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.