Effect of Mergers and Acquisitions on the Financial Performance of Insurance Companies in Kenya

Abstract

The market has become very dynamic, influenced by a myriad of factors; wars, immigration, economic booms, recessions, globalization and technological advancement. Due to these global trends, Nations and organizations are continuously adopting new ways of doing business to counter threats as well as exploit new opportunities. Among those corporate strategic approaches taken by firms are mergers and acquisition. A merger is said to occur when two or more corporations come together to form one entity. On the other hand acquisition refers to the process in which a business entity purchases a majority or a minority stake in another firm. In either of the cases the outcome is rapid expansion in proportion of the new firm. Studies by various scholars have given diverse results for post-merger performance of acquiring firms. Among the reasons why corporations seek inorganic growth through mergers and acquisition are; to attain reduced risk, improve entry within the markets as a result of enhanced size, or make use of tax carried forward as a gain, enjoy economy of scale through cost reduction, enjoy market power through bigger market share. Corporations may also engage in mergers and acquisition as defensive mechanisms to avoid being acquired or for managers to attract takeover premia after acquisition. The key objective of this study was to examine the influence of mergers and acquisitions on financial results in insurance firms in Kenya between 2000 and 2015. The study took a causal research design and covered three years premerger and three years‟ post-merger. The researcher used financial ratios ROA and ROE as well as industry specific ratios such as claims ratio and management expense ratio. Both trend and cross sectional analysis were carried out. Pre-merger results of the merged firms were compared with post-merger results to determine if there was any change and in which direction. In addition the results of the merged firms were compared with the whole industry to determine if merged firms performed better or worse than the industry average. The results indicated a marginal drop in the short run in ROA and ROE for the merged firms. Further there was an increase in industry specific ratios; claims ratio and management expenses ratio. Based on the research findings there was increased market share for the post-merger period. The research recommends careful planning and implementation of mergers and acquisition so as to attain full benefits on all fronts.