The Effect of Mergers and Acquisitions on the Financial Performance of Commercial Banks Listed on the Nairobi Securities Exchange

Abstract

In the past decade, two commercial banks have been placed under receivership in Kenya: Chase Bank and the Imperial Bank. The Imperial Bank was placed under receivership due to poor banking practices that led to declining financial performance. Five years later, the Central Bank of Kenya (CBK) approved KCB bank to acquire Imperial Bank in 2020. The main objective of the study was to determine the effects of mergers and acquisitions on financial performance of Kenyan commercial banks listed in Nairobi Securities Exchange. Gibrat’s theory of growth, financial synergy theory and Modigliani-Miller Theory (M&M Theory) guided the study. The researcher adopted and used a cross-sectional research design for this study. The study population consisted of the six relevant cases for listed commercial banks on NSE that have merged or/and acquired others for the study period. The study focused on all these six cases, three years preceding the merger and three years’ post-merger. The study relied on open-access secondary data derived from published audited financial reports of the selected banks. Other sources were financial statements filled to the Capital Markets Authority, and the Nairobi Securities Exchange as obtained from their online databases. Quantitative data analysis was undertaken. The study concludes based on the data presentations in chapter four and the summary of the findings above that commercial bank financial performance improves with the merger and acquisition. Based on the data presented in Chapter 4 and the summary of the conclusions above, the study indicates that mergers and acquisitions increase commercial banks' financial performance. According to the findings, the firm size of publicly traded commercial banks has grown because of mergers and acquisitions. Based on the facts, it can also be stated that when corporations join forces, they accumulate more assets. The study found that after a merger and acquisition, the net interest margin improved dramatically. Improved operational performance can be the outcome of initiatives such as improving banking personnel's competence and professionalism, as well as increasing management efficiency to boost banking institutions' competitiveness. Mergers and acquisitions result in a larger bank and a pool of experience, both of which are critical factors in a company's success. On organization synergy, the study concluded that the cost-to-income ratio improved by registering a huge reduction after merger and acquisition. The lower cost-to-income ratio is due to increased efficiency and economies of scale within xii

commercial banks, both of which are critical to properly managing a bank's financial situation. Financial synergy has also improved resource use and financial resource mobilization within banks, according to the study. Commercial banks with a weak and unstable capital base should strive to integrate their operations through mergers and acquisitions, according to this report. Commercial banks will be able to increase their profitability by expanding their market share and revenue base through mergers and acquisitions.