The effect of mergers and acquisitions on the financial performance of Commercial Banks in Kenya

Abstract

Mergers and acquisitions (M&A) are being increasingly used world over for improving competitiveness of companies through gaining greater market share, broadening the portfolio to reduce business risk, for entering new markets and geographies, and capitalizing on economies of scale not forgetting strategic positioning. Mergers and acquisitions (M&A) are being increasingly used world over for improving competitiveness of companies through gaining greater market share, broadening the portfolio to reduce business risk, for entering new markets and geographies, and capitalizing on economies of scale not forgetting strategic positioning.The objective of this research project was to establish the effect of mergers and acquisitions on the financial performance of Commercial Banks in Kenya. This is by conducting analysis on the commercial banks that merged or were acquired between the year 2004 and December 2013. Data were collected from each bank under study Annual Statement of Accounts and Financial Reports. Comparisons were made between the mean of 3-years pre-merger/acquisition and 3years post-merger/acquisition financial ratios. The type of research design was the causal study that relies on control factors. The study employed a survey of the merged/acquired banks within the period of study. The sample of the study consisted of 14 banks that merged in the period of study in Kenya. The study used secondary sources of data from the audited annual reports of accounts for the respective banks over the period. Financial data from Balance Sheets, Statements of comprehensive Income and Statements of Cash Flow of the respective commercial banks for three years pre-merger and three years post-merger was used to calculate and analyse the liquidity, bank size and leverage from the published financial statements and reports for the merged banks for the period under study. The study established that there is improvement in the banks’ financial performance after the merger/acquisition. Liquidity of the banks as well as the size increased after the merger/acquisition. There was however also an increase in the leverage of the banks after the merger/acquisition, a variable that the study found insignificant in financial performance. The analysis and results show that Commercial Banks performed better in the post- merger/acquisition era as compared to the pre-merger/acquisition era. This study recommends that commercial banks with unstable liquidity and those that want to increase their sizes thus strengthening their capital bases should seek to consolidate their establishments through mergers and acquisitions