Effect of mergers and acquisition on financial performance of selected insurance companies in Kenya

Abstract

Mergers and acquisitions as evidenced by their increased activity seem to be very popular to the corporate players involved. However, they appear to provide at best, a mixed performance to the broad range of stakeholders involved. Numerous studies from around the world have failed to agree on whether mergers and acquisitions improve the acquiring firm’s financial performance. It is against this that this study was undertaken. The purpose of this study therefore was to examine the effect of mergers and acquisition on financial performance of selected insurance companies in Kenya. It was specific to the effect of cost efficiency, risk diversification, operating synergy as well as growth and expansion on financial performance of selected insurance companies in Kenya. Given the nature of the study descriptive research design was adopted. It was guided by theory of efficiency, empire building theory, and agency theory. The target population for the study was all 141 employees working in 5 merged insurance companies in Kenya. The insurance companies considered in the study were those that had merged during the period of 2014 to 2018. It adopted a census of the entire population. Questionnaires were used to collect data. To determine the validity and reliability of research instruments, a pilot study was conducted before the actual data collection and further split half method carried out to calculate Cronbach alpha. A value of above 0.7 confirmed the reliability of the research instruments. The data was analyzed using both inferential (multiple regression and correlation) and descriptive statistics (frequencies, percentages, mean and standard deviation) and was presented by use of tables and charts. The study findings indicated that, cost efficiency (β = 0.314; p = 0.000), risk diversification, (β = .274; p=0.000), operating synergy, (β = .310; p =0.000) and growth and expansion (β = .136; p=0.036) were significant factors that influence financial performance of insurance firms. The study recommends that firms facing constraints on the market should consolidate their energies by resorting to merger/acquisition so as to expand their profitability as well regulators should further deploy non-market-based assessment tools that will help in assessing past performance of companies intending to merge.