The effect of mergers and acqiusitions on the financial performance of commercial banks in Kenya

Abstract

Mergers and acquisitions are a common method of business combinations and have a critical role in the external growth of great companies in the world. The study aimed at evaluating the relationship between financial performance of commercial banks in Kenya and mergers and acquisitions. The study compared the financial performance of the 6 commercial banks for the 7 year period before the mergers and the 7 year period after the mergers. The study was conducted as a descriptive study and a census survey was done on the commercial banks that merged between 2003 and 2008. The study used secondary data from published bank’s financial statements, annual reports of the banks and the supervision reports from the Central Bank of Kenya. Various ratios such as liquidity, profitability, efficiency and capital adequacy ratios were computed using the data. A discriminant analysis was done on the average pre-merger and post-merger ratios to assess the impact of the mergers on the financial performance of commercial banks in Kenya. It was concluded that commercial banks experienced mixed results post-merger/acquisition with some banks experiencing declined performance; others experiencing improved performance while other did not record any significant changes in the financial performance post-merger/acquisition. Overall, the study found that M&A’s did not lead to the improved financial performance of commercial banks. It was recommended that commercial banks that seek to improve their profitability should pursue mergers and acquisitions.