EFFECT OF RISK FACTORS OF MERGERS AND ACQUISITIONS ON FINANCIAL PERFORMANCE OF FIRMS LISTED ON NAIROBI SECURITIES EXCHANGE IN KENYA
Abstract
This study analysed the risk factors associated with mergers and acquisition on financial performance of firms listed at the NSE. The study was based on the theories of Differential Efficiency/Financial Synergy Theory, Q Theory of Merger, Size and Return To Scale Theory, and Hubris Theory. The study adopted a descriptive research design and mixture of qualitative and quantitative methods of research approach. The target population of 16 firms that merged between 2000 and 2016 was used. Primary data on finding risk was collected with the aid of structured questionnaireand secondary data on profitability, liquidity and funding variables was obtained from financial reports of the target population firms. Collected data was analysed using Statistical Package of Social Science (SPSS) version 23. Multiple regression analysis and correlation analysis was performed. Result showed that post merger performance for revenue was higher than pre merger with a significance increase in revenue and profit; post merger cash flow performance was lower compared to pre merger with a significance decrease in cash flow; post merger debt ratio recorded was higher than pre merger debt ratio with a significance rise in use of debt funding for M&A deals; pre merger equity funding ratio was higher than post equity ratio; post merger current asset ratio was greatly lower that pre merger with a significance drop in value of current asset over current liabilities; pre merger acid test ratio was higher that pre merger with a significance rise in inventories following M&As; and post merger cash ratio was higher than pre merger with a significance rise in cash and cash equivalence following M&A; cash payment has adverse effect on financial cash flow, mixed payment had moderate effect and leverage payment had low adverse effects. The study concluded that M&As deals have favourable effect or low risk on profitability performance of combined firm; adverse effects on funding risk of the combined business; adverse effect or increased risk on firms liquidity performance. The recommends that great care should be observed in transacting M&As not to adversely affect the combined firm cash flow; a mixture of both equity and debt should be adopted as the increased use of debt increases finance risk of the concern; prudent management of current assets to avoid liquidity risk that might arise from increased liability related to M&As deals and use of hybrid and non cash payment methods in settling M&A deals.
Key Words: Profitability Risk, Funding Risk, Liquidity Risks Payment Risk, Financial Performance
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DOI: http://dx.doi.org/10.61426/sjbcm.v5i2.719
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