murger and acquisition 3

CHAPTER NO 4

HYPOTHESIS

Ho = µ1 = µ2:  No gross profit margin sign difference

Ho = µ1 = µ2:  No operating profit margin sign difference

Ho = µ1 = µ2:  No net profit margin sign difference

Ho = µ1 = µ2:  No return on capital employed sign difference 

Ho = µ1 = µ2:  No return on net worth sign difference

Ho = µ1 = µ2:  No debt equity ratio sign difference

H1≠ µ1 ≠ µ2:  Gross profit margin sign difference

H1≠ µ1 ≠ µ2:  Operating profit margin sign difference

H1 ≠ µ1 ≠ µ2: Net profit margin sign difference

H1≠ µ1 ≠ µ2:  Return on capital employed sign difference 

H1≠ µ1 ≠ µ2:  Return on net worth sign difference

H1≠ µ1 ≠ µ2:  Debt equity ratio sign difference

CHAPTER NO 5

RESEARCH METHODOLOGY

Purpose of Research:

This research study is explanatory causal research. In which independent variable is mergers effects and dependent variable is financial performance.

Mode of Observation:

This research work mode of observation is case study because this work on a particular bank i.e., Allied Bank Limited and this study under the qualitative research. This study use secondary data i.e. annual reports for research work.

Time Dimension of Research:

The time dimension of this research work is longitudinal panel study because this work over an extended period and  this research study work on effects of bank  merger per and post financial performance and study gathers information on the same bank at each time point. This study will use ten years data for this research work five years before merger and five years after merger.

Sampling Design:

There will no sampling design of this research study because this study work on a single bank and the particular bank will be this work sample of study

Data Analysis:

This study will analyze the financial statements data through six financial ratios and apply T- stat to these financial ratios. After this analysis we will find out the effects of mergers pre and post in the financial performance of a particular bank i.e. Allied Bank Limited and on this bases we accept or reject our hypothesis.

CHAPTER NO 6

DATA FINDING AND ANALYSIS

Financial Ratios Analysis:

The six financial ratio calculations of ALLIED BANK LIMITED are given below to find out the mergers effect on before and after financial performance:

1.     Gross Profit Margin:

I will calculate gross profit margin from the following formula:

Gross Profit ÷ Revenue or Sale × 100

Gross profit = Revenue   ̶   Cost of goods sold

                                 OR

Gross Profit = Interest Income   ̶   Interest Expense

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
Gross profit	(1,460,514)	(25,621)	(693,216)	254,455	3,474,690
Revenue	1,062,970	1,472,179	2,143,280	1,739,649	9,226,897
Ratio	(137)%	(2)%	(32)%	15%	37%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
Gross profit	4,747,819	5,124,836	9,075,690	1,075,405	1,1167,693
Revenue	12,313,669	15,006,838	20,160,239	24,153,445	29,111,828
Ratio	38%	34%	45%	45%	38%

2.     Net Profit Margin:

Net profit margin I will calculate from the following formula:

Profit after Tax ÷ Revenue × 100

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
Profit after tax (PAT)	(1,122,065)	(1,069,257)	385,580	168,270	3,090,133
Revenue	1,062,970	1,472,179	2,143,280	1,739,649	9,226,897
Ratio	(106)%	(73)%	18%	7%	33%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
Profit after tax (PAT)	40,761,158	4,156,686	7,122,167	8,225,332	10,139,681
Revenue	12,313,669	15,006,838	20,160,239	24,153,445	29,111,828
Ratio	33%	28%	35%	34%	35%

3.     Operating Profit Margin:

Operating profit margin is calculated by the following formula:

Operating Income or Earnings before Interest and Tax (EBIT) ÷ Total Revenue × 100

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
EBIT	(839,266)	(1,586,704)	954,059	456,960	4,834,195
Revenue	1,062,970	1,472,179	2,143,280	1,739,649	9,226,897
Ratio	(79)%	(108)%	44%	26%	52%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
EBIT	5,953,076	6,120,940	10,536,120	12,343,106	15,108,482
Revenue	12,313,669	15,006,838	20,160,239	24,153,445	29,111,828
Ratio	48%	41%	52%	51%	52%

4.     Return on Capital Employed:

Return on capital employed is calculated by following formula:

Earnings Before Interest and Tax ÷ Capital Employed × 100

Capital Employed = Equity + Long term debt

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
EBIT	(839,266)	(1,586,704)	954,059	456,960	4,834,195
Capital employed	3,324,439	2,215,617	(2,303,824)	21,408,834	22,607,890
Ratio	(25)%	(72)%	(41)%	2%	21%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
EBIT	5,953,076	6,120,940	10,536,120	12,343,106	15,108,482
Capital employed	41,342,047	48,583,268	65,709,810	51,940,902	87,613,558
Ratio	14%	12%	16%	24%	17%

5.     Return on Net Worth:

Return on net worth formula is given below:

Net Income ÷ Shareholders Equity

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
Net income	(1,122,065)	(1,069,257)	385,580	168,270	3,090,133
Shareholders’ equity	(4,418,317)	(5,267,451)	(4,869,107)	9,514,152	12,914,105
Ratio	25%	20%	(8)%	2%	24%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
Net income	40,761,158	4,156,686	7,122,167	8,225,332	10,139,681
Shareholders’ equity	18,408,391	20,805,117	25,891,278	31,166,452	37,620,358
Ratio	22%	20%	27%	26%	27%

6.     Debt to Equity Ratio

The formula for calculation of debt to equity ratio is given below:

Total debt ÷ Shareholders Equity

Before merger
Rupees in ‘000
	2001	2002	2003	2004	2005
Total debt	8,969,756	8,883,125	4,338,013	14,429,045	12,142,045
Shareholders’ equity	(4,418,317)	(5,267,451)	(4,869,107)	9,514,152	12,914,105
Ratio	(203)%	(169)%	(89)%	152%	94%

After merger
Rupees in ‘000
	2007	2008	2009	2010	2011
Total debt	26,428,040	30,730,641	42,980,961	24,893,241	54,008,517
Shareholders’ equity	18,408,391	20,805,117	25,891,278	31,166,452	37,620,358
Ratio	143%	147%	166%	80%	144%

After these calculations we apply t- stat to find out the effects and on the bases of t-stat we can accept or reject (Ho, H1). The formula of t-stat and calculations are given below:

t-Test: Two-Sample Assuming Equal Variances on the basis of Gross profit margin
	Before	After
Mean	-23.8	40
Variance	4639.7	23.5
Observations	5	5
Pooled Variance	2331.6
Hypothesized Mean Difference	0
Df	8
t Stat	-2.08
P(T<=t) one-tail	0.035
t Critical one-tail	1.86
P(T<=t) two-tail	0.070
t Critical two-tail	2.31

T-calculated value is greater than t-critical value than reject Ho otherwise don’t reject Ho. In above table t- stat calculated value is -2.08 and t critical value is 2.31. Our t calculated value is less than t critical value and we accept Ho (i.e., No gross profit sign difference) and there is no significant sign difference after merger.

t-Test: Two-Sample Assuming Equal Variances on the basis of Net profit margin
	Before		After
Mean	-24.2		33
Variance	3774.7		8.5
Observations	5		5
Pooled Variance	1891.6
Hypothesized Mean Difference	0
Df	8
t Stat	-2.08
P(T<=t) one-tail	0.04
t Critical one-tail	1.86
P(T<=t) two-tail	0.07
t Critical two-tail	2.31

In above table t- stat calculated value is -2.08 and t critical value is 2.31. Our t calculated value is less than t critical value and we accept Ho (i.e., No gross profit sign difference) and there is no significant sign difference after merger.

t-Test: Two-Sample Assuming Equal Variances on the basis of operating margin
	Before		After
Mean	-13		48.8
Variance	5594		21.7
Observations	5		5
Pooled Variance	2807.85
Hypothesized Mean Difference	0
Df	8
t Stat	-1.84
P(T<=t) one-tail	0.05
t Critical one-tail	1.86
P(T<=t) two-tail	0.10
t Critical two-tail	2.31

In above table t- stat calculated value is -1.84 and t critical value is 2.31. Our t calculated value is less than t critical value and we accept Ho (i.e., No operating margin sign difference) and there is no significant sign difference after merger.

t-Test: Two-Sample Assuming Equal Variances on the basis of return on capital employed
	Before	After
Mean	-23	16.6
Variance	1322.5	20.8
Observations	5	5
Pooled Variance	671.65
Hypothesized Mean Difference	0
Df	8
t Stat	-2.42
P(T<=t) one-tail	0.02
t Critical one-tail	1.86
P(T<=t) two-tail	0.04
t Critical two-tail	2.31

In above table t- stat calculated value is -2.42 and t critical value is 2.31. Our t calculated value is greater than t critical value and we reject Ho (i.e., No return on capital employed sign difference) and there is significant sign difference after merger.

t-Test: Two-Sample Assuming Equal Variances on the basis of Return on equity
		Before		After
Mean		12.6		24.4
Variance		218.8		10.3
Observations		5		5
Pooled Variance		114.55
Hypothesized Mean Difference		0
Df		8
t Stat		-1.74
P(T<=t) one-tail		0.06
t Critical one-tail		1.86
P(T<=t) two-tail		0.12
t Critical two-tail		2.31

In above table t- stat calculated value is -1.74 and t critical value is 2.31. Our t calculated value is less than t critical value and we accept Ho (i.e., No return on return on equity sign difference) and there is no significant sign difference after merger

t-Test: Two-Sample Assuming Equal Variances on the basis of debt equity ratio
	Before	After
Mean	-43	136
Variance	25096.5	1067.5
Observations	5	5
Pooled Variance	13082
Hypothesized Mean Difference	0
Df	8
t Stat	-2.47
P(T<=t) one-tail	0.02
t Critical one-tail	1.86
P(T<=t) two-tail	0.04
t Critical two-tail	2.31

In above table t- stat calculated value is -2.47 and t critical value is 2.31. Our t calculated value is greater than t critical value and we reject Ho (i.e., No return on return on equity sign difference) and there is significant sign difference after merger.

CHAPTER NO 7

CONCLUSION

 We conclude from data analysis that some main reasons of the merger and insufficient performance. These include deficiency claim receivable, inward bills of collection, unused commercial letter of credit, outstanding guarantees issued, outward bills of collection and late deposits (payment) received and confirmed export letters of credit and others. The fair values of results shows on the statement of condition represent the current credit risk exposure but not the maximum risk exposure that could rise in the future as a result of change in values.

Some major notes regarding insignificant performance (acceptance of Ho) are below:

Unclassified loans

These are loans that do not have a greater-than normal risk and don’t possess the characteristics of classified loans. The borrower has the apparent ability to satisfy his obligations in full and therefore no loss in ultimate collection is estimated.

Classified loans

These are loans which possess the characteristics outlined here under. Classified loans are subdivided into four categories:

·         Loans especially mentioned;

·         Substandard

·         Doubtful

·         Loss

·        Loans especially mentioned

These are loans and advances that have potential weaknesses that deserve management’s close attention.

·        Substandard

These are loans or portions thereof which appear to involve a significant and unreasonable degree of risk to the Bank because of unfavorable record or unsatisfactory characteristics. There exists in such loans the possibility of future lot have a well-defined weakness or weaknesses that

risk their liquidation. Such well-defined weaknesses may include adverse trends or development of financial, managerial, economic or political nature, or a significant weakness in collateral.

·        Doubtful

These are loans or portions thereof which have the weaknesses inherent in those classified as ‘Substandard’, with the added characteristics that existing facts, conditions, and values make collection or liquidation in full highly improbable and in which substantial loss is possible.

·        Loss

These are loans which considered uncollectible or worthless and of such little value that their continuance as bankable assets is not warranted although the loans may have some recovery or salvage value. The amount of loss is difficult to measure and it is not practical to defer writing off these basically worthless assets even though partial recovery may be obtained in the future.

The overall results show that after merger financial performance of bank was not satisfactory and not present increase in financial performance. In literature review point of view it is unnecessary that mergers can increase financial performance of bank.  Hence, the after mergers of bank show no as much improvement in performance.