Effects of mergers and acquisitions on cost and scale efficiency of the combined commercial banks in Kenya

Abstract

The broad objective of the study was to determine the effect of mergers and acquisitions on the scale and cost efficiency of the combined commercial banks in Kenya. The study hypothesized that the combined firms should demonstrate improved efficiency after conclusion of the merger, take over, or stock swap. This hypothesis was based on the argument that the newly formed firm (post-merger) is highly capitalized and brings together a pool of technically equipped workforce, besides the infrastructure. In achieving the above objective, the study applied secondary data obtained from the audited financial statements of the commercial banks for the period 1994-2009. Data were obtained from the Banks Supervision Department at the Central Bank of Kenya. In order to measure the cost and profit efficiency of the listed banks, the study employed the Data Envelopment Analysis (DEA) technique. The key findings of the study are as follows. First, the findings indicated that firm which engaged in take-over of subsidiaries had no significant changes in levels of their cost efficiency after mergers. However, some of the firms that merged with other banking institutions demonstrated significant declines in their cost efficiency that would most likely be attributable factors such as overstaffing due to the combined workforce, the long learning curve of management on how to best use technology to reduce costs, and increase operational costs occasioned by the integration of operations from the two previously independent institutions. Secondly, it emerged that a decline (or no change) in CE does not necessarily translate to profit efficiency for the combined bank. This is because the staff who are responsible for bringing new business are not able to generate revenues to offset their expenses which are fixed and this affects both the cost efficiency and profit efficiency. Thirdly, the findings showed that after the mergers and takeovers, the combined commercial banks continued to realize profits against declining cost efficiency and relatively low profit efficiency because they are key players in lending to the government through the low risk treasury bonds and bills, from which they realize good returns