The Effect of Mergers and Acquisitions on the Financial Performance of Petroleum Firms in Kenya

Abstract

The objective of this research project is to establish the effect of mergers and acquisitions on the financial performance of petroleum firms in Kenya. This is by conducting an industry analysis of the petroleum sector in Kenya. The study is limited to a sample of pair companies listed on the Kenyan market that merged/acquired between the years 2002-2012. Data were collected from the NSE Annual Statement of Accounts and Financial Reports of the firms. Comparisons are made between the mean of 3-years pre-merger/acquisition and 3-years post-merger/acquisition financial ratios, while the year of merging/acquisition is exempted. Using financial ratio analysis and paired„t‟ test, the study reveals that mergers/acquisitions have insignificant effect on the overall financial performance of petroleum firms in Kenya. Also, there is improvement in the firms‟ performance after the merging/acquisition takes place. It recommends that merging and acquisition should not be used to keep failing business alive but to increase competitiveness and financial standing and management should also instill discipline upon itself so that the continued existence of the firm is not jeopardized. The analysis and results show that petroleum firms performed better in the post- merger/acquisition era as compared to the pre-merger/acquisition era. This is supported by the fact that merging/acquisition had a significant impact on the ROA, which is the overall standard measure of financial performance due to the statistical significance it has on ROA as well as total asset ratio. On the other hand, merger/acquisition was seen to have an insignificant positive effect on the liquidity and solvency of the petroleum firms. This suggests that there was a significant improvement on the financial performance as reflected by the significant increase in ROA. It is therefore recommended that management should not only undertake mergers and acquisitions in order to improve operation and sustain failing businesses but also improve their competitiveness and financial standing. Management should come up with a sound strategy towards asset and liability management so as to avert the problem of mismatching investments and also the quality of assets should be enhanced.