EFFECTS OF MERGER AND ACQUISITION ON FINANCIAL PERFORMANCE: CASE STUDY OF COMMERCIAL BANKS

Abstract: The objective of this research was to determine the effects of mergers and acquisitions on the financial performance of commercial banks in Kenya. Theoretically it is assumed that mergers improve company performance as a result of synergies acquired, market power, enhanced profitability and risk diversification. The research focused on the financial performance of commercial banks in Kenya which merged between 1999 and 2005. Comparative analysis of the bank’s performance pre and post-merger periods was conducted to establish whether mergers lead to improved financial performance before and after merging. Secondary data from financial statements was collected for 5 years before and after the merger and analyzed with the aid of statistical tools. Descriptive research design was used where banks’ performance shall be analyzed before and after the merger to determine whether there is any effect on the financial performance. The population used in this study was all the 36 Kenyan commercial banks that have undergone mergers. The study comprised of 16 commercial banks that have undergone mergers between 1999 and 2005.The study used secondary data from the NSE, CBK, published facts and figures and reports for the period in study. The data was analyzed on the basis of the mean. The chi square test was computed to test the null hypothesis. The study focused on the financial performance of the merged Kenyan banks before and after the merger. The comparative analysis for the pre- and post-merger periods was carried out to establish whether mergers lead to improved financial performance. The study established that merger was influencing profitability of banks. The study found that there was an increase in the t- value from 20.582 to 23.249, an indication that there was an increase in the return on equity after merger. The study concludes that mergers and acquisitions influence capital adequacy ratio positively. The study found that there was an increase in the t value for capital adequacy ratio pre-merger to post –merger from 19.064 to 21.764. The study also concludes that mergers and acquisitions influence long-term solvency ratio positively. The study found that there was a general increase in solvency of the companies as there was an increase in the t-value from the pre-merger to post –merger from 34.194 to 39.351, there was an increase in the mean difference from 84.25 to 92.25. The study recommends that those firms facing constraints on the market should consolidate their energies by resorting to merger/acquisition so as to expand their profitability as the merger/acquisition is not just for the best interest of the managers but also shareholders as it leads to an increase in shareholders’ wealth as opposed to each financial institution operating separately on its own.