EFFECT OF MERGERS AND ACQUISITIONS ON FINANCIAL PERFORMANCE OF FINANCIAL INSTITUTIONS IN KENYA
Francis Ndung’u Njambi - Master of Science Student, Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Peter Wang’ombe Kariuki - Lecturer, Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
Mergers and acquisitions are corporate restructuring activities conducted in a bid to enhance the firms’ returns or increase the efficiency of their operations. There are enormous benefits attributed to mergers and acquisitions and this factor has increased the attractiveness of mergers and acquisitions globally hence the recent trend towards mergers and acquisitions. Due to changes in the operating environment, several licensed institutions, mainly commercial banks, have had to merge; combine their operations in mutually agreed terms where one institution takes over another's operations. The main objective of the study was to assess the effect of mergers and acquisitions on financial performance of financial institutions in Kenya. Specifically the study sought to establish the effect of capital base upon merger on financial performance of financial institutions in Kenya, to determine the effect of income diversification upon merger on financial performance of financial institutions in Kenya, to evaluate the effect of asset quality upon mergers on financial performance of financial institutions in Kenya and to investigate the effect of liquidity upon merger on financial performance of financial institutions in Kenya. The study was guided by monopoly -market power theory, the value-increasing theories, hubris hypothesis and the Modigliani–miller theorem. This study focused on 16 firms which had undergone mergers and acquisition between period 2005 and 2015. To this end therefore, a census on accessible population was done due to its small size. The secondary data was for the duration of 6 years including 3 years prior to merger or acquisition and 3 years after merger or acquisition. After data was collected, it was analyzed using correlations, descriptive statistics and multiple regression with the aid of Stata. The regression coefficients were tested for significance using t-statistic at 5% level of significance and conclusions drawn. The study revealed that capital base, income diversification, asset quality and liquidity had a significant effect on performance of financial institutions in Kenya upon mergers. This study recommends that financial institutions with a weak and unstable capital base should seek to consolidate their establishments through mergers and acquisitions. The study also recommends that Management should not only undertake mergers and acquisitions in order to improve operation and sustain failing businesses but also improve their asset quality and financial standing. Further, the study recommends that those firms facing operational constraints should to consolidate their energies by resorting to merger so as to improve their performance.
