The Impact of Merger and Acquisition Announcements on Share Prices of Companies Listed at the Nairobi Securities Exchange

Abstract

Many companies have different strategies for growth ranging from making new investments in capital projects to identifying a suitable target to merge or to acquire in their pursuit to deliver greater value to the shareholders of their respective companies. Mergers and acquisitions benefit companies wanting to reposition themselves in the market. By adding capabilities to their product offerings, companies can rapidly expand their market coverage and modify their market position. When a merger or an acquisition is announced, a significant amount of information is revealed about that particular deal and this information can be used to evaluate the reaction of stock market to a merger or an acquisition announcement. The objective of the study was to determine the impact of mergers and acquisition announcement on share prices of companies listed at the Nairobi Securities Exchange. The associated effect was measured by the event study methodology whereby secondary data was used for analysis. The research findings showed that there were changes in stock prices immediately after merger and acquisition announcement was made. However, in some instances, the share prices dropped after the announcement whereas in some cases the prices went up. In essence, abnormal returns were witnessed in some of the listed firms. For some companies however the announcement did not in any significant manner influence the share returns and accumulated returns. The study found out that that the mergers and acquisitions announcements had significant effects on total accumulated share returns for the various listed companies before and after the announcements. Therefore, they were indeed wealth creating projects for investors at the Nairobi Securities Exchange since they were able to positively influence share returns even in the short term. In essence, merger and acquisition announcements resulted to build ups of shareholders wealth after they took effect. Nevertheless, the positive impact of the mergers on returns not occurring to a number of listed firms should not be mistakenly interpreted to mean that the mergers were not wealth creating projects in the long run. The study therefore vehemently concluded that firms will take some grace period before they can actually profit from consolidations. The study recommends that listed companies should carefully make consolidation decisions before undertaking a merger and acquisition take-over. To the regulators, they ought to impose full disclosures with regards to bidding firms on the rationale behind their intended takeovers so that discrepancies can be detected early. The study recommends that regulators should actually deploy tools of synergy assessment that are non-market based in a bid to assess the performance of bidding companies and the acquiring companies. This may help to establish possible reasonable scepticisms before and after merger event.