Effect of Mergers and Acquisitions on Shareholders Wealth of Commercial Banks in Kenya

Abstract

The purpose of this study is to establish effect of mergers and acquisitions on shareholders wealth of commercial banks in Kenya. The population comprised of 43 commercial banks. The sample comprised of six firms that had been listed at the NSE at the time of merger announcement (or approval). They included National Industrial Credit Bank Ltd (NIC); Diamond Trust Bank (DTK); Barclays Bank of Kenya (BBK); Kenya Commercial Bank (KCB); CFC Bank (CFC); and Standard Chartered Bank (SCBK). The observations were centred within an l l-day event window surrounding when the announcement for merger was made. A data observation sheet was used to collect the following data for each firm: Bank name; actual calendar date surrounding the event dates; the event day; the average share price; and the daily market index. Following Brown and Warner (1985), this study employed event study market methodology to determine the effect of shareholders wealth. The Market Model was used and residuals were tested to determine whether or not merger events provided positive or negative abnormal returns to the participants. It also provided a basis for examining the issue of whether or not shareholder wealth was enhanced by mergers. Key findings of the study were two-fold. First, the study established that the share prices of the six sampled firms did not exhibit significant changes within an I I-day event window. The results imply that the past Kenyan bank M&As were not wealth creating projects for the shareholders of both the bidding entity and the combined entity. Secondly, the findings showed that the shareholders' total cumulated return had not significantly changed due to announcement (or approval) of a takeover bid. The findings concurred to findings from recent studies. The study concludes that past Kenyan bank M&As were not wealth creating projects for the shareholders of both the bidding entity and the combined entity. The study recommends that listed companies should be careful when deciding to undergo merger and acquisition activity.