Effects of Mergers and Acquisitions on Financial Performance of Petroleum Companies in Kenya

Abstract

The business environment is rapidly evolving and this has forced firms to adopt survival strategies to cope up with these changes. M&A is a concept that has attracted attention of most firms as a way of turning around firm performance through synergy, resources sharing, technical know-how and management competencies. This study was set out to determine the effect of M&A on financial performance of petroleum companies in Kenya. The study adopted a descriptive research design to establish hypothetical relationship that exists between variables as supported by agency theory, resource-based theory and free cashflow theory. The target population involved 4 petroleum firms that were involved in M&A in the period between 2000-2017. The study covered a duration of 6 years; 3 years pre and 3 years post M&A. The year of M&A was deemed to be zero. Secondary sources of data were obtained from NSE and financial statements of individual petroleum companies. Data analysis was carried out using descriptive statistics and paired t-test and the study found that M&A led to an increase of all the study variables: debt-to-equity ratio, ROE, liquidity and operational efficiency. This was a consequence of a combination of assets, resources; technology and management competencies. The research also concluded that size of the firm and liquidity level was statistically significant which meant that M&A had an effect on financial performance of petroleum companies. The study recommends that the need for petroleum companies to continue practicing M&A to improve on their performance; and gain from technical skills and technological resources. The study limited itself to a descriptive research design that cannot enable the researcher to establish ‘cause and effect’ relationship between variables. Although the study established the nature of relationships amongst variables, it did not establish the causal effects amongst M&A and financial performance of petroleum companies. The current study is mirrored on petroleum companies in Kenya. A replica of this research needs to be conducted in a different sector that is similar in size and areas of intervention, and then the researcher can compare findings upon which a plausible conclusion will be drawn.