EFFECT OF DIVERSIFICATION ON THE FINANCIAL PERFORMANCE OF MERGED INSTITUTIONS

Agnes Ogada,Amos Njuguna,George Achoki

doi:10.47672/ajf.98

Abstract

Purpose: The purpose of the study was to assess the effect of diversification on the financial performance of merged institutions.Methodology: The study adopted a mixed methodology research design. The study population included all the 51 merged financial service institutions in Kenya. Purposive sampling was used. Primary data was obtained from questionnaires and a secondary data collection template was also used. The researcher used quantitative techniques in analyzing the data. Descriptive analysis for the study included the use of means, frequencies and percentages. Inferential statistics such as correlation analysis was also used. Panel data analysis was also applied. Further, a pre and post merger analysis was used.Results: Diversification had no significant effect on financial performance of merged institutions.Unique contribution to theory, practice and policy: The study findings call for a re-assessment of the literature on diversification. Further research is necessary to study why sometimes the diversification-performance relationship is positive, others negative, and often quadratic. Further research is needed to investigate whether diversification effects on performance depends on the industries considered. This study recommends that companies with a weak and unstable capital base should seek to consolidate their establishments through mergers and acquisitions. Through mergers and acquisitions, these companies will be able to extend their market share and revenue base hence increase their profitability. In addition, mergers and acquisition leads to a higher CAR which improves the financial soundness of the companies.

Highlights

1.1 Background of the Study Mergers and Acquisitions is an important financial tool that enables companies to grow faster and provide returns to owners and investors (Sherman, 2011)
Diversification had no significant effect on financial performance of merged institutions
The study used primary data to explain the effect of diversification on financial performance of merged institutions

Summary

Introduction

1.1 Background of the Study Mergers and Acquisitions is an important financial tool that enables companies to grow faster and provide returns to owners and investors (Sherman, 2011). Mergers and Acquisitions refer to the change in ownership, business mix, assets mix and alliance with the view to maximizing shareholders’ value and improve the firm performance (Pazarkis, Vogiatzoglo, Christodoulou, Drogalas, 2006;Gaughan,2012;Nakamura, 2015). According to (Pazarkis et al, 2010;Gaughan,2012;Nakamura, 2015), one of the main elements of improving company performance is the boom in mergers and acquisitions. Some of the reasons put forward for mergers and acquisitions are: to gain greater market power, gain access to innovative capabilities reducing the risks associated with the development of a new product or service, maximize efficiency through economies of scale and scope and in some cases, reshape a firm’s competitive scope (Hitt et al, 2009;Fluck et al,2011; Vermeulen and Bakerma, 2011; Vaara, 2012). Other reasons include short-term solution to finance problems that companies face due to information asymmetries (Flucket al2011), revitalize the company by bringing innew knowledge to foster long-term survival (Vermeulen et al 2011) and to achieve synergy effects (Lubatkin, 2007; Vaara, 2012)

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