Implementation of Mergers and Acquisitions Strategy at Total Kenya Limited

Abstract

Mergers and acquisitions (M&A) occur due to shocks to an industry's economic, technological and regulatory environment (Harford, 2005). Industry shocks such as liberalization, deregulation and globalization force firms to seek a more competitive position in the market. With the liberalization of the oil industry in 1994, several foreign multinationals experienced unhealthy competition and divested from Kenya citing poor returns. These included Agip (1999), BP (2005), Mobil Oil (2007), Chevron Kenya (2009) and Kenya Shell (2011). Chevron Kenya was acquired by Total Kenya with assistance of the parent company. This study sought to find out the process and challenges in the implementation of the M&A between Total Kenya Ltd and Chevron Kenya Limited. Data was collected through interview guides administered to the management of Total Kenya Limited (TKL). Results were analyzed through content analysis and conclusions drawn from the study. The study found that negotiations, due diligence and valuation were conducted between the parent companies- Total Outre Mer and Chevron Corporation of USA. Total Outre Mer first acquired Chevron Kenya and soon thereafter sold it to Total Kenya Ltd. This arrangement shielded TKL from foreign exchange risks at a time when financial markets were volatile. The study also found that the primary motive of the acquisition was to acquire strategic assets that were considered necessary to compete effectively in Kenya. The most strategic assets were the lubricants blending plant, aviation facilities in major airports and, retail petrol stations. The acquisition placed Total Kenya as the market leader in the petroleum industry in terms of petrol station network and market share. The company also achieved substantial growth in sales revenue from Kes 45 billion in 2008 to Kes 120 billion in December 2012. Paradoxically, the company moved from a profit of Kes 703 million in 2008 to a loss of Kes 202 million in 2012. These losses were attributed to high finance costs associated with heavy borrowing to finance the acquisition and price control by the government. These results are in line with conclusions drawn by Cartwright & Schoenberg (2006) that M&A provide a mixed performance. This mixed performance' can be seen in the case of Total Kenya where the company achieved market leadership and substantial growth in revenue, but made losses for two straight years in2011 and 2012.