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

Abstract

Mergers and acquisition refers to where two or more companies combine corporate resources to operate as a unit with an aim of improving their performance. Previous study on this topic give conflicting findings on how firms performance react to merger and acquisition The objective of the study is to investigate the effects of merger and acquisition on the financial performance of financial institutions in Kenya. The study adopted a descriptive study design using event study model to analyse the relationship existing between the accounting ratios (ROA and ROE) as measures of financial performance. The study found that that merger and acquisition events results into either increase or decrease in the financial performance. Abnormal financial performance was calculated for the pre and post-merger period. The cumulative abnormal average return (CAAR) for all the banks involved in the study found ROA to be 5.274, thus concluding that merger and acquisition positively affect financial performance. However, the CAR for ROE found -1.823 as a result of the variability of the extreme negative performance of Equatorial Commercial bank. This leads to the conclusion that merger and acquisition event results into an increase in financial performance of the companies. The study recommends that management teams need to take advantage of the benefits of mergers and acquisitions. However, analysis need to be done when choosing a firm to merge with or a company to acquire in order to ensure that the merger exercise will add value to the firm competitive advantage