Effect of Mergers and Acquisitions on Profitability of Commercial Banks in Kenya

Abstract

Mergers and acquisitions (M&A) are being increasingly used world over for improving competitiveness of companies through gaining greater market share, broadening the portfolio to reduce business risk, for entering new markets and geographies, and capitalizing on economies of scale not forgetting strategic positioning. The main objective of this study was be to establish whether M&A's have any effect on the profitability of commercial banks in Kenya. The following aspects were the specific objectives of the study; to examine the effect of capital base on profitability of mergers of commercial banks in Kenya, to determine how efficiency because of mergers and acquisition affects profitability of commercial banks in Kenya, to determine the relationship between competitiveness mergers and acquisitions and profitability of commercial banks in Kenya and to investigate the effect of expertise on profitability of mergers of commercial banks in Kenya. The study adopted a descriptive research design and the population of interest will comprised of all the 24 banks that merged or were acquired in Kenya during the study period of 2000 to 2010. The study used both primary and secondary sources of data from published and audited annual reports of accounts for the population of interest, C.B.K., N.S.E., C.M.A., and bank supervision annual reports from C.B.K. Primary data was obtained from the merged commercial banks through questionnaires. The data was analyzed using SPSS and computation of financial ratios from the financial statements like the balance sheet, cash flows, and profit and loss accounts and hence the interpretation of the study model. The results of the analysis were presented in tables, percentages, graphs and charts. Multiple regression analysis between variables was also done which showed that the variables under study were significant in explaining the relationship between the mergers and acquisitions on the profitability of commercial banks. The study recommends that institutions having weak capital base consolidate to create synergies so as to enjoy economies of scale as this will improve their profitability instead of going public by listing on the Nairobi Stock Exchange as this may be an expensive venture as it requires much funds for listing and that those firms facing constraints on the market should consolidate their energies by resorting to merger/acquisition so as to expand their profitability as the merger/acquisition is not just for the best interest of the managers but also shareholders as it leads to an increase in shareholders' wealth as opposed to each financial institution operating separately on its own.