ABSTRACT
A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. According to popular perception, Mergers fail to deliver the synergies, competitive scale, and financial results that executives had anticipated (Robert, 2002). With the negative viewpoint so popular, many executives may have second thoughts about proceeding with a merger, even if a deal looks promising. In Kenya, a number of organizations including banks have embraced the Merger strategic move. Despite its anticipated advantages, some studies have shown the opposite. A study on effects of mergers on the performance of companies was carried out on CFC and Stanbic Limited in Kenya with greater emphasis on profitability, Cash flow and Share price as company performance parameters. The study was hinged on a conceptual framework where the envisaged aspects of mergers would form the independent variable while the expected outcomes formed the dependent variable. The interplay of the said variables were regulated by a moderating variable hinged on government policy, nature of industry and level of competition. The target population of the study was 50 respondents. The study utilized the descriptive survey design. Data was collected from the published annual reports and accounts of the CFC and Stanbic Limited before and after merging and was subsequently analyzed using t-test. The findings of the study were used to assess whether mergers improve financial and operational efficiency of banks. The findings will also be used by the government to assess whether their policies relating to mergers are bearing fruits. Finally, the findings of the study were useful to CFC Stanbic Bank in accessing its performance over the years and how to improve competition in banking sector. The findings indicate that merger had no significant influence on profitability and share price. It however had significant influence on cash flow. Future research can be done on effects of mergers and acquisition on the performance of companies in different fields so as to shed more light on the effect of mergers and acquisitions on other companies in different countries.
CHAPTER ONE
INTRODUCTION
1.0 Background of the Study
A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives while remaining independent organizations. Strategic alliances are voluntary arrangements between firms involving exchange, sharing, or co-development of products, technologies, or services. They can occur as a result of a wide range of motives and goals, take a variety of forms, and occur across vertical and horizontal boundaries (Sudarsaman, 2005).
Strategic alliances between firms are now a regular phenomenon. Their proliferation has led to a growing stream of research by strategy and organizational scholars who have examined some of the causes and consequences. Strategic alliances are becoming an important form of business activity in many industries, particularly in view of the realization that companies are competing on a global field. Strategic alliances are not a panacea for every company and every situation. However, through strategic alliances, companies can improve their competitive positioning, gain entry to new markets, supplement critical skills, and share the risk and cost of major development projects. Strategic alliance can be described as a process wherein participants willingly modify their basic business practices with a purpose to reduce duplication and waste while facilitating improved performance.
Increased competition arising from the fast changing global market has resulted in a situation where firms are finding it increasingly difficult to remain competitive. More than ever before many skills, capacities and resources that are essential to a firm’s current and future prosperity are being found outside existing boundaries and outside management’s direct control. Accordingly, managers must think outside these boundaries in order to ensure that their firms remain competitive and enter into relationships that will avail tangible and intangible benefits. The changing environments and the new forms of competition have created new opportunities and threats for firms. This has forced many of them to adopt many forms of restructuring activity. It has therefore become common phenomenon for firms to come together in pursuit of a common strategy which avails gains to both firms (Gupta, 2012). There are three potential benefits that business may realize from strategic alliances (Sudarsaman, 2005): ease of market entry, shared risk, share knowledge and expert.
Studies tracking shareholder returns for every large, publicly traded North American acquirer in the 1990s showed that only 44 percent of deals initiated by these companies yielded superior investor returns. On average, acquirers underperformed their respective industries by 3 percent.
For example, shareholder value was an important element in the failed merger attempt between Germany’s Deutsche Bank and Dresdner Bank in 2000. Early adopters of shareholder-value goals include Lloyds-TSB and banks in Scandinavia, Spain and the Benelux countries. In 1999, ABN-AMRO of the Netherlands announced a policy shift to shareholder value, requiring greater focus on the expansion of highly profitable activities like asset management; private banking and corporate finance, all of which require only relatively limited capital.
A number of obstacles have been identified as limitations to the progress of MA in the banking industry. A 1993 ILO study on banking noted that efficiency improvements through mergers were frequently overestimated. Contemporary research appears to confirm this observation. Worldwide, two-thirds of mergers end in failure – some because of staff hostility and others because of insufficient preparation and inability to integrate personnel and systems. Even more failures are due to irreconcilable differences in corporate cultures and management. Among some of these obstacles to MA are bank regulation, competition policy, trade union organization, internet banking, and inadequate assessment of cultural aspects of MA: each poses a limitation on effective growth of MA in banking. For example, bank regulation places a limitation on MA to ensure that a merged institution does not exceed the legal size to assume the position of a relatively giant monopoly, as stipulated by law. Also, a 1999 KPMG study noted that MA deals were 26 percent more likely than average to be successful if they paid satisfactory attention to cultural issues, and that a company increases its chances of success if it uses reward systems to stimulate cultural integration or cooperation. Cultural aspects therefore constitute a significant obstacle to cross- border combinations even though the differences continue to ease with time, education and training. Any merger or acquisition is a complex process taking up more time than usually expected: it requires integrating very different organizations, blending often very diverse cultures and dealing with complex questions of dissimilar work organization. This requires high levels of managerial capacity in change management, the constitution of effective teams and network integration – all demands for which many managers are ill-equipped but which can lead to an accumulation of critical errors, misunderstandings and ruin that might look like a highly promising deal on paper!
Developed countries are the most important sellers and buyers in MA, accounting for about 90 per cent of sales/purchases in 1998-99. Of about 10 per cent of sales/purchases involving developing countries, the bulk (70 per cent) originates in Latin America and the Caribbean. The value of mergers and acquisitions’ sales by developing countries increased from $12 billion in 1991-95 to $61 billion in 1996-99. MA purchases by firms from developing countries rose from an average of $8 billion in 1991-95 to $30 billion in 1996-99.
In varied attempts to reduce costs and improve profitability, most major South African banks are examining possibilities of merging with assurers or other banks, while many others are expanding into other African countries. Standard Bank (Stanbic) expanded into 14 African countries in the 1990s, believing this would allow it to be the financial services provider for industries wishing to tap African markets. An attempted hostile takeover of Stanbic by Nedcor was blocked by the Minister of Finance in 2000, partly because of competition concerns, fears of increased systemic risks and the possible loss of up to 10,000 jobs in a country with extremely high unemployment. In arguing its case to the regulatory authorities, Nedcor advanced the need for South Africa to have a “national champion” to compete on a global scale. It claimed the merger would result in enhanced revenues, risk mitigation and cost reduction. These arguments were disputed by Stanbic that highlighted the failure of similar mergers elsewhere and noted that 70-80 percent of mergers in financial services did not deliver the efficiency touted. Among the reasons it stressed for merger failures were the loss of talented staff, low employee morale, unrealistic estimates of synergy benefits, under estimation of revenue losses and unexpected difficulties in integrating back office functions and systems.
In Kenya, mortgage financial institutions and banks are regulated according to the provisions of the Banking Act. These banks are the players in the Kenyan banking industry and therefore a need to study them to ensure that they operate according to the law, (Gachanja, 2013).There are fourteen major M&A in Kenya since the year two thousand.
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Item Type: Kenyan Topic | Size: 49 pages | Chapters: 1-5
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