Relationship Between Mergers and Acquisition and the Financial Performance of Listed Firms in Nairobi Securities Exchange

Abstract

Mergers and acquisition plays an important role in external corporate expansion, acting as a strategy for corporate structuring and control. It is a different activity from internal expansion decisions, such as those determined by investment appraisal techniques. M&A can facilitate fast growth for firms and is also a mechanism for capital market discipline, which improves management efficiency and maximizes private profits and public welfare. The main objective of the study was to establish the relationship between mergers and acquisition and the financial performance of listed firms in Nairobi Securities exchange, period of study was between 2000 to 2013.The study used data from firms annual financial reports data, the annual financial reports were obtained from capital markets authority and from the listed firms under study. The various studies on the relationship of mergers and acquisitions on financial performance gave different results; some studies indicate that listed firms experience improved/better financial performance after merger/acquisitions while other studies found no change in the financial performance. Other studies also did indicate listed firms in M&A deals experienced decreased financial performance during early years after M&A and later improved financial performance. The research design for the study was descriptive study; data analysis was divided into pre-merger/acquisition period and post-merger/acquisition period. A Mann Whitney test at confidence level of 95% was performed on data sets to get pre-merger/acquisition period and post-merger/acquisition averages. This helped in comparison of financial performance before and after merger/acquisition. Ratio analysis on financial data collected was undertaken in order to compare and ascertain the financial performance over the two periods. The study concluded that mergers and acquisitions do have a positive relationship with financial performance for firms listed in Nairobi Securities Exchange.