquisition refers to a situation where
one company acquires another and the latter ceases to exist” (Machiraju, 2007). To sum up, a
merger “creates” a new company with a new name from two organizations who join forces.
An acquisition happens when one business buys another company which is smaller and might
be absorbed within the parent organization or run as a subsidiary (Taneja & Saxena, 2014).

Picardo (2019), A corporate merger or acquisition can have a profound effect on a company’s
growth prospects and long-term outlook. But while an acquisition can transform the acquiring
company literally overnight, there is a significant degree of risk involved, as mergers and
acquisitions (M&A) transactions overall are estimated to only have a 50% chance of success.
Company generally go into merger because of the reasons such as to create synergies and
economies of scale, to dominate the market and to get bigger.
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

Business Maps of India (n.d.) Mergers and acquisitions bring a number of changes within the
organization. The size of the organizations change, its stocks, shares and assets also change,
even the ownership may also change due to the mergers and acquisitions. The mergers and
acquisitions play a major role on the activities of the organizations. However, the impact of
mergers and acquisitions varies from entity to entity; it depends upon the group of people who
are being discussed here. The impact of mergers and acquisitions also depend on the structure
of the deal.

Employees generally view organizational changes as a threat, so that mergers and

acquisitions, which are particularly stressful forms of organizational reconfiguration, often
generate significant trauma and uncertainty about the future for employees (Morán &
Panasian 2005). Mergers and acquisitions introduce changes in their well-defined career paths
that can affect future opportunities in the organizations for which they work. For them, M&A
will often mean lay-offs, relocation, downsizing, restructuring or being assigned to new jobs.
They thus find themselves faced with a completely different situation and with the prospect of
changes in job profiles and work teams. .As a consequence, they may feel very insecure,
anxious or even betrayed. The research done by Naveed, Hanif & Ali (2011) showed that
employees who were working in a pre-mergers & acquisitions environment felt a strong threat
to their job security.

Effective support for career development is important for employees and forms part of a joint
strategy with organizations to achieve the resilience required to handle change more
effectively. There is evidence, however, that the organizational changes typically described in
the literature, such as delayering in a quest for flexibility, have had a negative impact on
career progress and resulted in resistance to change (Lips-Wiersma & Hall 2007).

Organizations focus on career development to build engagement during difficult times so that
stressed employees have a positive focus on the future (Knight 2014).

Methodology

Data Collection procedure: Primary data were collected using the questionnaire.

Population and sample: Questionnaire were distributed to 215 people out of which 93
responded to the question and provided their view point towards the M&A.
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

Instrument: Statistical tools such as T-Test, Chi-Square and correlational analysis has been
used to analyze the data that has been received. Statistical Package for the Social Sciences
(SPSS) has been used to get the results.

Data Analysis
Table: 1 Demographic Characteristics
Variable Group N Percentage Cumulative
Percent
Age 20-30 53 57 57
30-40 29 31.2 88.2
40-50 9 9.7 97.8
50-60 2 2.2 100
Total 93 100
Position Trainee 30 32.3 32.3
Junior Assistant 31 33.3 65.6
Senior Officer 18 19.4 84.9
Manager 6 6.5 91.4
Others 8 8.6 100
Total 93 100

1) Independent T-test between Junior Officer and Senior Officer with the Payment
regarding the compensation policy for the extra work.

Table:2 Levene's Test for Equality of Variances (t-test for Equality of Means)

F Sig. t df Sig. Mean Std. 95%

(2- Differen Error Confidence
taile ce Differen Interval of the
d) ce Difference
Lower Upper
The Equal 0.01 0.91 0.87 47 0.38 0.26703 0.30478 - 0.8801
reward variance 3 0 6 5 0.3461 7
and s 2
compensat assumed
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

ion Equal 0.86 34.45 0.39 0.26703 0.30822 - 0.8931

policies variance 6 2 2 0.3590 0
for extra s not 5
work. assumed

𝐻0 : There is no significant mean difference in reward and compensation for extra work for
different job position.

𝐻1 : There is significant mean difference in reward and compensation for extra work for
different job position.

From the table 2, it can be seen that the p value that is 0.910 is greater than given value of
0.05. Hence, in this case, the null hypothesis is not rejected. It means there is no significant
mean difference in reward and compensation for extra work for different job position. The
research work can’t provide enough evidence to day that there exist significant difference
between Job position and the reward and compensation for extra work.

2) Independent T-test for Trainee and Manager with the Payment regarding the
compensation policy for the extra work.

Table: 3 Levene's Test for Equality of Variances (t-test for Equality of Means)

F Sig. t df Sig. Mean Std. 95% Confidence

(2- Differen Error Interval of the
tailed ce Differe Difference
) nce
Lower Upper
The reward Equal 2.32 0.13 0.40 34 0.68 0.20000 0.4899 - 1.19559
and varianc 2 7 8 6 0 0.795
compensati es 59
on policies assume
for extra d
work.
Equal 0.50 9.38 0.62 0.20000 0.3926 - 1.08273
varianc 9 4 2 5 0.682
es not 73
assume
d
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

𝐻0 : There is no significant mean difference between Job position and the reward and
compensation for extra work.

𝐻1 : There is significant mean difference between Job position and the reward and
compensation for extra work.

From the table 3, it can be seen that the p value that is 0.137 is greater than given value of
0.05. Hence, in this case, the null hypothesis is not rejected. It means there is no significant
mean difference between Job position of Trainee and Manager with the reward and
compensation for extra work. The research work can’t provide enough evidence to say that
that there exist significant mean difference between Job position and the reward and
compensation for extra work.

3) Chi Square Analysis of Risk Involved in M&A and the success rate of M&A
Table: 4

Value df Asymptotic Exact Exact Sig. (1-

Significance Sig. (2- sided)
(2-sided) sided)

Pearson Chi-Square 1.531 1 .216

Continuity Correction .793 1 .373
Likelihood Ratio 1.412 1 .235
Fisher's Exact Test .297 .184
Linear-by-Linear 1.514 1 .219
Association
N of Valid Cases 93

a. 1 cells (25.0%) have expected count less than 5. The minimum expected count is 3.22.
b. Computed only for a 2x2 table.
The above presented result of table 4 is derived from the Chi square test. It can be seen that
the table shows the results of association between “Risk Involved in M&A” and “The success
rate of M&A”.
Var1 = Risk Involved in M&A.
Var2 = The success rate of M&A.
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

𝐻0 = There is no any significant relationship between risk involved in M&A and the success
rate of M&A.
𝐻1 = There is significant relationship between risk involved in M&A and the success rate of
M&A
From the result of Pearson Chi-Square analysis, we can know that the significance level or F-
Value is 0.216. And, the given value is at 95% or 0.05. Since the F-Value is greater than 0.05,
null hypothesis is not rejected.
Therefore, we can say that there is no significant relationship between Risk Involved in M&A
and the success rate of M&A in Nepalese Banking Industry. The level of risk in M&A does
not exactly determines the success level of M&A.
4) Correlation Analysis of the way company policies are put into practices and recent
merger is the result of unfavorable economic condition of bank.
Table 5: correlation analysis

The recent merger is the The way company

result of the unfavorable policies are put into
economic conditions in practices.
bank
The recent merger is the Pearson Correlation 1 -0.121
result of the unfavorable
economic conditions in Sig. (2-tailed) 0.249
bank
The way company policies Pearson Correlation -0.121 1
are put into practices.

Sig. (2-tailed) 0.249

a. Listwise N=93

The table 5 shows that there is negative correlation between the recent merger is the result of
unfavorable economic conditions in bank and the way company policies are put into practices
.i.e. -0.121. It shows that there is no significant relationship between two variables at 5% level
of significance.

5) Impact on Financial Performance by M&A with reference to NMB Bank and Om

Development Bank

Before Merger the individual financial figure of NMB bank and Om Development bank
shows ROE 11.68% and 11.26% respectively. And, EPS of Rs.29.27 and Rs 14.86
respectively.
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

However, after the merger ROE of the firm is 13.62% and EPS is Rs. 25.25. It can be said that
merger of the both bank has helped to increase the financial performance in terms of
investors’ eyes because the merger has led to increase the ROE and average EPS of the bank.
Though the situation of banking industry is not so good.
Findings

The major findings of the study are summarized as follows:

 We first explored the relationships that might exist between each organizational
effectiveness measure and each strategic HR practice to both employees and managers in
companies with M&A experience.
 There is no significant mean difference in reward and compensation for extra work for
different job position.
 There is no significant relationship between Risk Involved in M&A and the success rate
of M&A in Nepalese Banking Industry i.e. The level of risk in M&A does not exactly
determines the success level of M&A.
 There are significant differences in corporate culture of Merged companies ”
 There is no negative correlation between recent mergers is the result of unfavorable
economic condition of bank and the way company policies are put into practices.
 Merger of the NMB and OM development bank has helped to increase the financial
performance in terms of shareholder value because the merger has led to increase the ROE
and average EPS of the bank.

Conclusion
The aim of this study was to study about the current status of M&A of banking industry of
Nepal. The article clarifies that there is negative correlation between economic condition of
bank and merged activity. Weaker the economic condition of bank, higher the chance of
merger and vice-versa. Similarly, this article has contributed to identifying what successful
financial institutions with M&A experience are doing in their management of people. With
the evidence of respondent opinion we come to know that there is no difference in reward and
compensation for extra work before and after the merger and acquisition policies in banks.
CURRENT STATE OF MERGER AND ACQUISITION IN NEPALESE BANKING INDUSTRY

Testing of hypothesis has demonstrated that the main cause on the recent merger, which is
based to employees and manager’s opinion, is the result of unfavorable economic condition.
According with many publications, the main reason for merger was the need to grab
competitive advantages and for market dominance through economies of scale.

Also, the results of this study note that employees consider that merger was necessary, but in
moderate degree. This conclusion implies with the overall perception about the benefits of the
merger, which was considered by employees' perceptions in a moderate level. Finally, an
important finding is the fact that there is no significant resistance to change both for
employees in M&A banks. And merged NMB bank have increased shareholder value after
merger. This result will allow a smoother integration into the new corporate culture, a fact
which is also confirmed by the quality gap which isn’t statistically significant.

Implication

From this research, we can suggest that financial institutions planning for merger and
acquisition a long-term business planning should be applied or through a process of
integrating company cultures before M&A. After a merger, employees don't know what to
expect. Also, it is crucial for the new company to recruit professionals who have
extensive knowledge, experience and take care of factors such as employee morale.
Furthermore, employees’ participation is very important and through corporate
communication the two cultures of these companies will understand how they should work
together. Future work should concentrate to examine the effect of the new culture to the
financial assets of the company. This analysis will extract conclusions both from the aspect of
employees and the new company. Summarizing the conclusions above, the final company will
have to form a new culture, which all employees will learn, follow and respect and will
incorporate data both from the two organizations.
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