Masaryk University Faculty of Economics and Administration Finance & Accounting ASSESSMENT OF MERGERS AND ACQUISITIONS ON THE PERFORMANCE OF SELECTED COMMERCIAL BANKS IN KENYA Master’s Thesis Supervisor: Author: Ing. Petr VALOUCH, Ph.D. Brigid MUTAI Brno, 2019 MASARYK UNIVERSITY Faculty of Economics and Administration MATER’S THESIS DESCRIPTION Academic Year: 2018/2019 Student: Brigid Mutai Field of Study: Finance (Eng.) Title of the Thesis: Assessment of Mergers and Acquisitions on the Performance of Commercial Banks in Kenya. Title of the Thesis in English: Assessment of Mergers and Acquisitions on the Performance of Commercial Banks in Kenya. Thesis objective, procedure, and methods The aim of the master thesis is to assess the effect used: of mergers and acquisitions on the performance of Commercial banks in Kenya. The structure of the thesis and methods used: - Introduction: identification of the purpose of the thesis, illustration - of the research problem & statement of study objectives - Review of Literature on the Mergers & Acquisition: theoretical literature and empirical literature - Research methodology: the research design, data collection procedure, and method of data analysis. These will entail: - The quantitative analysis of the performance indicators (i.e. profitability, efficiency, solvency, lending intensity & risk profile) - Quantitative analysis of the data- estimation of multiple regression - equation to determine the effect of the independent variables on the dependent variable - Results of the study and discussion of the results - Summary of findings, conclusions based on the findings and recommendations Extent of graphic-related work: According to thesis supervisors’ instructions Extent of thesis without supplements: 60-80 pages Literature: GATTOUFI, S. and AL-MUHARRAMI, S. Assessment of mergers and acquisitions in GCC banking. International Journal of Accountingand Finance, 2014, roč. 4, č. 4, s. 358-377.ISSN 1752- 8224. GHATAK, A. Effect of mergers and acquisitions on the profitability of India pharmaceutical. Research Journals of Social Science & Management, 2012, roč. 2, č. 6, s. 131-138. ISSN 2251-1571. RASHID, A. and NAEEM, N. Effects of mergers on corporate performance: An empirical evaluation using OLS and Bayesian methods. Borsa Istanbul Review, 2017, roč. 17, č. 1, s. 10-24. ISSN 2214-8450. HUH, K. The performances of acquired firms in the steel industry: Do financial institutions cause bubbles?. The Quarterly Review of Economics and Finance, 2015, roč. 58, č. 2, s. 143-153. ISSN 1062- 9769. Thesis Supervisor: Ing. Petr Valouch, Ph.D. Thesis Supervisor’s Department: Department of Finance Thesis Assignment Date: 2018/12/13 In Brno, date: 2019/05/09 Author’s Name: Brigid Mutai Thesis Title: Assessment of Mergers and Acquisitions on Performance of Commercial Banks in Kenya. Department: Department of Finance Thesis Supervisor Ing. Petr Valouch, Ph.D. Year: 2019 Abstract: The purpose of this thesis was to assess the effect of mergers and acquisitions on the performance of commercial banks in Kenya. Theory suggests that mergers and acquisitions improve performance. The improvements result from synergies such as economies of scale, enhanced market power, greater lending capacity, and enhanced technology. The research evaluated the pre-merger and acquisition performance of the banks, and the post-merger performance. The study covered the period 2008-2018. Performance in this study was indicated by profitability, efficiency, solvency, lending intensity, and risk. The performance measures were computed using ratios. The study established that mergers and acquisitions do not necessarily improve bank performance as in most cases this restructuring move resulted in deterioration of performance. Keywords: Merger, Acquisition, M&A, Bank, Kenya, East Africa, Lending Intensity, Solvency, Efficiency, Profitability, Risk Profile, ROA, ROE Author’s Statement I hereby certify that this is my original work, Assessment of Mergers and Acquisitions on the Performance of Selected Commercial Banks in Kenya, which I am submitting for assessment. The whole document is my own work developed under the supervision of Ing. Petr Valouch, Ph.D. Where the work of others has been used in the study, it has been acknowledged and properly referenced using APA notation. The data used in the thesis was seen and discussed with the thesis supervisor. In Brno, 9th of May 2019 _______________________ Brigid Mutai Acknowledgement I would like to sincerely thank my thesis supervisor Ing. Petr Valouch who agreed to read drafts of my paper and gave feedback that enhanced the quality of the paper. Also, I would like to thank my friends for providing corrections and insight as well as my family for their constant encouragement and support. Table of Contents 1. INTRODUCTION ............................................................................................................. 7 2. LITERATURE REVIEW ................................................................................................... 8 2.1 Mergers and Acquisitions ............................................................................................... 8 2.2 Types of Mergers and Acquisitions ............................................................................... 9 2.3 Trends in Mergers and Acquisitions in the Banking Sector ..................................... 12 2.4 Trends in Mergers and Acquisitions in the Banking Sector in Kenya .................... 13 2.5 Theoretical Underpinnings ........................................................................................... 15 2.5.1 Synergy Hypothesis .................................................................................................... 15 2.5.2 Hubris Hypothesis ....................................................................................................... 16 2.5.3 Differential Efficiency Theory .................................................................................... 18 2.6 Motives for Mergers and Acquisitions in the Banking Sector ................................. 18 2.8 Valuation of Mergers and Acquisitions ...................................................................... 24 2.9 Mergers and Acquisitions and Firm Performance ..................................................... 26 3. RESEARCH METHODOLOGY ................................................................................... 30 3.1 Conceptual Framework ................................................................................................. 30 3.2 Firm Performance ........................................................................................................... 31 3.3 Research Design .............................................................................................................. 35 3.4 Population of the Study ................................................................................................. 36 3.5 Scope of the Study .......................................................................................................... 36 3.6 Study Data ....................................................................................................................... 37 3.6.1 Guaranty Trust Bank (Kenya) Ltd - Merger ............................................................ 37 3.6.2 Equatorial Commercial Bank-Merger & Acquisition ............................................. 37 3.6.3 The Cooperative Bank of Kenya – No Restructuring ............................................. 38 4. RESULTS & DISCUSSION ........................................................................................... 39 4.1 Presentation of the Statistics on Selected Banks’ Performance ................................ 39 4.1.1 Equatorial Commercial Bank Ltd .............................................................................. 39 4.1.2 Guaranty Trust Bank Ltd ............................................................................................ 42 4.1.3 Cooperative Bank of Kenya ........................................................................................ 46 4.2 Assessment of the effects of M&As on Performance ................................................. 49 4.2.1 Effects of M&As on Profitability ............................................................................... 54 4.2.2 Effects of M&As on Solvency ..................................................................................... 57 4.2.3 Effects of M&As on Efficiency ................................................................................... 59 4.2.4 Effects of M&As on Lending Intensity ..................................................................... 61 4.2.5 Effects of M&As on Risk Profile ................................................................................ 63 4.2.6 A comparison of Performance among the banks .................................................... 64 5. CONCLUSION AND RECOMMENDATIONS ........................................................ 66 5.1 Conclusion ....................................................................................................................... 66 5.2 Recommendations .......................................................................................................... 67 5.3 Limitations ....................................................................................................................... 69 REFERENCE LIST ..............................................................................................................