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THE EFFECT OF MERGERS AND ACQUSITIONS ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA BY AKOTH VIVIAN D61/72859/2014 A RESEARCH PROJECT PRESENTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF BUSINESS ADMNISTRATION (MBA) DEGREE, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI OCTOBER 2016 i DECLARATION I hereby declare that this research project is my own work and effort and that it has not been submitted anywhere for any award. Where other sources of information have been used, they have been acknowledged. Signature………………………………… Date……………………………………… AKOTH VIVIAN D61/72859/2014 This research project has been submitted for examination with our approval as the University supervisors. Signature………………………………… Date……………………………………… MS. HELEN KINYUA LECTURER, DEPARTMENT OF FINANCE AND ACCOUNTING SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI Signature………………………………… Date……………………………………… DR. MWANGI CYRUS IRAYA SENIOR LECTURER, DEPARTMENT OF FINANCE AND ACCOUNTING SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI ii ACKNOWLEDGMENT I am grateful to God for the good health, resources and ability He has given me to successfully undertake the Masters of Business Administration. I am grateful to the entire team of the Department of Finance and Accounting, University of Nairobi for the unlimited support during the period which I undertook the Masters in Business Administration program. I wish to thank my mother, father and siblings who encouraged me, supported me and had confidence in me to successfully complete the Masters in Business Administration Program. I am eternally grateful to my supervisors, Ms. Helen Kinyua and Dr. Mwangi Cyrus Iraya for their great guidance, inspiration, constructive suggestions patience, inspiration throughout the research project. May the Lord bless you abundantly. I would also like to sincerely appreciate all those whom I interacted with during the MBA program and who contributed to my accomplishment. iii DEDICATION This project is dedicated to God, to my mother; Beatrice Atieno Osewe; my father; Prof. Ochanda Ogola; my siblings; Njega Rakwar, Jedida Rakwar, Aura Ochanda and my friend Sabina Olwaga for their support. iv 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. v TABLE OF CONTENTS DECLARATION............................................................................................................... ii ACKNOWLEDGMENT ................................................................................................. iii DEDICATION.................................................................................................................. iv ABSTRACT ....................................................................................................................... v LIST OF TABLES ......................................................................................................... viii LIST OF FIGURES ......................................................................................................... ix LIST OF ABBREVIATIONS .......................................................................................... x CHAPTER ONE: INTRODUCTION ............................................................................. 1 1.1 Background to the Study ........................................................................................... 1 1.1.1 Mergers and Acquisitions ................................................................................... 2 1.1.2 Financial Performance ........................................................................................ 5 1.1.3 Mergers and Acquisitions and Financial Performance ....................................... 7 1.1.4 Commercial Banks in Kenya .............................................................................. 8 1.2 Research Problem ...................................................................................................... 9 1.3 General Research Objective .................................................................................... 12 1.4 Specific Objectives .................................................................................................. 12 1.5 Value of the Study ................................................................................................... 13 CHAPTER TWO: LITERATURE REVIEW .............................................................. 15 2.1 Introduction ............................................................................................................. 15 2.2 Theoretical Literature Review ................................................................................. 15 2.2.1 Financial Synergy Theory ................................................................................ 15 2.2.2 Theory of Corporate Control ............................................................................ 16 2.2.3 Theory of Managerial Hubris ........................................................................... 17 2.3 Determinants of Financial Performance of Commercial Banks.............................. 18 2.4 Empirical Literature Review ................................................................................... 21 2.5 Conceptual Framework ........................................................................................... 24 2.6 Summary of Literature Review ............................................................................... 25 CHAPTER THREE: RESEARCH DESIGN AND METHODOLGY ...................... 27 3.1 Introduction ............................................................................................................. 27 3.2 Research Design ...................................................................................................... 27 3.3 Population................................................................................................................ 27 vi 3.4 Data Collection ........................................................................................................ 28 3.5 Data Analysis .......................................................................................................... 28 3.5.1 Conceptual Model............................................................................................. 29 3.5.2 Analytical Model .............................................................................................. 29 3.5.3 Test of Significance .......................................................................................... 30 CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION ................ 31 4.1 Introduction ............................................................................................................. 31 4.2 Descriptive Statistics ............................................................................................... 31 4.2.1 Liquidity Ratio .................................................................................................. 31 4.2.2 Profitability Ratio ............................................................................................. 32 4.2.3 Efficiency Ratio ................................................................................................ 33 4.2.4 Capital Adequacy Ratios ...................................................................................... 33 4.3 Correlation Analysis ................................................................................................ 34 4.4 Discriminant Analysis ............................................................................................. 35 4.7 Discussion of Research Findings ............................................................................ 36 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS .. 39 5.1 Introduction ............................................................................................................. 39 5.2 Summary of Findings .............................................................................................. 39 5.3 Conclusion ..............................................................................................................
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