The Effect of Mergers and Acquisitions on the Financial Performance of Commercial Banks in Kenya

Abstract

This paper looked at the effects of mergers and acquisitions on financial performance of commercial banks in Kenya. This study set to establish whether the many mergers and acquisitions that have happened in Kenya’s banking sector had influenced financial performance. The type of research design was an event study which was designed to investigate the effect of an event on a specific dependent variable. The population of a study consisted of 14 banks that merged in period 1998 to 2013 in Kenya. The study used secondary data from audited annual financial statements of respective banks over the period. Financial data from statements of financial positions, statement of comprehensive income statements and statements of cash flows of respective commercial banks for five years before and after mergers was used to calculate and analysed the ROA, ROE and C/I from the published financial statements and reports for the merged banks for the period under study. The research found that there was improvement in financial performance of commercial banks after a merger or acquisition, this conclusion was reached due to increase in ROA, ROE and reduction in Cost to Income ratio. T test for mean difference on ROE shows that premerger period had a mean of 2.079 as contrasted by post merger mean of 3.965.Also on C/I ratio the research established a pre merger mean of 64.271 and post merger mean of 55.812 thus reduction in total overall operating cost and increase in overall income after a merger. The new financial formed after a merger is more financially sound due to reduction of insolvency risks. The study established a increase in mean on ROA from 1.591 and post merger mean was 2.689. This depicts that post merger period was accompanied by higher performance. The Levene’s significance on ROE and C/I is less than .05 thus finding shows significance difference in performance in commercial banks with post merger bank had higher return. Consequently, ROA shows a insignificant difference in performance with p value of .397 which is more than .05, with unequal variances. In conclusion, Mergers and acquisitions alone can’t achieve strong, efficient and competitive banking systems because performance is dependant of several factors.