Mergers and Acquisition and Financial Performance of Commercial Banks in Kenya
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Commercial banks’ managers and shareholders are always adopting mergers and acquisitions aiming to improve their financial performance, economies, efficiency as well as their liquidity position. However, this doesn’t always turn out to be so since different performances has been experienced by the firms that have undergone mergers and acquisitions in the banking sector. While some studies indicate that mergers and acquisitions have adverse effect, others indicate that it doesn’t have an effect while others have documented that it positively improves performance. In the recent years commercial banks have undergone mergers and acquisitions whereby in the last 20 years a total of 10 acquisitions and 13 mergers have taken place but the performance of these banks remain mixed. Therefore, there was a need to interrogate whether commercial banks’ financial performance is affected by mergers and acquisitions given that the effect is mixed. The study’s specific objectives included establishing the influence of organizational operating synergy, firm size and risk diversification as mergers and acquisitions effects on Kenyan commercial banks’ financial performance. The theories that provided a theoretical justification as well as interrogation of the key study variables are; the Synergistic Mergers Theory, the Agency Cost Theory (ACT) and Resource Based Theory. A causal research design was adopted where a census was conducted on the entire population of the last 20 years’ 10 acquisitions and 13 mergers. This study used both primary and secondary data, which was analyzed with SPSS to generate inferential and descriptive statistics and frequencies. The results of regression and correlation analysis were presented in tables and figures. The study found that organizational operating synergy, bank size, and risk diversification all had a positive and significant impact on the financial performance of Kenyan commercial banks. According to the study, operation synergy had a significant impact on bank financial performance due to lower operating expenses, increased market share, consolidation of operations, and synergies within the banking industry. An increase in bank size will result in effective gains that will be passed on to customers in the form of high deposit rates, lower lending rates, and lower interest rates. However, increasing the size of the bank beyond certain limits indicates a decline in the scale, leading to inefficiency. The diversification of a bank's operations varies depending on the bank. Diversification of risk is a risk-reduction technique that involves allocating investments across a variety of financial instruments. When banks diversify their risk, they reduce the amount of risk they are exposed to in order to maximize their returns. According to the study, Kenyan commercial banks should critically evaluate the merging institutions' overall business and operational compatibility and focus on capturing long-term operational synergies. There is a need for bank policies that place a higher priority on determining and monitoring their loan portfolio, customer deposits, and asset quality. The banks should invest in a broad range of assets such as bonds, stocks, real estate etc so as to reduce the volatility and risk to their portfolio by holding investments that have a low correlation to one another.