The Effects Of Mergers And Acquisitions On The Financial Performance Of Insurance Firms In Kenya

Abstract

Mergers & Acquisition are arguably the most popular strategy among firms who seek to establish a competitive advantage over their rivals due to forces of globalization and fast technological changes coupled by market dynamics as well as changes in the regulatory environment. The objective of this research project is to establish the effects of mergers and acquisitions on the financial performance of insurance firms in Kenya. The research is based on the background that there has been a mixed and inconsistent result in the previous researches conducted in this area and scanty information linking M&A to financial performance has been presented in previous studies. The research employed event study approach as research design and descriptive statistics was used to analyze the data. The study utilized secondary data on financial statements of the merged/acquired insurance firms three years before and three years after the merger/acquisition. Panel data was collected on net profit, net premium, operating cost, current asset, current liability, total asset, total debt and revenue, this data was used to compute ratios and evaluate financial performance. The population of the study was made up of seven insurance companies that had merged/acquired over the sample duration period of 2000 and 2015. The study established that following merger and acquisition of insurance firms, ROA significantly increased from 27 percent to 50 percent after merging/acquisition of the insurance firms. This significant improvement shows that there is an increase in management efficiency in employing available assets to generate earnings. The importance of ROA means that any decrease in the management efficiency use of assets leads to a significant decline in profitability. Nevertheless, in this study ROA is the standard and proficient measure of financial performance, therefore merging/acquisition can be said to have significant positive effect on financial performance of insurance firms in Kenya. The study concludes that merging/acquisitions on its own cannot achieve strong, efficient and competitive insurance systems because performance is dependent on several other factors which need to be brought on board while evaluating M&A transaction.