Acquisition of Nepal Bangladesh Bank by Nabil Bank

BY

Shashi Shah

PU Registration no. 2019-2-03-2001

Exam Roll no. 20031933

A Project Work Report Proposal submitted to Pokhara University in partial

fulfillment of the requirements for the degree of

Bachelor of Business Administration

at the

LA Grandee International College

Pokhara

February/2023

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Contents
Chapter One.............................................................................................1
Introduction..............................................................................................1
1.1Background.......................................................................................1
1.2 Objectives of the study...................................................................2
1.3 Need and scope of the study..........................................................3
1.4 Limitation of the Study....................................................................4

Literature Review.................................................................................5
2.1.1 Power theory................................................................................5
2.1.2 Resource theory or synergy theory.............................................6
2.1.3 “Eat or be eaten” theory of mergers...........................................6
2.2 International Context......................................................................7
2.3 National Context.............................................................................9

RESEARCH METHODOLOGY................................................................11
3.1 Research Design............................................................................11
3.2 Nature and Source of Data...........................................................11
3.3 Theoretical Framework................................................................12
REFERENCES............................................................................................13

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1
 Chapter One

Introduction

1.1Background

Nabil Bank Limited, previously known as Nepal Arab Bank Limited is a first private
commercial bank in Nepal, commencing its business since July1984. Nabil was incorporated
with the objective of extending international standard modern banking services to various sectors
of the society. Pursuing its objective, Nabil provides a full range of commercial banking services
through its 52 points of representation. In addition to this, Nabil has presence through over 1500
Nabil Remit agents throughout the nation.

Nepal Bangladesh Bank ltd. Also known as NBB was a public owned commercial bank,
established in June 1994. The overall strategic objective of the NBB was to stick in core values
and conduct for the betterment of the bank. Its head office is at Kamaladi-28, Kathmandu. It had
a network of 111 branches, 8 Extension Counters, 5 Branchless banking, and 87 ATM terminals.

The financial liberalization of the late 1980s has brought immense benefits to the Nepali
economy in the forms of increase in private sector investments and growth in access to finance
opportunities. The competitive financial system has developed customer-centric services and
innovative use of technology thereby, widening the service provided by the banking institutions.
However, due to inadequate capital and narrow financial inclusiveness, the Nepali financial
industry has not lived up the promises it had shown immediately following the liberalization
process.

Nepali banking system is characterized by low volume of turnover, high-interest rate on

lending, inefficient management and inadequate resources to fund big projects (NRB, 2013).
Nepali financial system has not only fallen short of attaining meaningful financial inclusion but
also displays regional and urban-rural imbalance. Nepal Rastra Bank (NRB) has undertaken the

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financial consolidation policy in order to overcome these problems. Merger and Acquisition
(M&A) is one of the efficient measures of consolidation in the financial system. The
Government of Nepal has been promoting mergers as a means to achieve efficiency through
economies of scale and scope by facilitating a consolidation between weaker and stronger banks
to create an efficient and robust merged entity.

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.

Merger and Acquisition is considered a vital tool to facilitate the sound and efficient
performance of the financial industry while solving the problems underlying the system. The
instrument also plays a key role in bringing down the cost of operations and increasing the
market competitiveness and profitability of the firms. In the international financial markets,
M&A is often conducted to fulfil the demands of regulatory bodies and as an attempt to enhance
the competitive advantage and expand the operations of the financial institutions. But, despite
these hopeful expectations, almost half of the mergers and acquisitions fail to meet the initial
expectations.

After the Covid-19 pandemic, Merger and Acquisition has become more popular in order

to overcome the financial losses and uncertainties. In less than a year, the acquisition of NBB by
Nabil bank is the second big merger/acquisition that has landed in. Earlier, a merger plan
between Himalayan Bank and Nepal Investment Bank Limited failed due to the vested interests
of the board of directors of the banks concerned.

1.2 Objectives of the study

 To build knowledge and facilitate efficient learning concerning acquisition.

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  To understand the need, process and outcome of acquisition.

 To understand how merger and acquisition mean greater financial strength

for both companies involved in the transaction.

 To understand how M&A results in exponential growth in a short period of time.

 To understand how pricing and other infrastructures are managed

during M&A.

 To know about the issue of adjustment of the manpower after the acquisition.

 To know about the employee protest that took place during the acquisition and how it
was solved.

1.3 Need and scope of the study

The field of mergers and acquisitions has been a central part of academic research since
the 1950s. Numerous studies have been conducted on the subject, including those focused on
financial and economic factors, strategic considerations, and sociocultural factors. Companies
merge with or acquire other companies for growth. This growth manifests itself in different
ways, such as market share, geographic expansion, knowledge transfer and product
diversification. Growth is what underpins all of these motives.

The process of M&A often involves a high degree of uncertainty and can be challenging
for the employees. It is stated that mergers can increase anxiety among employees, thereby
frequently causing counterproductive behaviors. The increasing changes within an organization
lead to increase in job insecurity among employees, ultimately resulting in the decrease of
organizational commitment, trust in the organization, job satisfaction and job performance.
Without a doubt, merger and acquisition activities generate substantial psychological impact on
employees but how advantageous M&A can be on the other hand cannot be neglected as well.

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1.4 Limitation of the Study
The limitations of the study are those characteristics of design or methodology that
impacts or influences the interpretation of the findings from the research. In my study also, there
are some limitations and they are enlisted below:

 The study deals with certain financial tools such as ratio analysis and statistical tools.
 Only secondary data is used here.
 Limited resources and time at the disposal of the researcher did not allow a much wider
analysis of the subjective in question.
 The whole study will be limited to a specific time period.

2.1 Literature Review

This chapter deals with the literature review and provides conceptual framework
associated with merger performance of Nepalese banking institutions from other researchers that
have been carried out in the same field in developed and emerging market. It is divided into two

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sections. First section presents theories of merger and acquisition, second section is concerned
with empirical studies about impact of merger and acquisition. Second section is further divided
into two parts that includes review of major studies regarding impact of merger and acquisition
on financial performance and review of Nepalese studies regarding impact of merger and
acquisition on financial performance.

Theories on merger and acquisition

There are some theories that are used to explain the reason of firm to engage in merger
and acquisition. They are :-

2.1.1 Power theory

Market power is potential of a market participant or group of participants (persons,
firms, partnership, or others) to influence price, quality and the nature of the product in the
market place. In turn, market power can lead to un-competitively high and risk-free profits
(Montgomery, 1985). Based on the market power theory, merger and acquisition will result in a
reducing the number of banks and shrinking of competition, which lead to higher market
concentration and increase market power of the banking sector.

This will enable banks to increase price within the market and gain excess profit. Based
on this reason, merger and acquisition is expected to improve performance of both targets and
bidders. (Hankir et al., 2011).

2.1.2 Resource theory or synergy theory

Based on synergy theory, it is said that ―the amount of economic value that will result
from a merger will depend on the amount of the resource held by the firm, relative to total
amount present in the economy, and availability of opportunities to use this resource. (Chatterjee,
1986).

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 Merger and acquisition are expected to raise future cash flow and increase firm value by
synergy in operating and financing either due to increase economic of scale by enlarging the firm
size, or due to increase economic of scope because of specific combination advantage between
the merged firms.

The synergy comes from revenue increases as a result of cross selling or up selling, cost
reduction as a result of efficiency gains, and benefits of new opportunities in tax saving. Under
this theory, performance of both targets and bidders is expected to improve. (Hankir al., 2011)

2.1.3 “Eat or be eaten” theory of mergers

According to Gorton, Kahl and Rosen (2005), the basic elements of the ―eat or be eaten
theory is based on the following assumptions:

First, managers may have a preference for keeping their firms independent. Managers of
acquired firms are likely to play subordinated roles in the new firms or may even lose their jobs.

Secondly, there is a state of the world in which at least some mergers generate value.

Thirdly, a firm of a given size cannot acquire a larger firm. The larger the acquisition, the
more difficult it is to finance.

Thus, the policy thrust of the ―eat or be eaten‖ theory is that mergers and acquisitions
could take place either to avoid being acquired by other firms, maintain company’s
independence, increase a firm’s size or protect its managers’ jobs. In other words, managerial
defensive motives may be the reason for mergers and acquisitions as managers may want to
make acquisitions to increase their firm’s size and hence reduce the likelihood of their firms
being taken over.

2.2 International Context

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 Vander (1996) analyzed the effects of merger and acquisition on performance of the
banks. This study highlighted various techniques to estimate the treatment effects of banks
mergers on performance. This study provides evidence in favor of the view that there are positive
and long-lasting effects of banks merger and acquisition on the bank’s performance and the
society as well especially it totally improves the cost efficiency of the banks. The finding from
this research also suggests that the pre-merger effects are likely to occur in terms of the higher
cost efficiency. Nevertheless, the small size banks enjoy the cost benefits more than the large
size banks.

Tripe (2000) analyzed a small sample of seven to fourteen banks, employed accounting
ratios and two Data Envelopment Analysis (DEA) models to explore the efficiency of six banks
mergers in New Zealand between 1989 and 1998. They found that the acquiring banks to be
generally larger than their existing ones, although they were not consistently more efficient.
They found that five or six merged banks had efficiency gains based on the financial ratios while
another only achieved a slight improvement in operating expenses to average total income.
Based on DEA analysis, they found that only some merged banks were more efficient than the
target banks pre-merger. The results suggest that four banks had obvious efficiency gains post-
merger.

Mylonidis and Kelnikola (2005) examined the merging activities in Greek banking
system. The main purpose is to access the financial performance of the recent mergers and
acquisitions in Greek banking system. The methodology used to access the financial
performance is the Operating Performance (OP) of the banks by observing the pre- and post-
merger financial performance of the Greek banks. Profits, operating efficiency and labor
productivity ratios of the bidding and targets banks do not improve after merger but when
compared with the ratios of non-merging banks then it is concluded that the merger program has
a positive impact on banks’ operating performance but it has a negative impact on liquidity
measure.

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 Said and Rhman (2008) investigated the effect of mergers and acquisitions in the
banking sector of Malaysia. The objective of this study was to make available proof of the
proficiency improvements that banks experienced from the 1998—2004 merger application in
Malaysia and to assess the performance of banking institutions. In this research a sample of ten
Malaysian banks were selected that underwent merger and acquisitions during the 1998 to 2004.
Three approaches to analyze the impact of mergers were used in this study namely paired sample
t-statistics, Data envelopment analysis and regression analysis to test the significance. The
variables of study called camel –type variables include advances/loan loss reserves to capital,
growth of loans; in order to measure the liquidity risks of banks, a ratio of loan to deposits is
used. The efficiency impact of mergers was measured by using the DEA. Paired sample t-
statistics was used to measure the pre- and post-merger average performance of camel type
variables. The results of this study showed that mergers do not result in improving the productive
efficiency of merged banks.

Sinha and Gupta (2011) studied the Indian financial sector in the scenario of mergers
and acquisitions. The aim of this study was to investigate the post- merger impact in the financial
sector of India. Author stated that Indian corporations were subject to a strict control regime
before 1990s. In this study a sample of eighty mergers were selected that involved in mergers
and acquisitions during the 1993—2010. This study uses the paired sample t-test, regression and
wilcoxon /Mann Whitney to achieve the research objectives and to test the significance of
research hypothesis. The variables used in this study were profit margin, total cost, advances,
profit before interest and taxes, depreciation and amortization, profit after tax ratio, current ratio,
interest coverage ratio and return on capital employed. Three years average before and after
merger is taken for all variables and significance is tested with the help of paired sample t-
statistics. The conclusion of this study showed that mergers both have a positive and negative
impact on the firm performance.

Njogo B. Ayanwale and Nwankwo E (2016) evaluated the impact of mergers and
acquisitions on the performance of deposit money banks in Nigeria using a sample of ten banks.
Research used secondary data, obtained from the bank’s annual reports and statements of

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accounts covering a period of 2001-2010, Using nine variables; Return on Assets, Return on
Equity, Net Profit Margin, Asset Utilization, Equity Multiplier, Earnings per share, Debt Equity
ratio, Debt Asset ratio & Leverage ratio, the study evaluated the performance of the banks before
and after mergers and acquisitions using pair sample t-test. The results showed that there is
significant difference in the performances of Deposit Money Banks in the pre- and post-merger
periods using the ROA, ROE and LR as yards tick but shows no significant impacts in the
performances of Deposit Money Bank using other variables as yard stick. The study hereby
recommends that the CBN should set and enforce corporate governance standards for
commercial banks and also enforce risk-based supervision in banks.

2.3 National Context

Shrestha R., (2011) concluded that financial ratios are one of the key indicators of the
performance measurement but may be misleading at times because they do not control for
product mix or input prices. M&A are of growing importance in a developing country like Nepal
because of the extravagant financial losses generated from public enterprises. The objectives and
motives of initiating mergers and acquisitions are undoubtedly beneficial. But their achievements
are still very difficult although not impossible. There are three basic expected objectives of
mergers and acquisitions. They are:

i. Downsizing of the government expenditure.

ii. Promotion of functional expertise through active involvement of private sector to

enhance internal growth, efficiency and productivity and

iii. Promotion of accountability and corporate culture and transparency in merged

companies to have improved managerial and financial implications.

Neupane (2013) examined critical factors in Merger and acquisition of Nepalese

financial institutions and concluded that merged firms enhanced the ability to attract loans,
increased employee’s productivity and net assets growth and that this was evident in the Nigerian

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banking industry. This study also pointed out that mergers and acquisitions might lead to
improved productivity of employees and the general performance of the banks due to the
integration of information and communication technologies packages and good corporate
governance.

Shrestha (2014), 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. Apart from garnering tax advantages and achieving economies of scale, M&A provides
financial benefits and career growth and advancement as well. The benefits of the M&A 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.

Dhakal (2015) after the Nepal Rastra Bank implemented the merger bylaws policy in
2011, Nepalese market was able to observe increasing trend in merger and acquisition in banking
and financial institutions (BFIs) of Nepal. 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.

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RESEARCH METHODOLOGY
This chapter deals with the methodology use to conduct the research and to analyze the
data based. The term ‘methodology’ generally refers to the approach by which data is extracted
to be clearly understood. For the convenience of the presentation, the methodology has been
presented in the following different sub-headings:

3.1 Research Design

This study is based on descriptive and comparative research designs to deal with the
various issues raised in this study regarding pre- and post-merger performance of commercial
bank in Nepal. Descriptive research aims to accurately and systematically describe a population,
situation or phenomenon. It can answer what, where, when and how questions, but not why
questions. A descriptive research design can use a wide variety of research methods to
investigate one or more variables Using descriptive methodology helps in fact- finding operation
that search for adequate information about performance of commercial bank in Nepal
Comparative method is about looking at an object of study in relation to another. The object of
study is normally compared across space and/or time. Comparative methods can be qualitative
and quantitative.

3.2 Nature and Source of Data

To a greater extent this study is based on secondary data which have been collected from
various sources like bank supervision report and banking and financial statistics provided by
Nepal Rastra bank, published and unpublished journals by different researchers and institutions.

A self-administered survey questionnaire was also created to discern sentiments of

employees from the BFIs, the target population, regarding merger and acquisition. The survey
instrument was developed mainly with an aim to identify the factors affecting the organizational
identification and turnover intention of employees after the acquisition.

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 3.3 Theoretical Framework

Independent Variable Dependent Variable

Changes in company
strategy

Cost

Satisfaction with
Management Decision merger

Pre-acquisition planning

Restructuring of
managerial hierarchy

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