This archive report was first published on 15 October 2019.
Why Not All Mergers Are Good for Shareholders ¶
Companies exist to create wealth for their shareholders, but the relationship between shareholders and managers can be complex. Managers may act in their own interest at the expense of the owners, especially when they have more information about the business activities.
For example, managers may opt for a merger even when it is of no value to the firm's shareholders. In Kenya, several financial institutions have merged lately, including the merger between KCB and the National Bank of Kenya. The question is whether the merger makes economic sense to the shareholders of the two banks as well as the depositors.
Research shows that a well-managed merger translates to improved share prices driven by reduced costs and a well-diversified company. However, poorly planned and executed mergers can go horribly wrong, as seen in the US with the merger between American Online (AOL) and Time Warner Inc (TWX), which failed and the two companies unbundled.
The KCB and NBK merger in Kenya is a case in point. The bank must come out clean on the merger in terms of value creation and resulting efficiency. A successful merger can't be a zero-sum game given the huge transaction costs attached to the merging process. The bank must tell the market how it will handle the NBK directors who will now join its board.
The merger must also benefit depositors and borrowers in terms of attractive interest rates. If there is any benefit to be realised for KCB, it will be in the form of economies of scale associated with NBK's branch network. However, if the new vehicle becomes too big to be managed, then merger benefits will evaporate, and KCB might decline in value.
As the market watches the KCB-NBK merger keenly, especially the post-merger financial performance, risk, growth in share price and dividends to shareholders, it is essential to evaluate the merger in financial terms. Unfortunately, this might not be the case for the KCB and NBK merger.
-The writer teaches at the University of Nairobi
