INTERNATIONAL JOURNAL OF ACADEMICS & RESEARCH (IJARKE) · horizontal merger. This can be explained with the help of an example that a textile firm merges with another textile firm

INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/1.2article08

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94 IJARKE PEER REVIEWED JOURNAL Vol. 1, Issue 2 Nov. ’18 – Jan. 2019

Mergers and its Influence on the Financial Performance of Commercial

Banks in Eldoret Town, Kenya

Jebor Kathleen, Kisii University, Kenya

Dr. Caleb Akuku , Kisii University, Kenya

Dr. Jared Bitange Bogonko, Kisii University, Kenya

1. Introduction

A merger is a combination of two or more equally strong firms to form a completely new entity. The firms lose their original

identity after the merger. In business or economics, a merger is a (commonly voluntary) combination of two companies into one

larger company (Chowdhury, 2012). Merges thus are strategic alliances between two or more companies, where the partners in the

alliance seek to add to their competencies by combining their resources with those of other firms with a commitment to reach an

agreed goal (Ireri, 2011). Mergers are used as instruments of momentous growth and are increasingly getting accepted by most

firms as critical option of business strategy to accelerate competitiveness. They are widely used in emerging industries such as

information technology, pharmaceuticals; telecommunications, business process outsourcing as well as in traditional industries to

gain strength, expand the customer base, reduce competition or enter into a new market or product segment (Mishra & Chandra,

2010).

According to Huh, (2015) mergers are of various types, these include, horizontal merger, vertical merger and market extension

mergers, horizontal merger which is a merger between two firms in the same line of business. The aim in this type of merger is to

eliminate a competitor company, to increase market share, buy up surplus capacity or obtain a more profitable firm. Firms merge

horizontally to form new optimal firm boundaries in response to shocks from economic or trading environment changes,

regulatory changes in particular industries, or technological transformations. By streamlining operations, replacing management,

and realizing cost savings, merging firms can increase efficiency and realize synergistic gains (Ahern and Harford, 2014).

Vertical merger which is the merger between firms in different levels of production of various components of the same end

product for example the merger between a tyre manufacturing firm and a car assembly company. The main purpose of this type of

INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH (IJARKE Business & Management Journal)

Abstract

Many merged companies face various operational challenges experienced at the early years of operations, these include:

Information Technology, Human Resource, Communication and financial issues. The Financial issues rely on the

maximization of the shareholders’ wealth. Most merging companies face various financial challenges. The purpose of this

study was to assess merger and its influence on financial performance among commercial banks in Eldoret Town. It was

guided by the following objectives: to establish the effect of horizontal mergers on financial performance of commercial banks

in Eldoret Town, The study adopted survey research design and it was guided by the theory of efficiency, empire building

theory and agency theory. The target population for the study was all 102 employees working in 4 merged commercial banks

in Eldoret town. The banks to be considered in this study were those that merged during the period of 2005 to 2017. The study

adopted a census technique. Questionnaires were used to collect data. To determine the reliability of research instruments a

pilot study was conducted before the actual data collection and further split half method was 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 all the study variables were significant to financial

performance (Horizontal mergers β=0.160, p value=0.032,). The findings further indicated that the effect of the predictor

variable Horizontal Merger explains 83.6% of the variations in financial performance of commercial banks in Eldoret town.

Therefore it was concluded that merger is a predictor for financial performance of commercial banks. 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 both companies intending to merge as a way of establishing possible reasonable for markets skepticism before

and after the merger periods.

Key words: Mergers, Horizontal Mergers and Financial Performance


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merger is to ensure a guaranteed supply of raw materials and eliminate the problems associated with coordination and negotiation

with suppliers. Vertical mergers are common in the manufacturing industry, given the whole relationship between raw materials,

warehousing, manufacturing and distribution (Samuels, 2005). Vertical merger deals can take place among the firms of similar

industries as well as in different industries. When two or more firms get together in same industry in finance such deal is known as

horizontal merger. This can be explained with the help of an example that a textile firm merges with another textile firm. The

merger of two firms dealing in same business takes shape of horizontal merger, which bring about synergetic gains in terms of

increased market share, cost saving, and exploring new market opportunities. Similarly, a vertical merger may occur, when textile

firm buys its own dealer/supplier of cotton. The vertical merger is likely to decrease operating costs of operations and reduce costs

by expanding economy of scales (Poornima & Subhashini, 2013).

The market extension mergers take place between two companies that deal in the same products but in separate markets, the

main purpose of this merger is to make sure that the merging companies can get access to a bigger market and that ensures a

bigger client base (Gaughan, 2007).The motivation behind this pursuit is that the resulting combination of products, key people,

and existing pipeline will allow the business to operate in new markets and offer new options to their existing market. Pursuing

market extension mergersdoes not come without challenges. Combining two businesses results in many new issues that did not

exist before, this includes: operating a company with a presence in multiple markets, a larger and more diverse customer base, a

more complex product and services portfolio, and a high level of people and operational complexity. Another issue is the cost

reduction goals can conflict with revenue growth opportunities (Abdou & Annis, 2011).

Globally, mergers continue to play a major role in shaping business activities (Ndung’u, 2011).). Once a phenomenon seen

primarily in the US, mergers are now taking place in countries throughout the world. Continental Europe has experienced mergers

bursts intersperse with relative inactivity both domestically and across national border since the stock market bull run from the

recession 1980-1981, the deregulation of the financial services sector, and development of new financial instruments and markets,

labeled the first European merger wave (Kiarie, 2014). The first real increase in mergers activity in the UK, on the other hand, can

be traced back to the 1920’s when the development of mass production techniques created an increase in the vertical integration

through scale of production, while the second merger wave came in the 1960s as a response to the internationalization of the

world economy. There was a need for M&A to create larger firms that would be capable of being effective in international

competition especially from countries like the US and Japan (Kithitu, Cheluget, Keraro & Mokamba, 2012).

In developing countries, especially African countries, the primary purpose of merger activity is to elevate the profitability

growth of the company. But this growth strategy goes through certain issues such as miscommunication and employee turnover

while being executed. Further with the failure of the activity can push the company into chaotic situation in aligning their goals

and stand to lose their positive performance. Since merger activities recently increased around the world, companies that are doing

merger and activities exposing themselves to having failure on performance between two companies that cause from differences

between management style and opinion. Through merger activities, the non-interest expenses of the company increasing instead of

helping the company to attain cost savings (Saboo, & Gopi, 2009).

In Kenya a merger or an acquisition can best be seen against the background of Kenya competition law as contained in the

Restrictive Trade Practices, Monopolies and Price Control Act (Cap 504 Laws of Kenya). This is the governing law of all mergers

in Kenya. This law was enacted to encourage competition in the economy by prohibiting restrictive trade practices, controlling

monopolies, concentration of economic power and prices and for connected purposes Monopolies and Price Commission (MPC)

(The East African, 2013). Section 22(1) of Cap 504 dealing with mergers, the emphasis is on control i.e. the power to make major

decisions in respect of the conduct of the affairs of the enterprise after no more than minimal consultations with other persons

whether directors or other officers of the enterprise. Section 27(1) (a) gives the Minister for Finance powers to approve all

mergers and takeovers between two or more independent enterprises engaged in manufacturing and which distribute substantially

similar services (Mugo, 2017).

The law also sets up the necessary institutional framework for effective administration and enforcement. When documenting

merger or takeover experience in Kenya, it is important to discuss the approval process. Firms will make an application to the

Commissioner of Monopolies and Prices (CMP), who investigates, evaluates and makes a recommendation to the Minister for

Finance. The Minister may authorize or reject and Gazette within reasonable time. There is a tribunal, the Restrictive Trade

Practices Tribunal (RTPT) to which an aggrieved party may appeal and may overrule the Minister or uphold his decision. If at this

stage the aggrieved party wants to appeal further, the only option is to file an appeal to the High Court for final determination

(Mboroto, 2013).

According to Kithitu, Cheluget, Keraro and Mokamba (2012) Corporations in Kenya, including commercial banks are

undertaking various strategies in efforts to improve financial performance. Financial performance is paramount to the success of

any organization as it reflects the financial health of companies in the market and the performance as compared to other players in

the industry. Mergers have been undertaken in efforts to improve organization performance due to the benefits they are believed to

carry along. Improving financial performance through mergers and acquisition is mainly considered a management strategy.

Management considers merger to reduce costs and expenses and maximize shareholder value (Ismail, TAbdou, & Annis, 2011).


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2. Research Problem

Mergers are used in improving company’s competitiveness and gaining competitive advantage over other firms through

gaining greater market share, broadening the portfolio to reduce business risk, entering new markets and geographies, and

Capitalizing on economies of scale (Saboo and Gopi, 2009). Mergers provide enormous potential for growth for companies that

simply can’t be achieved as quickly through organic, incremental development. However, success rates are not very high,

rendering them an expensive and very risky way to grow a business.

Most merging companies faces various financial challenges, for example they have to settle the financial burdens of the

acquired company such as debts and maybe tax obligations which could reduce the company’s liquidity making it unable to pay

its short-term debt and meet unexpected cash needs resulting into bad ratings and loss of creditors confidence. Moreover, financial

mergers can lead to companies inability to meet long-term obligations when due and measures the long term financial strength of

a firm, this affects overall organizational performance.

In commercial banks of Kenya merger arrangements, there is lack of systematic and thorough attention paid to potential

problems of the integration, particularly in aspects of financial performance, Harney (2011) reported that over the recent years,

most mergers that have occurred in Kenya are yet to show the direct effects in terms of Financial performance. There is no clear

indicator of the benefits of a merger. There exists a high degree of calculated risk-taking to tap opportunities that come the way of

business, but there is risk avoidance in business and where risk is low, development is also low and industrial advance merit

becomes nearly static. Corrupt practices at public and private sector level are another impediment. This needs to be discouraged

and incidence of corrupt practices should be severely punished. It is therefore against this background that the study sought to

determine the effect of mergers on financial performance of commercial banks in Kenya.

3. Objective of the Study

To establish the effect of horizontal mergers on financial performance of commercial banks in Eldoret Town.

4. Review of Literature

4.1 The Theory of Efficiency

The theory of efficiency was preceded by Malkiel, Burton. In 1987. The theory suggests that mergers only occurred when they

are expected to generate enough realizable synergies to make the deal beneficial to both parties. It is the symmetric expectations

of gains which results in a friendly merger being proposed and accepted. If the gain in value to the target was not positive, it is

suggested the target firm’s owners would not sell or submit to the acquisition, and if the gains were negative to the bidders, the

bidder would not complete the deal.

Burton and Malkie (2003) suggests that if we observe a merger deal, efficiency theory predicts value creation with positive

returns to both the acquirer and the target. Most of the more recent literature concludes that operating synergies are the more

significant source of gain (Mantravadi & Reddy, 2008) although it does also suggest that market power theory remains a valid

merger motive. Increased allocative synergies is said to offer the firm positive and significant private benefits (Malkiel, B Gordon

and Ellis, 2010). Because, ceteris paribus firms with greater market power charge higher prices and earn greater margins through

the appropriation of consumer surplus. Indeed, a number of studies find increased profits and decreased sales after many mergers

(Mantravadi & Reddy, 2008) a finding which has been interpreted by many as evidence of increasing market power and allocative

synergy gains (Gugler 2003). From a dynamic point of view too, market power is said to allow for the deterrence of potential

future entrants (Kiplagat, 2006) which can again afford the firm a significant premium, and so offer another long-term source of

gain.

In an efficient merger market, the theory of corporate control provides a third justification, beyond simply synergistic gains,

for why mergers must create value. It suggests that there is always another firm or management team willing to acquire an

underperforming firm, to remove those managers who have failed to capitalize on the opportunities to create synergies, and thus to

improve the performance of its assets (Mishra & Chandra, 2010). Managers who offer the highest value to the owners, it suggests

will take over the right to manage the firm until they themselves are replaced by another team that discovers an even higher value

for its assets (Chepkemoi, 2013).

The theory was relevant to this study because, inefficient managers will supply the „market for corporate control, and

managers that do not maximize profits will not survive, even if the competitive forces on their product and input markets fails to

eliminate them. Hostile takeovers should, as a result be observed amongst poorly performing firms, and amongst those whose

internal corporate governance mechanisms have failed to discipline their managers. Once again the empirical evidence again

seems to support this conclusion (Chepkemoi, 2013).


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This theory has been criticized because of the imperfections in financial markets to a combination of cognitive biases such as

overconfidence, overreaction, representative bias, information bias, and various other predictable human errors in reasoning and

information processing. These errors in reasoning lead most investors to avoid value stocks and buy growth stocks at expensive

prices, which allow those who reason correctly to profit from bargains in neglected value stocks and the overreacted selling of

growth stocks.

4.2. Effect of Horizontal Mergers on Financial Performance

Horizontal mergers refer to the merger between companies in the same industry and shares the same product lines and

markets. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and potential gains in

market share are much greater for merging firms in such an industry (Kariri, 2013) Neoclassical theory suggests that firms merge

horizontally to form new optimal firm boundaries in response to shocks from economic or trading environment changes,

regulatory changes in particular industries, or technological transformations. By streamlining operations, replacing management,

and realizing cost savings, merging firms can increase efficiency and realize synergistic gains (Jensen, 1993; Comment and

Schwert, 1995; Maksimovic and Phillips, 2002; Lambrecht, 2004). Theories of merger waves also attribute their formation to the

pursuit of increased efficiency in response to economic, regulatory and technological shocks (Ahern and Harford, 2014).

Empirical studies widely support the view that companies merge horizontally to pursue efficiency gains. Using event-study

techniques, a strand of literature examines the average stock market reactions of merging and related firms at merger

announcements, and concludes that horizontal mergers are efficient (Fee and Thomas, 2004; Shahrur, 2005). Using plant-level

data, Li (2013) demonstrates that acquirers increase the productivity of their targets through more efficient use of capital and

labour. Maksimovic, Phillips, and Prabhala (2011) find that acquirers selectively retain plants acquired in mergers and restructure

target companies to exploit their comparative advantage and increase productivity. Recent literature also identifies product

differentiation and corporate innovation as specific sources of synergies and find they drive merger activities (Hoberg and

Phillips, 2010; Bena and Li, 2014).

In terms of the relative importance of the sources of efficiency gains, Devos, Kadapakkham, and Krishnamurthy (2009) use

forecast data from the Value Line Investment Survey to decompose the sources of merger gains and observe that the bulk of gains

come from operating synergies and a small portion from tax savings. Apart from these cross-sectional large-sample studies,

industry-specific studies, e.g., Erel (2011) on the deregulated banking industry and Becher, Mulherin, and Walkling (2012) on

electric utilities, support the view that horizontal mergers improve efficiency.

Muhammad (2011),conducted a study of post-merger profitability of a Royal Bank of Scotland (RBS) and found out of 20

ratios, score for the ‘better’ ratios after merger was just 6 (i.e. 30% only). The study thus concluded that the merger of RBS failed

to pull up its profitability. From the ratio analysis it was proved that the RBS merger proved to be a failure in banking history.

This study is irrelevant because it doesn’t support theory of efficiency which asserts that M&As are executed to achieve net gains

from synergies (Trautwein, 1990). The efficiency gains accrue from operating synergies which are achieved through the transfer

of knowledge and economies of scale.

Ndora (2010) studied the effects of mergers and acquisitions on the financial performance of insurance companies of Kenya. A

sample of six insurance companies that had merged between the year 1995 and 2005 were used from a population of 42 registered

insurance companies in the republic as at that time. To measure financial performance, profitability ratios, solvency ratios as well

as capital adequacy ratios were computed and the results tabulated. The findings indicated an increased financial performance by

the firms for the five years after the merger than it was five years before the merger. It was concluded that mergers and

acquisitions would result to the increase in financial performance of an insurance company.

According to Wangari, (2015) Mergers and acquisitions are critical to the financial performance of various firms and in

particular commercial banks because commercial banks are an integral element of the financial sector and the economy. M&A’s

through enhancing the shareholder gains, enhancing profitability, ensuring efficient utilization of resources due to the economies

of scale and increasing the return on equity for organizations impact the financial performance. Companies therefore use M&A’s

as a tool to expand their operations with the aim of increasing their long term profitability.

Heron and Lie (2002) noted that the financial performance of firms improved after a combination; specifically, the firms

studied experienced improved asset turnover and reduction in capital expenditure. Fatima and Shehzad (2014) on the other hand

revealed that there was no significant relationship in the ratios of commercial banks pre-merger and post-merger; and thus reached

a conclusion that mergers did not lead to the improvement of the financial performance of Banks. Quite a number of organizations

are involved in M&A’s so as to enhance their value and they are an effective way of improving the performance of corporations

through increase in revenues and profitability. M&A’s enhance growth through increase in the market share and creation of

synergies for organizations.

5. Research Methodology


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5.1 Target population

Population refers to the entire group of individuals, objects or things that share common attributes, from which the researcher

seeks to find information. The target population is the entire group of individuals, objects or things that share common attributes

and to which results were generalized (Kombo & Tromp, 2006). The target population for the study was all 102 employees

working in 5 merged commercial banks in Eldoret town. The banks were considered in this study were those that merged during

the period of 2005 to 2017.This include branch managers, operations and control managers and all employees The period was

selected so as to provide insightful information on the performance of merged companies in Kenyan Banking industry thereby the

effects on commercial banks financial performance. This is indicated in Table 1 below:

Table 1 Target population

Bank Name Branch manager Operations and

Control managers

Employees Total

Commercial Bank of Africa ltd 1 4 16 20

Prime Bank ltd 1 5 17 23

CFC Stanbic Bank Ltd 1 5 15 21

Kenya Commercial Bank

Limited

1 7 30 38

Total 4 21 77 102

5.2 Census Enquiry

For the purpose of selecting the study population the study employed census technique. Census refers to the quantitative

research method whereby all the members of the population participate in a study. There all the 102 respondents selected

participated in the study.

5.3 Data Analysis and Presentation

The study is expected to generate both quantitative and qualitative data. The data collected was cleaned, edited, coded and

stored before being analyzed. Both descriptive and inferential statistics was used for data analysis. Descriptive statistics method

was applied to analyze numerical data gathered using closed-ended questions. This was done using Statistical Package for Social

Sciences V20 (SPSS) computer software. SPSS was considered appropriate since it allowed the researcher to follow clear set of

quantitative data analysis procedures that leads to increased data validity and reliability and demonstrates the relationship between

the research variables. Descriptive analyses provide the foundation upon which correlational studies emerge; they also provide

clues regarding the issues that should be focused on leading to further studies (Mugenda & Mugenda, 2008). Descriptive statistics

helped to compute measures of central tendencies and measures of variability in order to determine how independent variables

affect the dependent variable. The time frame for analysis was conducted for secondary data, time frame for analysis was 2005 to

2016. The performance of these banks was analyzed five years prior and after merging. The annual financial statements of the

merged banks that meet this condition was analyzed to determine performance by using the pre- and post-merger five years

period.

Inferential statistics was applied through correlation analysis and the use of multiple regression analysis. The correlation

analysis was used to establish with statistical significance, the nature of the existing relationship between the dependent variable

and the independent variables. The regression analysis was used to determine with statistical significance, the influence or effect

that the independent variables has on the dependent variable.

The following regression model was used;

Y= α +β1X1 +

Where,

Y= Financial performance,

X1= Horizontal Merger

α=constant value

=error term

6. Results and Discussion

6.1 Effect of Horizontal Mergers on Financial Performance

The researcher sought to investigate the effect of horizontal mergers on financial performance of commercial banks in Eldoret

Town. The results were tabulated in table 2 as follows;


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Table 2 Effect of Horizontal Mergers on Financial Performance

Effect of Horizontal Mergers SD M Skew Kurt

Horizontal mergers promotes efficiency

and makes organizations realize synergistic

gain

F 2 4.06

-1.034 .518

% 2.1

Horizontal mergers enables organizations

to exploit their comparative advantage

F 13

3.86

-.888 -.280

% 13.4

Horizontal mergers increase the

productivity of their targets through more

efficient use of capital and labour

F 1

4.21

-1.13

.825 % 1.0

Horizontal mergers ensures increased

efficiency in response to economic, regulatory

and technological shocks

F 8

4.12

-1.36

1.66 % 8.2

Horizontal mergers enables organizations

to increase market share

F 9 4.13

-1.33

1.109 % 9.3

From the study findings in Table 2, a cumulative total of 76.3% of the respondents agreed that horizontal mergers promotes

efficiency and makes organizations realize synergistic gain, while a cumulative total of 9.3% disagreed. This was supported by a

mean of 4.06, regarding whether horizontal mergers enables organizations to exploit their comparative advantage 71.1% of the

respondents agreed while 18.6% disagreed this had a mean of 3.86, further on whether horizontal mergers increase the

productivity of employees targets through more efficient use of capital and labour majority of the respondents agreed with a

cumulative percent of 80.4% and disagreed with a cumulative percent of 6.2% and was supported by a mean of 4.21, further a

cumulative percent of 85.6% agreed that horizontal mergers ensures increased efficiency in response to economic, regulatory and

technological shocks while 10.3% disagreed and was supported by a mean of 4.12, lastly 82.5% of the respondents agreed that

horizontal mergers enables organizations to increase market share with a cumulative percent of 82.5 and 12 .4% disagreed this

was further supported by a mean of 4.13.These results indicate that majority of the respondents were in agreement that the effect

of horizontal mergers on financial performance of commercial banks in Eldoret Town.

These findings are supported by Maksimovic, Phillips, and Prabhala (2011) who stated that horizontal mergers selectively

retain plants acquired in mergers and restructure target companies to exploit their comparative advantage and increase

productivity. Also Kinyua (2011) on their study regarding on the information content of mergers and acquisitions on financial

performance of oil companies in Kenya, indicated that, there was a clear indication of the firms performing better financially after

the resulting merger and acquisition.

6.2 Documentary Analysis

Secondary data was collected using documentary analysis. The study used trend analysis to present the findings of commercial

bank performance for a period of 10 years that is four years before, the year of merger and five years after the merger. The study

was guided by return on equity and return on assets.

Return on Assets is an indicator of how profitable commercial bank is relative to its total assets. Return on Assets gives an idea

as to how efficient management is at using its assets to generate earnings. Return on Assets is calculated by dividing the

commercial bank’s annual earnings by its total assets (Lole, 2012). Return on Equity measures commercial banks profitability by

revealing how much profit a bank generates with the money shareholders have invested in it. This is useful for comparing the

profitability of a company to that of other firms in the same industry. It is the amount of net income earned as a percentage of

shareholders equity (Marangu & Jagongo, 2014).

6.2.1 Financial Performance of Commercial Bank of Africa

The study sought to find out the trend of Commercial bank of Africa financial performance over the 10 year period, that is four

years before, the year of merger and five years after the merger. Table 3 below shows the results.


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Table 3 Financial Performance of Commercial Bank of Africa

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Commercial

Bank of Africa

Ltd

ROA 1.28 2.9 2.91 3.38 3.84 3.21 3.52 4.12 4.56 4.85

ROE 1.59 1.96 1.8 1.6 2.08 2.95 2.75 3.12 3.52 2.95

The results in Table 3 indicate that Commercial Bank of Africa return on asset after the mergers increased from 2001 at 1.28%

to 4.85% in 2010. On the other hand return on equity also increased from 1.59% in 2001 to 2.96% in 2010. This implies that both

return on equity on return on assets increased. These findings were supported by Ahmad et al., (2011). Who stated that the

financial statements of commercial banks commonly contain a variety of financial ratios designed to give an indication of the

corporation's performance. Simply stated, much of the current bank performance literature describes the objective of financial

organizations as that of earning acceptable returns and minimizing the risks taken to earn this return.

6.2.2 Financial Performance of Prime Bank Limited

The study sought to find out the trend of Prime Bank Limited financial performance over the 10 year period. Table 4 below

shows the results.

Table 4 Financial Performance of Prime Bank Limited

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Prime Bank

Ltd.

ROA 0.13 -1.15 -5.9 -2.18 0.49 0.56 0.25 1.1 1.21 1.35

ROE -1.2 -3.29 -11.5 5.82 7.2 3.06 7.85 9.64 6.7 6.06

The results in Table 4 indicate that Prime Bank Limited return on assets increased during the study period from 2004 at 0.13%

to 2013 at 1.35%, on the other hand return on equity also increased from -1.2% in 2004 to 6.06% in 2013. This implies that return

on average equity as well as return on assets has been increasing before and after the mergers. This implies that mergers has an

influence on the financial performance of commercial banks.

6.2.3 Financial Performance of CFC Stanbic Bank Ltd

The study sought to find out the trend of CFC Stanbic Bank Ltd financial performance over the five year period. Table 5 below

shows the results.

Table 5 Financial Performance of CFC Stanbic Bank Ltd

2006 2007 2008 2009 2010 2012 2013 2014 2015 2016

CFC

Stanbic

Bank Ltd

ROA 6.01 14.37 18.14 17.6 14.8 9.75 14.7 9.5 11 24.7

ROE 0.9 1.95 1.85 2.1 2.15 0.8 1.31 1.4 2.1 1.6

The results in Table 5 indicate that CFC Stanbic Bank Ltd return on assets increased during the study period from 2006 at

6.01% to 2016 at 24.7%. On the other hand return on average equity also increased from 0.9% in 2006 to 1.6% in 2016. This

implies that return on average equity as well as return on assets of CFC Stanbic Bank Ltd has been increasing. This implies that

mergers have an influence on the financial performance of commercial banks.

6.2.4 Financial Performance of Kenya Commercial Bank Limited

The study sought to find out the trend of Kenya Commercial Bank Limited financial performance over the five year period.

Table 6 below shows the results.

Table 6 Financial Performance of Kenya Commercial Bank Limited

2006 2007 2008 2009 2010 2012 2013 2014 2015 2016

Kenya

Commercial

Bank Limited

ROA 0.1 0.74 1.84 1.34 1.92 1.05 0.85 1.13 2.65 1.95

ROE 3.35 3.87 3.81 3.27 4.33 1.05 0.85 1.13 2.65 1.95

The results in Table 6 indicate that Kenya Commercial Bank Limited return on average equity increased during the study

period from 2006 at 0.1% to 2016 at 1.95%. On the other hand return on average assets also decreased from 3.35% in 2006 to

1.95% in 2016. This implies that Kenya Commercial Bank Limited performance is has been influenced by the merger.


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6.3 Hypothesis Testing

From the study a multiple linear regression model was used to investigate the study hypotheses which examine the direct and

indirect effects of horizontal mergers on financial performance. Hypothesis testing was done with a significance level of 0.05,

such that when the significance value is less than the 0.05 the null hypothesis is rejected and when it is above 0.05 it is accepted.

This is discussed in the section that follows:

6.3.1 Horizontal Mergers and Financial Performance

The first study hypothesis indicated that there is no statistical significant relationship between horizontal mergers and financial

performance of commercial banks in Eldoret Town. The relationship between the independent variables (horizontal mergers) and

dependent variable (financial performance) was tested through use of a simple regression model. As shown below:

Table 7 Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .786a .618 .614 .47536

a. Predictors: (Constant), Horizontal Merger

As indicated in table 7, R-Squared is used to evaluate the goodness of fit of a model. In regression, the R square coefficient of

determination is a statistical measure of how well the regression line approximates the real data. It measures the proportion of the

variation in dependent variable explained by independent variables. From the results on model summary R= 0.786, R- square =

0.618, adjusted R- square= 0.614, and the SE= 0.475. The coefficient of determination also called the R square is 0.618. This

implies that the effect of the predictor variables (horizontal mergers) explains 61.8% of the variations in financial performance of

commercial banks in Eldoret town. This implies that a change in the horizontal merger has a strong and a positive effect on

financial performance of commercial banks. This study thus assumes that the differences of 38.2% of the variations are as a result

of other factors.

Table 8 ANOVAa

Model Sum of

Squares

df Mean Square F Sig.

1

Regressio

n 34.688 1 34.688 153.510 .000

b

Residual 21.467 95 .226

Total 56.155 96

a. Dependent Variable: Financial Performance

b. Predictors: (Constant), Horizontal Merger

As indicated in table 8, the findings of the study showed that there was a statistically significant relationship between the

independent variables and the dependent variable (F= 153.510; p=0.000). This therefore indicates that the multiple regression

model was a good fit for the data. It also indicates that horizontal mergers influence financial performance commercial banks.

Table 9 Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1

(Constant) .662 .277 2.390 .019

Horizontal

Merger .829 .067 .786 12.390 .000

a. Dependent Variable: Financial Performance

Results from the regression model above indicated that there was a significant relationship (p = 0.000) between horizontal

mergers and financial performance of commercial banks. This was interpreted to mean that the null hypothesis was rejected. The

study hence concluded that there was a significant relationship between horizontal mergers and the financial performance of

commercial banks in Eldoret town in Kenya. This study concurs to that of Maksimovic, Phillips, and Prabhala (2011)who stated

that horizontal mergers selectively retain plants acquired in mergers and restructure target companies to exploit their comparative

advantage and increase productivity.

The regression model was presented as:

Y = 0.662+ 0.829X1


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7. Conclusions and Recommendation

7.1 Conclusions

From the findings of the study, it was concluded that horizontal mergers promotes efficiency and makes organizations realize

synergistic gain, enables organizations to exploit their comparative advantage, increase the productivity of their targets through

more efficient use of capital and labour, ensures increased efficiency in response to economic, regulatory and technological

shocks and enables organizations to increase market share.

7.2 Recommendations

Managers can enhance the financial performance of their entities through mergers and acquisitions. By identifying strategic

targets, firms can benefit from synergies arising from economies of scale, increase efficiency as well as diversify their risks.

Ultimately, firm value and shareholder wealth is enhanced.

In addition, 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

Finally, the study recommends that regulators should further deploy non-market-based assessment tools that will help in assessing

past performance of both companies intending to merge as a way of establishing possible reasonable for markets skepticism

before and after the merger periods.

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INTERNATIONAL JOURNAL OF ACADEMICS & RESEARCH (IJARKE) · horizontal merger. This can be explained with the help of an example that a textile firm merges with another textile firm