CHAPTER-II

REVIEW OF LITERATURE

This chapter is to present the overview on the study through the different views and
ideas expressed by the past researches and philosophers on the issue related to the
study. This chapter has presented theoretical literature which explains the theories
related to the merger and the empirical literature which explains the empirical results
conducted by the researchers on the merger and acquisition.
Theoretical Literature Review: Different theories related to merger and acquisitions have
been presented for the justification of its impacts. Theories have been classified as value
increasing and value decreasing. Value increasing theories focuses on the generation of the
synergy from the M&A.

a) Differential Efficiency Theory: This theory explains that the merger and acquisition
increases the value of the firm as the firm’s management is strengthen from the merger of other
firms and as a result increases the efficiency of the management of the firm. The firm through
merger of same industry would be benefited as it would mean that company which is merging
with
the other company can expand without much cost because of the efficient utilization of all the
resources. This theory explains that the company having good potential if merged could be
utilized at optimum level with lower cost and increasing efficiency of the firm. This theory also
explains that the synergy would be gained from transfer of knowledge, economies of scale and
economies of scope.

b) Financial Synergy Theory: This theory explains that the financial synergy could be
gained by the firm through M&A as the firm could use internal financing at lower costs than
external financing. This would increase the diversification opportunities and lower the cost of
capital.

2.1 Conceptual Framework

2.1.1 Concept of Merger

In simple words, merger is complete absorption of one or more companies by a single existing
company. In other words, it is the process of diluting one or more companies together to form a
new company in a strong way making more competitive. Merger is a technique of business
growth. It is not treated as a business combination. Merger is done on a permanent basis.
Generally, it is done between two companies. However, it can also be done among more than
two companies. During merger, acquiring company and acquired companies come together to
decide and execute a merger agreement between them.

Investopedia an online dictionary defines merger as “The combining of two or more companies,
generally by offering the stockholders of one company securities in the acquiring company in
exchange for the surrender of their stock.”

The conceptual Framework of the research paper shows the relationship the study is
based on. This study is based on the merger and its overall impact post-merger based
on the variables like profitability, Liquidity and Capital markets.

Profitability

Merger Liquidity Impacts

Capital
Markets

Figure 1: Conceptual Framework of the study

The conceptual framework explains the relationship between the merger and its impact on the
performance of the bank with the help of different variables i.e. overall financial indicators of
NIC Asia Bank Ltd. The overall financial indicators will be explained by the changes in the
financial performance of banks pre-merger and post-merger as well as the impact due to the
merger. The overall financial performance of NIC Asia Bank Ltd will be explained by changes in
different Profitability Indicators (Gross Profit Margin, Net Profit Margin, Return On Assets,
Return On Equity, Average Yield, Non-Performing Assets, Total Loan Loss Provision To Total
NPA,), Liquidity Indicators(Liquidity Ratio, Cash To Deposit Ratio, Credit To Deposit Ratio,
Capital Fund To RWA), Capital Market Indicators(Earnings Per Share, Market Per Share, Net
Worth Per Share, Earning Yield, Price Earnings Ratio, Price To Book Value Ratio, Market
Capitalization) pre-merger and post-merger.