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

Abstract

A merger can be looked at as the process in which two or more business operations are combined into one business entity with the same management and ownership. From a legal stance, mergers can be looked at as the consolidation of two or more entities into one entity. An acquisition on the other hand, involves purchase of a controlling interest by a company in the share capital of a second existing company. Various motivations for mergers include synergy, diversification, acquiring market share, reduction of cost as well as gaining access to resources. Mergers and acquisitions are as a strategic tool in the modern corporate world and the trend has been witnessed in the insurance landscape with Kenya being no exception. Prior studies have not been conclusive on how mergers and acquisitions impact the financial performance of business entities. The study set out to determine the effects of mergers and acquisitions on the financial performance of insurance companies in Kenya. The population of the study was the mergers and acquisitions that took place between years 2010 and 2013 thus a census approach was adopted. Two year pre-merger and post-merger data was collected from secondary sources and compared to determine whether there was significant change in performance after the merger. The study employed various measures of financial performance which included return on assets, return on capital employed, net income margin, net working capital and leverage. The study established that after the merger, return on assets and return on capital employed significantly improved and concluded that mergers and acquisitions improve the financial performance of insurance companies in Kenya. The key limitation of the study was that the two-year duration for which was analyzed in too short to conclusively determine the impact of mergers and acquisitions on the financial performance of the merging firms.