Effect of Mergers on Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

The objective of the study is to determine the relationship between mergers and financial performance. To try and shed more light on this, this study sought to determine the effect of mergers on financial performance of NSE listed companies in Kenya. The research adopted a descriptive design to determine the relationship between mergers and financial performance. The population for this research was all the firms that have undergone mergers and are listed in the NSE. There were total of 15 companies listed on the NSE that had engaged in merger. However for this research, only companies studied those that merged between 1997 and 2013 are considered. The study used secondary data to be obtained from available financial statements of listed companies that have engaged in a merger in Kenya. Event analysis design was used to analyze the data. Four years before and after the merger were analyzed. Dividend per share (DPS) earnings per share (EPS), return on equity (ROE) and return on assets (ROA) were analyzed to determine the effect of merger on financial performance. The study found that mergers affect the share returns of merging firms listed at the NSE. Mergers have significant positive effect on DPS where merging of listed companies lead to increase in DPS. The study also finding that mergers have positive and significant effect on EPS where EPS before the merger was found to be declining but started to rise immediately after the merger. Increase in EPS implies improved performance of the company. The study also found that mergers have significant effect on ROA where mergers were found to enable merging firms to better utilize their assets in generating income. However, mergers have insignificant effect on ROE. The ROE remains statistically unchanged even after the merger. The study recommends that firms (listed/unlisted) having weak capital base or having challenges in generating income to merge with similar firms and create synergies so as to enjoy economies of scale and improve their share returns and hence maximizing shareholders wealth which is the general objective of profit making companies.