The Effect of Mergers and Acquisitions on Value Creation of Insurance Companies in Kenya
Abstract
Mergers and acquisitions continue to enjoy importance as strategies among insurance
companies for achieving growth. However, their success in creating shareholder value
remains contested. According to a 2009 study by Boston Consulting Group, only 46% of
insurance industry mergers and acquisitions in North America and Western Europe have
created value for shareholders .Nonetheless, the insurance industry in Kenya has witnessed a
number of mergers and acquisitions over the recent years. The aim of this research was to
evaluate whether these mergers and acquisitions have created value or destroyed value. The
research used a sample of 4 insurance companies in Kenya that had gone through a merger or
acquisition over the period 2000 to 2014. The research used the intrinsic valuation approach.
To measure the effect of the merger and acquisition, the research examined the difference
between the pre-merger fundamental values and the post-merger fundamental value of the
combined entities over a time horizon of four years. The valuation method used to measure
fundamental value was the residual income valuation model. The variables for the residual
income valuation model consisted of book value at year 0, dividends at year 0, residual
incomes over years one and two and forecast terminal value. Year 0 was the year of
consolidation, the accounting year following the completion date of the merger or acquisition.
The research found that mergers and acquisitions have a statistically significant effect on
book value and fundamental value of the merged entity. The research found no significant
effect on dividends, residual income and terminal value of the merged entity. Overall, the
research found mergers and acquisitions created value. The study recommends that insurance
companies seeking growth should seek to consolidate their establishments through mergers
and acquisitions – mergers and acquisitions enable insurers to expand their pool of
policyholders and reduce underwriting risk more rapidly than other growth strategies hence
creating value.
Citation
Degree Of Master Of Science In Finance,2014Publisher
University Of Nairobi