Effect of Mergers and Acquisitions Strategies on Financial Performance of Financial Services Sector

Abstract

The purpose of this study was to establish the effect of mergers and acquisitions strategies on financial performance of firms in the financial services sector in Kenya. The study was guided by the following specific objectives: to establish the effect of cost efficiency; diversification; synergy and board size, and determine the moderating effect of economic growth on financial performance of merged institutions. The study adopted a mixed methodology research design where qualitative and quantitative research approaches were used to test research hypotheses. The study population was fifty one (51) merged financial service institutions in Kenya which had completed their merger processes by 31st December 2013. The sampling frame was a list of merged financial service institutions given by both the Central Bank of Kenya and Insurance Regulatory Authority. Forty (40) firms with audited financial statements were purposively selected for the study. Primary data was collected through questionnaires while information on Return on Assets, Return on Equity and other mergers and acquisitions aspects were obtained using secondary data collection template. Quantitative techniques were used in analyzing both the primary and secondary data. This technique involved descriptive statistics which included the use of means, frequencies and percentages. Inferential statistics such as correlation analysis was used to test for the relationship between variables from the secondary data. Panel data analysis was also applied to determine change in the study variables and trends over a period of five (5) years from 2009 to 2013. A pre-merger and post - merger analysis was also used to test whether the merger and acquisitions had brought any significant difference in performance to the merged firms. The major findings were: firstly, that cost efficiency had a positive and significant effect on financial performance of merged institutions, but diversification had no significant effect on financial performance of merged institutions; secondly, that synergy and board size both had a significant relationship with financial performance of merged institutions. Finally, there is a significant relationship between the moderating effect of economic growth and financial performance of merged institutions. Based on these findings, the study recommends as follows: firstly, that policy makers (government) should be able to create or promote an enabling environment for mergers and acquisitions. For instance, facilitation in terms of infrastructure provision shall reduce their business costs hence motivates similar mergers in other institutions in Kenya. Secondly, stakeholders’ to identify where their most immense profit pools lie and focus on improving those units responsible for profit making. Thirdly, management of the financial services institutions should embrace diversification and financial innovation on product strategies as this will help in generating more income for the banks. Fourthly, investors should critically evaluate the overall business and operational compatibility of the merging institutions and focus on capturing long-term financial synergies. In this case, managers and investors are encouraged to place a remarkable degree of emphasis on the area of corporate governance and to some extent embark on eliminating Chief Executive Officer (CEO) duality. Finally, there should be a re-assessment of the literature on diversification. Further research is necessary to establish the following: why sometimes the diversification performance relationship is positive, other times negative, and often quadratic; whether a diversification effects on performance depends on the industries considered; and thus studies should be carried out for longer periods of time to establish if there is significant effect of diversification on performance of merged institutions. Finally study should be carried out to establish the effect of the mediating role of financial regulation on mergers and acquisitions on performance of financial institutions.