Effects Of Mergers And Acquisitions Indicators On Shareholder Value; A Case Of Insurance Firms In Kenya

Abstract

Mergers and Acquisitions are purposely intended to build internal capacity, increase the market share, attain cross boarder expansion, grow existing business when organic growth is becoming difficult and help in the diversification of risks. They are also poised to create synergies, diversification and build economies of scale which results to the rise in the values of both the predator and the targeted firms. In spite of the numerous successes of Mergers &Acquisitions within the global markets, Mergers &Acquisitions are affected by some factors which are both exogenous and endogenous. Although many issues concerning corporate mergers have been addressed in existing literatures, little concentration has been given to address the effects of Mergers &Acquisitions indicators on shareholder value of insurance firms in Kenya. This study therefore intends to bridge this knowledge gap by analyzing the Market share, Debt capacity and Cash Flows as the key indicators of Mergers & Acquisitions. The study made analysis of the effects of Mergers &Acquisition indicators on the shareholder value with the intention to specifically answer the most fundamental question; are Mergers &Acquisitions an appropriate strategy for creating or maximizing the shareholder’s value. The study adopted the longitudinal research design, based on descriptive survey, and its target population was insurance firms in Kenya that had adopted Mergers &Acquisitions as a corporate reorganization strategy during the periods of 2010-2014. The sample size consisted of the 8 Kenyan insurance firms. It relied on secondary data which was obtained from the audited financial statements and journals from Association of Kenyan Insurance (AKI). The study used descriptive statistics as well as regression to estimate a model to explain shareholder value of the merged or acquired insurance firms in terms of market share, debt capacity, and free cash flows based on 5% level of significance (p-value = 0.05).The Stata statistical software version 12 was used to assists in data analysis. The study revealed that the shareholder value of the merged or acquired insurance firms in Kenya was reducing between 2011 and 2014.The study concludes that Market Share affects the Shareholder Value of the merged or acquired insurance firms in Kenya positively; debt capacity affects the shareholder value of merged insurance firms in Kenya negatively, and free cash flows also affects the shareholder value of the merged or acquired insurance firms in Kenya negatively. The study also revealed at 0.05 significance level, market share, debt capacity, and free cash flows significantly predicting a sustainable shareholder value of the merged or acquired insurance firms in Kenya. The study recommends that the merged or acquired insurance firms in Kenya should; aggressively in propagating their marketing to expand the market penetration for increasing the market share, evaluating their own debt capacity to avoid any unnecessary risk of default, and free cash flow from the operations should be paid out to shareholders in the form of dividends so as to maximize the stock price and ensure improved shareholder value.