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AN INVESTIGATION INTO THE EFFECTS OF MERGERS AND ACQUISITIONS ON FINANCIAL PERFORMANCE OF COMPANIES IN KENYA (2003 - 2007)

BY KENNEDY MURITHI BUS-3-2371-3/07

A THESIS SUBMITTED IN PARTIAL FULFILLMENT FOR THE REQUIREMENT FOR THE AWARD OF MASTER OF BUSINESS ADMINISTRATION (MBA FINANCE) KENYA METHODIST UNIVERSITY

MAY 2010

DECLARATION I declare that this is my original work and has not been submitted for examination in any other University. Signature: ________________________Date: _________________________

KENNEDY MURITHI BUS-3-2371-3/07

This thesis has been submitted for examination with our approval as the University supervisors. Signature: ______________________Date: DR. T. M. NYAMACHE LECTURER, FINANCE KENYA METHODIST UNIVERSITY ___________________

Signature:

_________________________Date: _________________________

DR. FRANCIS MAMBO LECTURER, FINANCE KENYA METHODIST UNIVERSITY

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ACKNOWLEDGEMENT I would like to take this opportunity to express my sincere appreciation and gratitude to the following people and organizations without whose assistance, guidance and valuable support, this study would not have been successful.

Dr. Nyamache and Dr Mambo, supervisors, for directing and giving in-depth input for a comprehensive proposal.

All the staff and management of Kenya Methodist University, Nairobi Campus, who assisted and contributed to the success of this proposal.

To my colleagues in the MBA class for their support and team work that gave me a lot of support morally.

Finally, to Kenya Methodist University for having given me this opportunity to be part of this comprehensive Masters Degree Programme.

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DEDICATION To my wife Lydia and children Celine and Cynthia for their unwavering love, support, encouragement and dedication during the challenging and trying study.

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ABSTRACT The general objective of this study was to establish the effects of mergers and acquisitions on financial performance of companies in Kenya. The study also explored the impact of corporate restructuring to firms in Kenya. The specific objectives were: To determine the significance of mergers and acquisitions in the increase of market share of companies in Kenya, to find the role the mergers and acquisitions play in achieving and enhancing profitability in companies, to establish the extent to which mergers and acquisitions assist in the attainment of returns on investments, and to determine the benefits of synergy that is achieved once companies adopt mergers and acquisitions in Kenya.

Literature was reviewed on effects mergers and acquisitions .This review also monitored the trend of amalgamations of companies in Kenya. The focus was between the fiscal years 2003 to 2007. In the same section, the nature of mergers and acquisitions, types of mergers and the importance of mergers on company performance were reviewed.

The research design was descriptive. The design was appropriate to the study as it sought to obtain complete and effective corporate restructuring in Kenyan firms. From the findings, the study found that that mergers and acquisitions increase the market share of companies the firms entered into new geographical areas, diversify business growth, acquire states of art and technology, comply with new legislation, acquire brand loyalty and overcome entry barriers. Mergers and acquisitions also assisted in the

attainment of returns on investment in companies, the study also concludes that the benefits of synergy that is achieved through adoption of merger and acquisition were; increased market share, acquiring state of technology, complying with new regulation , acquire brand loyalty and overcome entry barriers. The study also established that there exist positive relationships between merger and acquisition and predictor factors which are market share, profitability of the company, diversification of risk, achievement of synergy and return on investment.

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LIST OF ABBREVIATIONS M&A: Mergers and Acquisitions FTC : Federal Trade Commission NAVPS: Net Asset Value Per Share NAV: Net Asset Value EPS: Earnings Per Share ROIC : Return On Investment Capital NSE: Nairobi Stock Exchange ABSA: Amalgamation of Banks in South Africa MPC: Monopolies and Price Control

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LIST OF OPERATIONAL TERMS Horizontal mergers: It takes place between firms that are actually or potentially competitors occupying similar positions in the chain of production. Vertical mergers: It takes place between firms at different levels of production. Conglomerate mergers: This is a merger between firms that are neither competitors nor potential or actual customers or suppliers of each other. Agency problems: Agency problems arise when managers own a fraction of the ownership of their firm. Market capitalization: The total market value of a company at the bourse.

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TABLE OF CONTENT DECLARATION.................................................................................................................ii ACKNOWLEDGEMENT..................................................................................................iii DEDICATION....................................................................................................................iv ABSTRACT.........................................................................................................................v LIST OF ABBREVIATIONS............................................................................................vii LIST OF OPERATIONAL TERMS................................................................................viii LIST OF TABLES..............................................................................................................xi LIST OF FIGURES...........................................................................................................xii CHAPTER ONE..................................................................................................................1 1.0 INTRODUCTION.........................................................................................................1 1.1 Background of the Study...........................................................................................1 1.2 Statement of the Problem...........................................................................................6 1.3 Research Questions..................................................................................................9 1.4 Objectives of the Study............................................................................................10 1.4.1General objective...............................................................................................10 1.4.2 Specific objectives............................................................................................10 1.5 Significance of the Study.........................................................................................10 1.6 Scope of the Study...................................................................................................11 1.7 Limitations of the Study...........................................................................................11 CHAPTER TWO...............................................................................................................13 2.0 LITERATURE REVIEW............................................................................................13 2.1 Nature of Corporate Restructuring...........................................................................13 2.2 Types of Mergers and Acquisitions/Corporate Restructuring.................................14 2.2.1 Horizontal mergers............................................................................................17 2.2.2 Vertical merges.................................................................................................18 2.2.3 Conglomerate mergers......................................................................................19 2.3 Motives behind Mergers..........................................................................................19 2.4 Importance of Mergers in Company Performance...................................................22 2.4.1 Merger analysis..............................................................................................24 2.4.2 Empirical studies of mergers............................................................................26 2.4.3 Information in merger review.........................................................................27 2.4.4 Merger remedies............................................................................................28 2.5 Performance Measures.............................................................................................29 2.5.1 Other measures of performance......................................................................31 2.6 Market Based Valuation........................................................................................33 2.7 Conceptual Framework............................................................................................36 CHAPTER THREE...........................................................................................................37 3.0 RESEARCH METHODOLOGY.................................................................................37 3.1 Research Design.......................................................................................................37 3.2 Target Population ....................................................................................................38 3.3 Data Collection Methods and Instruments...........................................................38 3.4 Research Area..........................................................................................................40 3.5 Sample Design and Size...........................................................................................40 3.6 Data Analysis, Interpretation and Presentation........................................................41 ix

CHAPTER FOUR:.............................................................................................................42 4.0 DATA ANALYSIS AND INTERPRETATION.........................................................42 4.1 Introduction..............................................................................................................42 4.2 Analysis and Interpretation .....................................................................................42 4.2.1 Personal Data....................................................................................................42 4.2.2 Firms Profile....................................................................................................45 4.2.3 Experience of the Firm......................................................................................48 4.2.4 Regression Analysis .........................................................................................52 CHAPTER FIVE:..............................................................................................................56 5.0 DISCUSSION CONCLUSION AND RECOMMENDATION..................................56 5.1 Introduction..............................................................................................................56 5.2 Discussion ...............................................................................................................56 5.3Conclusion ...............................................................................................................60 5.4Recommendation......................................................................................................60 REFERENCES..................................................................................................................61 APPENDICES ..................................................................................................................65 Appendix I: Introduction Letter.....................................................................................65 Appendix II : Questionnaire...........................................................................................66 Appendix III: Time Plan................................................................................................72 Appendix IV: Budget Estimate......................................................................................72 APPENDIX V: MERGER CONTROL NOTIFICATIONS- SOURCE MPC ANNUAL REPORTS 2001 - 2004..................................................................................................74

LIST OF TABLES Table 4.1: Education level ................................................................................................44 Table 4.2: Type of company..............................................................................................45 Table 4.3: Legal structure of the firm................................................................................46 Table 4.4: Classification of organization in terms of ownership.......................................47 Table 4.5: Sector of the organization.................................................................................47 Table 4.6: The Sort of Merger or Acquisition That the Company Undertook..................48 Table 4.7: Reason/S Why the Organization Undertook the Merger..................................49 Table 8: Whether the Firm Was Subjected To Appeal to the Tribunal.............................50 Table 4.9: Whether the Firm Appealed To the High Court...............................................50 Table 4.10: The Degree of Involvement of Managers in the Acquisition or Merger Process ..............................................................................................................................51 Table 4.11: Whether The Merger or Acquisition Undertaken the Firm Is A Success.......52 Table 4.12: Whether the Respondents Would Recommend a Merger or an Acquisition Again..................................................................................................................................52 Table 4.13: Model Summary ............................................................................................53 Table 4.14: Coefficients results.........................................................................................54

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LIST OF FIGURES

Figure 2.1:-The Conceptual Framework............................................................................36 Figure 4.2: Gender of the respondents ..............................................................................43 Figure 4.3: Number of years of service ............................................................................43 Figure 4.4: Ownership composition of company...............................................................44

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CHAPTER ONE 1.0 INTRODUCTION 1.1 Background of the Study The existing capabilities of a firm influence the kind of acquisition activity that will make business and economic sense. The central strategy for most firms seeking Mergers and Acquisitions (M &A) is to seek to become the leading player in the product-market area of the strategic business unit.

The changing environments and the new forms of competition have created new opportunities and threats for business firms. The change imperatives are strong, and firms must adjust to new forces of competition from all directions. This has forced many of them to adopt many forms of restructuring activity. Twenty years back, few companies made mergers a key element of their growth strategy. Mergers were an afterthought or episodic. Today, many companies look to achieve over 50 percent of their growth from M&As. Thomas and Weston(1992).

There is no question that the pent-up demand for mergers has been brought back to life due to various factors such as convergence of low interest rates, debt availability, private equity and venture capital, cash infusions from initial public offers and the perceived lack of organic growth opportunities due to a saturated marketplace. For large samples, some M&As succeed, others fail.

But well conceived and effectively implemented M&A activity can yield returns to shareholders in excess of broad stock market indexes .The Economist (2000). Some acquirers have developed processes that facilitate the achievement of highly impressive track records. For example, Anslinger and Copeland (1996) found out that samples of both corporate and financial buyers were able to achieve superior performance.

The returns to acquiring firms are influenced by a number of factors. Many firms engage in a series of M&A activities over time thus making it difficult lo isolate the influence of a single acquisition event. If the time period over which the returns to the shareholders of acquiring firms includes a year or two before a specific acquisition, on average acquiring firms earn at least the same as their cost of capital. But studies also reveal that for the largest combinations during the period of strategic mergers (1992-98), in at least twothirds of the cases, value is increased.

Other recent contributions suggest that long-term positive results for mergers are found for mergers across related product lines. Kraillinger (1997). It is important to note the long-term effects on performance of merger deals. As mentioned by Chakrabarli and Burton (1983), performance related incentives for mergers affect long term strategic variables which tend to be underestimated in much of the current empirical research, which usually focuses on the short-term, economic effects.

In these long-term effects, the expected synergistic characteristics of mergers can contribute to improved performance through successful efficiency of operations, whereby economies of scale spread the large fixed costs of investing in machinery or computer systems over a larger number of units. Another efficiency gain is achieved by combining complementary activities. An example is combining a company strong in research with one strong in marbling. .Cosh,Hughes,Lee and Singh(1989).

This effect of merging companies is a well-known classic issue, where increased size of companies and synergies, through internal growth or by means of mergers, are positively related to long-term performance. Schumpeter (1942).

The probability of deals success goes up considerably when the key elements of postmerger integration are not only started before closing, but when the likely risks and challenges of the integration are considered al the very beginning of the merger process, when the acquirer is deciding what to buy and what to pay. All of the elements that affect Post merger integration success, especially the culture of the companies, must be assessed and rolled into the synergy (and price to pay) calculation.

Pre-merger planning has become especially critical as companies face pressure to deliver synergies as soon as possible. In essence, there should not be separate mergers and postmerger integration process, but a holistic approach to the deal, from strategy to target identification and valuation to integration.

This involves looking downstream al core processes and the nuts and bolts of how things work and in getting the people who know how to design and implement changes to these systems and processes involved up front, especially during the valuation stage. Berger (1999).

With excess capacity in an industry, horizontal mergers can be used to shut down some high-cost plants to reduce industry supply and to increase efficiency in the remaining firms. Further, a number of industries formerly fragmented into many small-scale operations have been rolled up into larger firms. This form of merger is what is referred to as consolidation and a good example in Kenya is what the Coca Cola Company is carrying out by closing bottling facilities countrywide while expanding the company's bottling facilities in the city. The larger firm has been able to achieve efficiencies not achieved by the separate units. Berger (1999).

Mergers have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of business as a number of economies are being deregulated and integrated with other economies. Most mergers actually benefit consumers by allowing firms to operate more efficiently. But some are likely to lessen competition. That, in turn, can lead to higher prices, reduced availability of goods or services, lower quality of products, and less innovation. Indeed, some mergers create a concentrated market while others enable a single firm to raise resources. Berger (1999).

Internal growth and mergers are not mutually exclusive activities. Indeed, they are mutually supportive and reinforcing. Successful firms use many forms of M&A and restructuring based on opportunities and limitations. The characteristics and competitive structure of an industry will influence the strategy employed. The factors favoring M&A in part relate to industry characteristics. Some other advantages of M&A or external growth may also be noted. Thomas and Weston(1992).

An acquisition enables the acquirer to obtain an organization already in place with an historical track record. Some surprises are still possible, but they can be mitigated to some degree by appropriate due diligence. An acquisition generally involves paying a premium, but the cost of acquiring a company may be determined in advance. An acquisition may also represent obtaining a segment divested from another firm. The logic is that the segment can be managed better when added to the activities of the buying firm. Firms generally have internal development programs that are assisted by M&A activity.

Acquisitions and mergers have been popular methods of increasing the size and value of firms in modern times. This approach, in contrast to the older system of increasing value through organic growth, is faster and in many cases cheaper. It is important to observe that one of the greatest challenges of corporate raiding has always been identifying the business area in which a firm should participate in order to maximize its long-term profitability . It would be appropriate to adopt a definition of corporate strategy that helps in understanding issues in mergers and acquisitions. 5

Mintzberg and Quinn (1991), define strategy as a pattern or a plan that integrates an organizations major goals, policies and actions. Strategic decisions are based on building on or stretching an organizations resources and competencies to create new opportunities or capabilities based on these resources. Strategy therefore, may in some cases require major resources which are beyond firms existing capability. In such a situation, a merger or an acquisition may be the only available option. It may, therefore, for instance, be an appropriate phenomenon for an organization to merge with or acquire a supplier of its raw material so as to guarantee availability and quality of such raw material or with a competitor so as to expand its market share or with another firm in order to comply with changes in legislation. Many managers will today regard buying a company for access to markets, products, technology, resources or management talent as less risky and speedier than gaining the same objectives through internal efforts or organic growth. Jemison and Sitkin(1986).

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Statement of the Problem

Mergers and acquisitions have become the main means of attaining higher performance which is the main goal of any company. Failure to perform is critical to a business as it is the major cause of business failure. Many studies have been done in the area of M&A and results found from the studies have been inconsistent.

There are quite a number of activities that go on behind the scenes of these mergers and acquisitions which need to be known, but are apparently not easily available. The Restrictive Trade Practices, Monopolies and Price Control Act (Cap 504) is the principal guide that gives guideline and direct all processes of mergers and acquisitions in Kenya. This Act has not been revised since 1989, yet the dynamic changes in the market place demand that such a law should be reviewed from time to time, to support and promote effective competition . It is a law that is not in harmony with other sectional laws, such as the Banking Act or the Trade Licensing Act. The law does not give a period within which ministerial approval should be given. Any delays could make firms loose out on a merger opportunity. There are heavy and punitive penalties that are imposed by this law if any merger or a takeover proceeds without such an approval.

It is universally recognized that target identifications, evaluation and screening takes up a lot of managers' time, and forms their substantial costs relating to professional services. Jemison and Silkin(1986). The least a company could expect is to undergo an unfriendly approval process. This study will document in a comprehensive manner the experiences of companies that have undergone mergers and acquisitions in Kenya. The documented experiences would focus on factors that would include the approval processes and creation of shareholder value. The study would also give an insight of processes, and highlight barriers encountered from the perspective of those who have 'been there.

The study will tend to establish whether mergers and acquisitions always result in creation of shareholders' value.

In conducting this survey study among the Kenyan firms that have been involved in mergers and acquisitions activity, an opportunity to observe similarities or otherwise on these conclusions, will be established and documented.

Chesang (2002) ,carried out a study on Merger Restructuring and Financial Performance of Commercial Banking in Kenya. Her study did not cover mergers and acquisitions in other sectors of economy. Consequently, this study will include an insight in the field of mergers and acquisitions as to the approval processes, creation of shareholders wealth and firms perception as regards factors that contribute to the success or failure of mergers and acquisitions among a broader range of Kenyan firms

A study was conducted by Lev and Mandelker (1972), on 69 firms. They compared the performance of merged firms using profitability measures for 5 pre merger and 5 post merger years. They concluded that the market value of the acquiring firms rose on average by 5.6 % (significant at 10% level).

Lichtenberg, Frank, and Siegel (1990), examined United Kingdom active acquirers and found some evidence that companies undertaking mergers earned a higher rate of returns than those that relied on internal growth. They were however unable to identify a positive relationship between the level of merger activity and profitability.

Few studies have been done in Kenya concerning M&A and by conducting this research, the researcher will be able to know how companies perform.

Many companies in Kenya use share price as their measure of performance and by which they are judged by investors and stockholders alike. This study will be set to find out the effects of mergers and acquisitions, if any on the performance of the companies in Kenya. The question for the study will therefore be: Would the performance of the firm be the same before and after merging?

1.3 Research Questions The research questions had been decided as follows: i. What is the significance of mergers and acquisitions in the increase in market power of companies in Kenya? ii. What is the role that mergers and acquisitions play in achieving enhanced profitability of companies in Kenya? iii. To what extent have mergers and acquisitions assisted in the attainment of returns on investment in companies in Kenya? iv. What are the benefits of synergy that is achieved once companies adopt mergers and acquisitions?

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Objectives of the Study

1.4.1General objective To establish the effects of mergers and acquisitions on financial performance of companies 1.4.2 Specific objectives The specific objectives have been decided as follows: i. To determine the significance of mergers and acquisitions in the increase in market share of companies in Kenya. ii. To find out the role that mergers and acquisitions play in achieving enhanced profitability of companies in Kenya. iii. To establish the extent to which mergers and acquisitions assist in the attainment of returns on investment in companies in Kenya. iv. To determine the benefits of synergy that is achieved once companies adopt mergers and acquisitions.

1.5 Significance of the Study This study will be of value to: Current investors and firms at the Nairobi Stock Exchange(NSE) and elsewhere and any other firm in competitive industry as it will add knowledge on the understanding of the importance of mergers and acquisitions in analyzing company performance.

Academicians and researchers by providing more insight into the relationship between mergers and acquisitions and company performance.

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As the environment is very dynamic, the practitioners of management need to update themselves and their respective industries on the best practices required.

To the executives and managers of the companies listed at the NSE, the study will cover all the companies which have merged and the relative performance. This study will also contribute to the bulk of knowledge and research at the university as it will be used as a basis of reference by students for any future study in the field of mergers, acquisition and restructuring of companies.

1.6 Scope of the Study The scope of this study covered all the companies in Kenya that have undergone mergers and acquisitions between the year 2003 and 2007. Emphasis was, however, be on Nairobi since it is the capital city and most of the head offices are located in Nairobi.

1.7 Limitations of the Study The major constraints of this study were: i. Time factor: Due to the fact that the time allocated for this study was short, the researcher was compelled to take a case of only those companies that operate in Nairobi. This however, yielded reliable and valid results. ii. Financial constraints: This restricted the scope of this study because of lack of sufficient funds. The researcher however, engaged the use of his personal savings and went for cost effective data collection tools and methods to cut on costs.

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Lack of cooperation: The researcher encountered a lot of resistance while carrying out this study due to the fact that the topic under study touched on the sensitive issue of mergers and acquisitions. The researcher overcame this limitation by accompanying each questionnaire with a cover letter informing the respondents that the research study was purely for academic purposes and that the responses given would be treated with utmost confidentiality between the researcher and the respondent.

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CHAPTER TWO 2.0 LITERATURE REVIEW This chapter considers literature relevant to the subject under study. The main issues under review were; the nature of mergers, types of mergers and acquisitions, motives of mergers, importance of mergers in company performance, performance measures, market based valuation and the conceptual framework.

2.1 Nature of Corporate Restructuring Merger can be defined as any transaction that forms one economic unit from two or more previous ones. Takeovers and related activities in the 1980s are much broader in scope and raise more fundamental issues than previous merger movements. Thus the traditional subject of M&A has been expanded to include takeovers and related issues of corporate restructuring, corporate control and changes in the ownership structure of firms. Thomas and Weston (1992).

Many mergers have little or no negative impact on competition. Some may be procompetitive, for example, by enhancing production efficiencies resulting from economies of scale or scope. Mergers may also create new synergies, lead to innovation by combining talents of different firms, and provide additional resources to develop new products and services. Chakrabati and Burton (1983).

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Concerns about mergers, acquisitions and other corporate combinations are generally based on the same concerns about anti-competitive behavior. The main concern is that a larger merged firm may increase its market power. Hoskisson and Hitt(1994).

To the extend a merged firm becomes more dominant in a market, there is a greater potential to abuse the accumulation and exercise of market power to the detriment of competitors and customers.

2.2 Types of Mergers and Acquisitions/Corporate Restructuring Thomas and Weston (1992), found that business firms have used a wide range of activities in seeking to exploit potential opportunities. The major objective of mergers, tenders offers and joint ventures is to achieve expansion and growth. Merger is any transaction that forms economic unit from two or more previous separate business units. Tender offer is a method of making a takeover via a direct offer to target firms shareholders to buy their shares, while a joint venture is a combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and for a limited duration. Each of the venture partners continues to exist as a separate firm, and the joint venture represent a new business enterprises.

Sell-off is a general term for divestiture of part or all of a firm by any one of a number of means e.g. sale, liquidation, spin-off, and so on. Spin-offs is a transaction in which a company distributes on a pro rata basis all of the shares it owns in a subsidiary to its own shareholders. 14

This creates a new public company with (initially) the same proportional equity ownership as the parent company. Divestiture is the sale of a segment of a company, ,assets, a product line or a subsidiary to a third party for cash and/or securities. Equity carved is a transaction in which a parent firm offers some of a subsidiary common stock to the general public to bring in a cash infusion to the parent no longer exists and only the new offspring survive.

Under changes in ownership structures, we have exchange offer, its a truncation which provides one class (or more) of securities with the right or option to exchange part or all of the holdings for a different class of the firms securities, e.g. an exchange of common stock for debt. It enable a change in capital structure with no change in investment share purchases here a public corporation buys its own shares by tender offer, on the open market, or in negotiated buybacks.

Going private is a transformation whereby a public corporation is converted into a privately-held firm, often via a leveraged buyout or a management buy-out Leveraged buyout is where the company is purchased by a small group of investors, financed largely by debt. We also have leveraged cash-outs. a defensive reorganization of the firm s capital structure in which outside shareholders receive a large one-time cash dividend, and inside shareholders receive new shares of stock instead, and lastly Employee Stock Ownership Plans (ESOPs) a defined contribution pension plan designed to invest primarily in the stock of the employer firm.

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Restructuring is the changes in product-market participation, asset redeployment, financial engineering; changes in management systems to improve revenue growth and to achieve efficiency increases including cost reductions.

Corporate control is another type of merger, under corporate control we have premium buybacks its the repurchase of a substantial stockholder ownership interest at premium above the market price (called green mail) standstill agreement these represent voluntary contracts in which the stockholder who is bough out agrees not to make further investment in the company in the future.

Anti takeover amendments are changes in the corporate by laws to make acquisition of the company more difficult or more expensive. These include: supermajority voting provisions, requiring a percentage (e.g. 80%) of stockholders to approve a merger, staggered terms of directors which can delay change of control for a number of years, golden parachutes which award large termination payments to existing management if control of the firm is changed and management terminated and poison pill provisions which give present stockholders the right to buy at a substantial discount the shares of a successor company formed by a stock takeover.

Proxy contest is a type of merger where an outside group seeks to obtain representation on the firms board of directors. The outsiders are referred to as dissidents or

insurgents who seek to reduce the control position of the incumbents or existing board of directors.

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Since the management of a firm often has effective control of the board of directors, proxy contents are often regarded as directed against the existing management.

It is clear from the above list that the strategies include expansion, contraction and efforts to improve the efficiency of operations. Joint ventures represent a flexible method of exploring new areas with partners whose capabilities are complementary. Joint venture can be used to have the seller transmit knowledge about the operation and the buyer to learn more about what is being acquired.

With regard to split-ups and spin-offs, a firm may improve motivations and performance by creating separate operations, when an activity does not fall into an effective organization structure of the parent. Especially promising in this connection are crossborder transactions (like the Nation Media Group in the East African region) either in the form of joint venture or mergers and acquisitions to achieve new products, new technologies, and new geographic markets.

2.2.1 Horizontal mergers This takes place between firms that are actually or potential competitors occupying similar positions in the chain of production. Merger reviews typically focus on horizontal mergers since; by defining they reduce the number of competitors and the relevant markets. Also of concerns are mergers between a firm which is active in a particular market and another which is a potential competitor.

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In a horizontal merger, the acquisition of a competitor could increase market concentration and increase the likelihood of collusion. The elimination of head-to-head competition between two leading firms may result in unilateral anticompetitive effects.

An example is the acquisition of Amalgamated Banks of South Africa (ABSA), (a big bank in South Africa) by Barclays Bank (another big bank), in many areas of South Africa. The merger has reduced the number of competitors, often leaving Barclays Bank as the only major bank in the area. Owino (2005).

2.2.2 Vertical merges This takes place between firms at different levels in the chain of production (such as between manufactures and retailers); vertical mergers can also be of concern. Vertical mergers involve firms in a buyer-seller relationship- a manufacturer merging with a supplier of component products, or a manufacture merging with a distributor of its products. A vertical merger can harm competition by making it difficult for competitors to gain access to an important component product or to an important channel of distribution. This is called a vertical foreclosure or bottleneck problem.

Another example is the merger of Time Warner Inc, producers of HBO and other video programming and Turn Corp., producers of CNN, TBS, and other programmes. The USA Federal Trade Commission (FTC) was concerned that Time Warner could refuse to sell popular video programmes to competitors of cable TV companies owned or affiliated with Time Warner or Turner or offer to sell the programmes at discriminatory prices. 18

That would allow Time Warner Tuner affiliate cable companies to maintain

monopolies against competitors like Direct Broadcast Satellite (DBS) and new wireless cable technologies. Whats more, the Time Warner-Turner affiliates could hurt

competition in the production of video programming by refusing to carry programmes produced by competitors of both Time Warner and Turner. The FTC allowed the merger, but prohibited discriminatory access terms at both levels to prevent anti-competitive effects .Mantel and Eudema(2000).

2.2.3 Conglomerate mergers According to Hamed (1999) Conglomerate Mergers between firms that are neither competitors nor potential or actual customers or suppliers of each other which vary in types and attributes and they may be pure or mixed in form whereby pure mergers have no economic relationships between the acquiring firm and the acquired firm. Mixed mergers have aspects of both pure conglomerate merger, and of horizontal merger. This is a combination of firms engaged in unrelated lines of business activity, for examples merging of different businesses like manufacturing of cement products, fertilizers products, electronic products and advertising agencies.

2.3 Motives behind Mergers One of the most common motives for merges is growth. There are two broad ways a firm can grow. The first is through internal growth. This can be slow and ineffective if a firm is seeking to take advantage of a window of opportunity in which it has a short-term advantage over competitors. 19

The faster alternative is to merge and acquire the necessary resources to achieve competitive goals. Growth is essential for sustaining the viability, dynamism and valueenhancing capability of a company.

During the twentieth century, M&As have occurred in waves where times of low activity frequently have turned into periods of high activity. What are the motives that have made M&As such a widely used strategy?

Baker (1999) looks at the similarities within and across industries regarding merger motives. His empirical material consists of primary and secondary data collected from two merger in three industries respectively; manufacturing, banking and information technology. Their analysis makes use of three different perspectives, the reason for this being to create understanding and furthermore illuminate the complexity of the problem. The results clearly demonstrate similarities in merger motives within the industries, but also give some support for similarities across the industries. Using a multi perspective approach they have come up with a number of motives which include:

Enhanced profitability: when two or more companies combine they result in rise in profit because they realize cost reduction and efficient utilization of resources.

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Synergy: another commonly cited motive for mergers is the pursuit of synergistic benefits. This is the new financial math that shows that 2+2=5, that is, as the equation shows a combination of two firms will yield a more valuable entity than the value of the sum of the two firms if they were to stay independent: Value (A+B)> Value (A) + Value (B) Although many merger partners cite synergy as the motive for their transaction, energetic gains are often hard to realize. There are two types of synergy: that which is drive from cost economies and that which comes from revenue enhancement. Cost economies are the easier of the two to achieve because they often involve eliminating duplicate cost factors such as redundant personnel and overhead. When such synergies are realized, the merged company generally has lower per-unit costs.

Diversification of risk: Other motives for mergers and acquisitions include diversification, whereby companies seek to lower their risk and exposure to certain volatile industry segments by adding other sectors to their corporate umbrella. However, this is the exceptions rather than the norm.

Reduction in tax liability: Under the Kenyan tax law, a company is allowed to carry forward its accumulated loss to set-off against its future earnings for calculating its tax liability. A loss making company may not be in a position to earn sufficient profits in future to take advantage of the carry forward provision. Thus by combining with a profit making a company, the combined company can utilize the carry forward losses and save tax.

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Agency problems An agency problem arises when managers own only a fraction of the ownership of their firm. This partial ownership may cause managers to work less vigorously than otherwise or to consume perquisites (luxurious officers, company car etc) because the majority owners bear most of the cost. Manne (1965), emphasized that the market for corporate control and viewed mergers as a threat of takeover if a firms management logged in performance either because of inefficiency because of agency problem.

2.4 Importance of Mergers in Company Performance Mergers & Acquisitions can be seen as instruments used by companies externally acquire capabilities developed by their partners. As such they can have a positive economic effect on companies that are active in the M&A Market.

However, overview of studies on the economic effects of M&A performed during the late fifties and sixties reveals that there is substantial ex post evidence that mergers and acquisitions have positive effects on the performance of firms. Hoskisson and Hilt (1994), suggest that related acquisitions can have a positive effect on company performance if these acquisitions support innovative activities of firms.

The Stock Market is one of the most closely observed economic phenomenon in the world. Market indicators meet the demand for measures of stock market performance. Such indicators quantify movements in stock market prices and act as a standard in evaluating the returns on money invested in the stock market. 22

Stock market indices as aggregate measures are an instrument to meet the information requirement of investors by characterizing the development of global markets and specified market segments. A merger is believed to have a substantive effect on the stock market. Synergies top the list of merger motives.

To better understand the importance of M&As in company performance, Patrick (1994) ,surveyed the executives responsible for corporations' M&A strategy. Most of those surveyed listed synergy as a leading motivation for both domestic and cross-border mergers. Diversification was also identified as a good reason to engage in a merger. They also cite operating economics as an important merger goal.

They cite mergers as being important in increasing a company's focus and eliminating poorly performing units thus increasing managerial efficiency while creating a particular organizational structure at the same time. Mergers assist companies to increase cash, taking advantage of market conditions, seek tax advantages, restructure capital and resolve antitrust concerns taking advantage of market conditions, seek tax advantages, restructure capital and resolve antitrust concerns.

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2.4.1

Merger analysis

Large mergers, acquisitions and some other corporate combinations require prior review and approval in some jurisdictions. As part of their review, competition authorities may prohibit mergers or approve them subject to conditions. Mergers are usually only prohibited or subjected to conditions if the authority concludes that the merger will substantially harm competition. The merger of a firm that provides essential inputs to other firms can be problematic if the supply of those inputs to other firms is threatened. For example, the merger of a dominant local provider with a major Internet Service Provider (ISP) can raise concerns about whether other ISPs will obtain local access services on fair and non-discriminatory terms. Such a merger might be reviewed in order to ensure that adequate safeguards are in place to protect competing ISPs. Sherman (1998.)

In the context of a merger review, market definition is often the key factor in determining whether a merger is anti-competitive. If a market is defined broadly, the merging firms may he considered to be competitors. A more narrow market definition may result in a determination that the firms operate in different markets. On the other hand, a broad market definition could lead to a conclusion that the merged entity will face sufficient competition from other firms in the market. A narrow definition could lead to a conclusion that the merged entity would have excessive market power in a smaller market.Blair(1993).

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The second stage of the analysis is the identification of firm competing in the relevant market and their market shares. The determination of market share will have a direct bearing on an assessment of market power and the potential for abuse of market power by the merged entity. The evaluation of market participants includes not only firms which actually participate in the relevant market, but also firms which could be expanded to enter it.

In assessing the potential adverse effects of a proposed merger, attention will typically focus on the establishment or increase of the dominant position by the merged entity. There may also be concerns that the merger, by reducing the number of firms participating in a market, will create conditions which make anti-competitive agreements among them more likely. The evaluation of barriers to entry is an important aspect of merger review. A finding that there are low barriers to entry can help justify a merger.

Finally, the analysis concludes with an assessment of any efficiency to be realized as a result of the merger. In this stage, the objective is to assess efficiency or other welfare gains which can be projected to result from the merger. These will be balanced against any anti-competitive effects which have been identified in the earlier stages of the review.

Theoretically, substantial efficiency gains or other public welfare gains could support approval of a merger even where anti-competitive risks are identified. In practice, it is difficult for a competition authority to qualify the positive and negative aspects of the transaction and arrive at any verifiable net effect, it may also prove difficult lo determine

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how any efficiency or other welfare gains will be distributed between the producing firm and its customers. Similarly difficult is the development of any means to ensure redistribution of efficiency gains to broader public advantage.

In exceptional circumstances, a merger which would have- anti-competitive effects may be permitted where one of the merging entities is in severe financial distress. The competition authority may be persuaded that the public interest is better served by a merger than by the failure of one of the merging entities. However, transactions of this sort should be carefully evaluated. Sometimes the merger is not the best solution. For instance, it may be that another firm could expand productive capacity using the assets of the failing firm and that public welfare would be better served by this alternative solution. Bankruptcy is painful for shareholders, but does not always have a long-term negative effect on the economy.

2.4.2 Empirical studies of mergers. Early literatures on mergers suggest synergistic motives as the main rationale behind merger activity. A study conducted by Jong (1976), examined 39 companies which had undertaken large and or persistent mergers in the period 1954-1965. He concluded that the most that can be said there is no evidence from the sample that merger intensive firms have higher profitability than the average industry. Kouhm (1986), observes that acquiring firms tended to be faster growing than firms in their respective industries. This being the case a merger of these two firms is expected to lead to improved performance.

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Reid (1968), concluded that conglomerate mergers satisfied the desires of managers for larger firms but did not increase earnings or market prices.

Singh and Montgomery (1987), in a study carried for the period 1958-1968 found that conglomerate as a group raised the depressed pre merger rates of return on total assets up to the average for all firms. From the above empirical studies done in the field of M&A, it can therefore be observed that results are not similar and thus there is need to carry out further research in this area. 2.4.3 Information in merger review As part of the merger review process, the merging firms must normally provide information to the reviewing authority. It is standard practice in jurisdictions which impose merger review to require merging parties to submit advance notice of the proposed transaction. The information disclosed in the pre-merger notification will normally be used to determine if any anti-competitive concerns are present and whether to proceed with a more detailed review of the proposed transaction. The initial information filing typically triggers a waiting period, during which the reviewing authority will be entitled to request further information. This process concludes with a determination by the reviewing authority whether to proceed with a more detailed investigation.

If the competition authority decides to proceed with a further investigation, it will obtain more information from the merger participants.

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Additional information is usually gathered from third parties such as competitors and customers. Commercially sensitive information is also generally protected from public disclosure during a more detailed review; a competition authority will normally seek information about matters such as the following: Products, customers, suppliers, market shares, financial performance. Activity of competitors and competitors' market shares, of substitute products, influence of potential competition (including foreign competition). pace of technological or other change in the relevant markets, and its impact on competition and nature and degree of regulation in the relevant markets. The quality of a merger review will depend heavily on the quality and range of information available lo the reviewing authority. Nihat,Eric and Roll (2004).

2.4.4

Merger remedies

The goal of merger control laws is to prevent or remove anti-competitive effects of mergers. Three types of remedies are typically used to achieve this goal: Inhibition / Prohibition /Dissolution The first remedy involves preventing the merger in its entirety, or if the merger has been previously consummated, requiring dissolution of the merged entity.

Partial Divestiture A second remedy is partial divestiture. The merged firm might be required to divest assets or operations sufficient to eliminate identified anti-competitive effects, with permission to proceed with the merger in other respect.

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Regulation /Conditional Approval A third remedy is regulation or modification of the behavior of the merged firm in order to prevent or reduce anti-competitive effects. This can be achieved through a variety of one-time conditions and on-going requirements. The first two remedies are structural, and the third remedy is behavioral. Behavioral remedies require ongoing regulatory oversight and intervention. Structural remedies are often more likely to be effective in the long run and require less ongoing government intervention.

Partial divestiture or behavioral constraints are less intrusive in the operation of market than preventing a merger from proceeding or requiring dissolution of a previously completed merger. Partial divesture can reduce or eliminate anti-competitive effects while preserving some of the commercial advantages of a merger. Nihat et al (2004).

2.5 Performance Measures Sharpe et al (1999), lists the following as the other measures of performance.

Market capitalization This is the total market value of a company at the bourse. It is computed as the prevailing share price times the total number of shares. It is also the total market value of all quoted companies at the stock exchange. It keeps changing on a daily basis subject to changes in share price. Turnover This is the total number of shares traded at the stock exchange. 29

Share price This is the value of a company's share at a given time. It is very dynamic and keeps changing all the time. Net Asset Value per Share (NAVPS) The NAVPS is calculated by dividing the total net assets (fixed assets plus net current assets) by the number of shares outstanding as at the end of that year. Simply this is the net tangible assets attributable to the ordinary shareholders divided by the number of shares in issue. Net Asset Value (NAV) is of little use in investment decisions as in most cases it will usually be: well below the value calculated using earnings yield. However NAV is fairly descriptive in the case of property companies that tend to have low earnings compared with their asset value.

Earnings Per Share (EPS) This is calculated by dividing the net profits alter tax of a company (less any dividends on preference shares that the company may have paid) for a given year or period by the number of equity shares outstanding at the end of the year. The EPS does not reveal the quality of earnings, but as a thumb rule, the higher the EPS, the better.

Price to Earning Ratio (P/E Ratio) Earnings of a stock divided by its price is what one gets in return. This ratio tells one how cheap or expensive a stock is in the market place compared with its peers or against other stocks in other industries.

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This ratio is obtained by dividing the current market price of a share by its issuing company's annual earning per share or the market capitalization to the entire net profit (total earnings).This ratio indicates how many years it would take one to recoup one's investment in a stock at current market price if the company's performance was to stay frozen at the current level. 2.5.1 Other measures of performance By relating share prices to their actual profits, the Price to Earnings ratio (P/E) highlights the connection between share prices and recent company performance. If earnings move up with share prices the ratio stays the same. But if stock prices gain in value and earnings remain the same or go down, the P/E rises. For example, if a stock price was Kshs70 and it got Kshs2 in earnings, the P/E is 35, historically high.

Price-To-Book Ratio (IVB Ratio) A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value (book value is simply total assets minus intangible assets and liabilities). A lower IVB ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. This ratio also gives some idea of whether you're paying too much for what would be held if the company went bankrupt immediately.

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Return on Investment (ROI) The monetary benefits derived from having spent money on developing or revising a system. The intangibles are sometimes the most important benefits, but because many of them may be long term, they are typically the most difficult to quantify.

Return on Assets (ROA) A useful indicator of how profitable a company is relative to its total assets. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.

Net Income Total Assets Note: Some people add interest expense back into net income when performing this calculation because it measures operating returns before cost of borrowing. Return on Equity (ROE) This is a measure of a corporation's profitability, calculated as: Net Income Shareholder's Equity The ROE is useful in comparing the profitability of a company to other firms in the same industry.

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Return on Investment Capital (ROIC) A calculation used to determine the quality of a company. The general definition for ROIC is as follows:

Net Income -Dividends Total Capital Total capital includes long term debt and common and preferred shares.

2.6 Market Based Valuation There are several methods used to value companies and their stocks. They try lo give an estimate of their fair value, by using fundamental economic criteria. This theoretical valuation has to be perfected with market criteria, as the final purpose is to determine potential market prices. According to Thomas and Weston (1992), some of the methods of stock valuation are:

Fundamental criteria (Fair value) The most theoretically acceptable stock valuation method, called income valuation or discounted cash flow method, involves discounting the profits (dividends, earnings, cash flows) the stock will bring to the stockholder in the foreseeable future, and a final value on disposition. The discount rate normally has to include a risk premium. In some cases an asset valuation is also made.

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This entails analyzing the assets and liabilities of the firm. This type of valuation is typically done if the company is expected lo cease operations, it will provide a "termination value" rather than the "ongoing operations value" obtained from the income valuation method.

Market criteria (Potential price) Some feel that if the stock is listed in a well organized stock market, with a large volume of transactions, the listed price will be close to the estimated fair value. This is called the efficient market hypothesis. On the other hand, studies made in the field of behavioral finance tend to show that deviations from the fair price are rather common, and sometimes quite large.

Thus, in addition to fundamental economic criteria, market criteria also has to be taken into account (market-based valuation). Valuing a stock is not only to estimate its fair value, but also to determine its potential price range, taking into account market behavioral aspects. One of the behavioral valuation tools is the stock image; a coefficient that bridges the theoretical fair value and the market price.

A stock image is a stock valuation coefficient. It links the estimated economic value (fair value) and the stock market price. This coefficient, usually between .3 and 3, is related to the stock behavioral category.

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Technical Analysis This is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysis does not attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

In a shopping mall, a fundamental analyst would go to each store, study the product that is being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.

Fundamental Analysis This is another method of evaluating securities by attempting to measure the intrinsic value of a particular stock. Fundamental analysis studies everything from the overall economy and industry conditions, to the financial condition and management of companies.

In other words, it is the use of real data to evaluate a stock's value. The method uses revenues, earnings, future growth, return on equity, profit margins, and other data to determine a company's underlying value and potential for future growth.

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2.7 Conceptual Framework The study is based on the assumption that the independent variables affect the dependent variable. The independent variables will be extensively discussed in the literature review. Mergers and Acquisitions (y) Contribute to {Increase in market share of companies (x1)} + {Enhanced profitability of companies (x2)} + {Diversification of risks in the companies (x3)} + {Achievement of Synergy (x4)} + {Return on Investment (x5)} (y) = (x1) + (x2) +(x3) +(x4) +(x5)

Figure 2.1:-The Conceptual Framework Increase in market share (x1) Enhanced profitability of companies (x2) Diversification of risks in companies (x3) Achievement of Synergy (x4) Return on Investment (x5) Independent variables Source: Researcher 2008 Dependent variable Affects MERGERS AND ACQUISITIONS (y)

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CHAPTER THREE 3.0 RESEARCH METHODOLOGY The section covers the research design, population and sample size, data collection methods and procedures as well as data analysis. 3.1 Research Design The design of this research was a survey. A survey research seeks to obtain information that describes existing phenomena by asking individuals about their perceptions, attitude, behaviour or values .Mugenda and Mugenda(2003). This survey was a descriptive study that collected data from the firms that submitted Merger Notifications to the Monopolies and Price Control(MPC) in the years 2001 to 2004. This study documented the firms experiences in the mergers and acquisition processes. It also endeavored to establish the managers perception on whether the shareholders value was created or destroyed after the merger and acquisition activities were completed. The study also sought to document the managements most or least important factors that in their view, contributed to the success of failure in the implementations of these strategies. The other factors that were sought and included in this study were the managements perception in on importance of post merger acquisition activities.

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3.2

Target Population

The population of the study comprised of all merger control notifications received and processed by the Commissioner of Monopolies and Prices in the years 2001 to 2004 (see appendix I). This data may have some limitations. The distinction between takeovers and mergers in some years were not indicated. The firms that were listed in the MPC reports include either public, private, locally, foreign owned or both although no distinction has been made. It was also appropriate to

incorporate some questions relating to the firms profile in the first part of the questionnaire. Consequently, a census survey was carried out. The available data at the time of this study was for the years 2001 to 2004. It was therefore not possible to

expand the size of the population beyond this period. However, the target population for this study comprised 71 companies.

3.3 Data Collection Methods and Instruments Primary data was collected using structured undisguised and self-administered questionnaire. The questions were both open- ended and close-ended. The researcher felt that the respondents had practical experiences on the full process of mergers and acquisitions which helped crystallize their opinion. The likert scale was used to measure perception, attitude, values and behaviour and to help minimize subjectivity and make possible use quantitative analysis. Mugenda and Mugenda(2003). The respondent was to check one of the offered five fixed alternative expressions such as strongly disagree, agree, neither agree or disagree, agree and strongly disagree comprising of a continuum. In this five point continuum, values 1, 2,3,4,5, were assigned. 38

These values expressed the relative weights and direction, determined by the favourableness or unfavourableness of the item .Nachmias and Nachmias(2003). The questionnaires were distributed through postal mail with an enclosed self-addressed return envelope to help increase the response rate. The researcher followed this with telephone calls and personal visits.

The shareholders of the company were convinced that once the businesses merge, or there is an acquisition, value will be created. It was therefore very difficult to convince the shareholders of the companies to merge or carry out an acquisition transaction if they do not foresee any benefits. The Board of Directors therefore, through the Chief Executive Officer (CEO), were involved in a merger or an acquisition process. It was therefore, appropriate to target the CEO, as a respondent to this questionnaire or a senior partner in a partnership business as they were the most appropriate persons to complete the questionnaire. The questionnaire was developed and consisted of three parts: The first part of questions was to tap into the relevant information and the profile of the respondents. This assisted the researcher on the background information of firms that merged or acquired a target firm. The second set of questions sought to establish the experiences of the firms in the merger and acquisition process and reasons for adopting these strategies. The questions also addressed the approval process within the Competition Law.

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The third part of questions sought to investigate the respondent's perception of mergers and acquisitions as regards the factors contributing to the success or failure of M&A, post merger activities, turnover of staff and creation of shareholders wealth as a result of mergers and acquisitions These are sets of questions that were designed to seek the perceptions of the managers.

3.4 Research Area The research covered all the companies in Kenya that had undergone mergers and acquisitions between the year 2003 and 2007. The study area was confined to Nairobi since it is the capital city and most of the head offices of the companies under consideration are located in Nairobi. 3.5 Sample Design and Size The researcher used purposive sampling where he took 40% of these companies for the study to obtain a sample of 28 companies. However, within the companies, the

researcher purposively targeted two senior managers or senior partners in the partnership or merged companies and the Board of Directors through the CEO. There are 71 companies that have merged. The total number of respondents from the 28 companies was 2 respondents per company to yield a sample of 56 respondents.

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3.6

Data Analysis, Interpretation and Presentation

The returned questionnaires were checked for consistency and the correct ones were coded. Data analysis involved descriptive statistics such as percentages, frequencies, measure of central tendency such as means, mode and median by use of Statistical Package for Social Sciences (SPSS). The output was in form of tables, pie chats and graphs. Interpretation was done to allow for findings and recommendations.

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CHAPTER FOUR: 4.0 DATA ANALYSIS AND INTERPRETATION 4.1 Introduction This chapter presents the analysis and interpretations of the data from the field. From the study population of 71 respondents were targeted, 60 respondents responded and returned the questionnaire comprising of 84.5% response rate. 4.2 Analysis and Interpretation 4.2.1 Personal Data On the name of the organization the researcher requested the respondents to indicate their organization, from the findings of the study the study found that these organization were; Bidco(K) Ltd. & Elianto (K) Ltd, Crown Berger & Barclays Holdings, Securicor Security Services & Express Escorts, Smith Kline Beecham & Glaxo Wellcome (K) Ltd, Lonrho Motors E.A. Ltd & Toyota E. A. Ltd, Lelkina Dairies Ltd & Brookside Dairies Ltd, Africa Online Ltd & Net 2000 Ltd , SCB & Bullion Bank, Paramount Bank & Universal Bank, Unilever & Best Foots Ltd, Barclays Trust Investment & Old Mutual As Asset Managers, Bank of India & India Finance Ltd and Bank of India & India Finance Ltd among others. On the respondents designation the study found that the respondents were from various designation which were; accountant, operations manager, human resource manager, clerk, customer service officer, financial analyst, finance manager, director and procurement officer.

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Figure 4.2: Gender of the respondents


40%

m le a fem le a 60%

Source, Author (2010) The data in the above figure shows the study findings on the gender of the respondents ,from the findings, the study found that majority of the respondents were males as shown by 60%,while 40% of the respondents were females. Figure 4.3: Number of years of service
35 30 25 20 15 10 5 0 0 to 5 5 to 10 10 to 15 a bove 15 yea rs percent

Source, Author (2010) On the number of years the respondents had served their respective organization, from the findings of the study in the above table the study found that 36% of the respondent had served their organization for period of 10 to 15 years ,those who had served their organization for a period of 5 to 10 years were shown by 30% of all the respondents ,26% of the respondent had served their organization for a period of more than 15 years and 8% of the respondents had served their organization for a period of 0 to 5 years .

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Table 4.1: Education level Frequency Diploma Degree Post graduates degree Total Source, Author (2010) The data in the above table shows the respondent education level, from the finding the study found that majority of the respondents had a university degree as shown by 52.1% of the respondents, 35.4% of the respondent had postgraduates degrees and 12.5% of the respondents were diploma holders. On the location of the main offices of the respondents organization, the study found that most of the organization had their main offices located in Nairobi CBD area, Upper hill, industrial area, and Westland and Kariobangi area. On the years the organization was established, the study found that this ranged between 1960 to 1993. On the number of outlets the organization had, the study established that this ranged between 5 to 13 outlets. Figure 4.4: Ownership composition of company
60 50 40 30 20 10 0 loca l foreig n pa loca rt l/ pa foreig rt n

Percent 12 52 36 100

6 26 18 50

percent

Source, Author (2010)

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On the ownership composition of the company, the study revealed that majority of the companies as shown by 52% of the respondents were locally owned, those that were partly local and partly foreign were shown by 36% of the respondent while those that were foreign were shown by 12% of the respondents. Table 4.2: Type of company Frequency Privately owned Part private/part public Publicly owned Total Source, Author (2010) The data in the above table shows the type of company, from the findings in the above table the study found that majority of the companies were partly private and partly public as shown by 54% of the respondents, 30 % of the respondents indicated that their companies were publicly owned and 16% of the respondents indicate that their company were privately owned. 4.2.2 Firms Profile On the name of the firm before merger the study revealed that the names were; Bidco(K) Ltd, Elianto (K) Ltd, Crown Berger ltd , Barclays Holdings, Securicor Security Services ltd, Express Escorts, Smith Kline Beecham , Glaxo Wellcome (K) Ltd, Lonrho Motors E.A. Ltd , Toyota E. A. Ltd, Lelkina Dairies Ltd , Brookside Dairies Ltd, Africa Online Ltd , Net 2000 Ltd , SCB , Bullion Bank, Paramount Bank, Universal Bank, Unilever , Best Foots Ltd, Barclays Trust Investment , Old Mutual As Asset Managers, Bank of 45 8 27 15 50 Percent 16 54 30 100

India , India Finance Ltd and Bank of India and India Finance Ltd. On the date of incorporation of the company, the study found that date of incorporation ranged from 30th June 1968 to 23rd September 1990. On the name of the company after merger and take over, the study found that these names were; Bidco (K) Ltd, Crown Berger, Securicor Security Services, Smith Kline Beecham & Glaxo Wellcome (K) Ltd, Toyota E. A. Ltd, Brookside Dairies Ltd, Africa Online Ltd, SCB & Bullion Bank, Paramount Bank, Unilever Ltd, Old Mutual Trust Investment, Bank of India Ltd. On whether the respondent company had completed the merger or acquisition to its conclusion, the study revealed that all the companies had completed merger and acquisition to its conclusions. Table 4.3: Legal structure of the firm Frequency Partnership Part private/part public Publicly owned Total Source, Author (2010) 9 27 14 50 Percent 18 54 28 100

On the legal structure of the firm, the study established that majority of the firms were partly private and partly public as shown by 54% of the respondent,28% of the respondents indicated that their firms were publicly owned and those companies that their legal structure was partnership was shown by 18%.

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Table 4.4: Classification of organization in terms of ownership Frequency Percent Locally owned Both Local/Foreign Owned Total Source, Author (2010) On the classification of the firms in terms of ownership, the findings of the study in the above table shows that majority of the firms were locally owned as shown by 62.8% of the respondents and those that were both local and foreign owned were shown by 37.2% of the respondents. 27 16 43 62.8 37.2 100

Table 4.5: Sector of the organization Frequency Manufacturing Agriculture Service Total Source, Author (2010) 22 8 13 43

Percent 51.2 18.6 37.2 100

The study also requested the respondents to indicate the sector in which their organization belonged, from the finding of the study in the above table, the study found that majority of organization were in manufacturing sector as shown by 51.2%, those were in the service sector were shown by 37.2% of the respondents while 18.6% of the respondents indicated that their firms were in agriculture sector.

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4.2.3 Experience of the Firm Whether the Firm Was a Merger (M) or a Takeover (T) According to the study, all the respondents (100%) reported that their firms were mergers. Table 4.6: The Sort of Merger or Acquisition That the Company Undertook Frequency Horizontal merger Vertical merger Concentric merger Conglomerate merger Total Source, Author (2010) 27 16 2 5 50 Percent 54 32 4 10 100

The study also required the respondents to indicate the sort of merger or acquisition that their companies undertook. From the study, most of the respondents as shown by 54% reported that their companies undertook a horizontal merger, 32% said vertical merger, 10% of the respondents said conglomerate merger, while a small proportion of respondents as shown by 4% reported that their firms undertook a concentric merger.

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Table 4.7: Reason/S Why the Organization Undertook the Merger Yes Increase market share Acquire state- of -the art technology To diversify in a growth business Overcome entry barrier Acquire brand loyalty Enter to a new geographical area Comply with new legislation Source, Author (2010) 78.3 60.0 66.7 41.7 51.7 68.3 60.0 No 21.7 40.0 33.3 58.3 48.3 31.7 40.0

The study also sought to establish the reasons why the organizations took the merger. According to the findings, 78.3% of the respondents said in order to increase market share, 68.3% said to enter to a new geographical area, 66.7% said to diversify in a growth business, the respondents who said to acquire state- of -the art technology and to comply with new legislation were shown by 60% each, 51.7% said to acquire brand loyalty, while 41.7% of the respondents reported that they took a merger in order to overcome entry barrier. Duration Taken To Receive an Approval from the Commissioner of Monopolies and Price According to the findings, the study found that it took the firms a minimum of 3 months and a maximum of 13 months to receive an approval from the commissioner of monopolies and price

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Table 8: Whether the Firm Was Subjected To Appeal to the Tribunal Frequency Yes No Total Source, Author (2010) 38 12 50 Percent 76 24 100

The respondents were also asked whether their firms were subjected to appeal to the tribunal. From the results, the majority of respondents (76%) reported that their firms were subjected to appeal to the tribunal, while 24% said that their firms were not subjected to appeal to the tribunal. Duration It Take For the Appeal to Be Concluded By the Tribunal On the duration it took the firms for the appeal to be concluded by the tribunal, the study established that it took a minimum of 5 and a maximum of 12 months. Table 4.9: Whether the Firm Appealed To the High Court Frequency Yes No Total Source, Author (2010) 31 19 50 Percent 62 38 100

According to the findings in the above table, most of the respondents as shown by 62% said that their firms appealed to the high court, while 38% reported that their firms did not appeal to the high court.

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Reasons for Appeal From the findings, the reasons why firms appeal to the high court include; where the authority blocks a merger the parties can appeal its decision to the High Court, appeal against a board decision against them, the merging parties may also challenge a merger decision imposing a remedy and complains by the minority shareholders of the involved firms. Duration It Took To Conclude the Appeal in the High Court According to the findings, it took the firms that appealed to the high court a minimum of 2 and a maximum of 14 months to conclude the appeal in the high court. Duration the Firm Took To Conclude the Negotiation with the Other Firm From the findings, it took the firms 3-6 months to conclude negotiations with the other firm. An Estimate of the Merger or Acquisition Budget The study also sought to establish the estimate of the merger or acquisition budget. According to the study, the budget ranged between Kshs 500, 000-2M. Table 4.10: The Degree of Involvement of Managers in the Acquisition or Merger Process Frequency Very little Moderately A lot Total Source, Author (2010) 5 8 37 50 Percent 10.0 16.0 74.0 100

The respondents were also requested to indicate the degree that they involved managers in the acquisition or merger process. From the study, most of the respondents as indicated by 74% reported that they involved their managers a lot in the acquisition or merger 51

process, 16% reported that they moderately involved the, while 10% of the respondents said that they involved them to a very little extent. Table 4.11: Whether The Merger or Acquisition Undertaken the Firm Is A Success Frequency Yes No Total Source, Author (2010) 47 3 50 Percent 94 6 100

From the findings in the above table, the majority of the respondents as indicated by 94% termed the merger or acquisition undertaken by their firm a success, while a small proportion of respondents as indicated by 6% reported that the merger or acquisition undertaken by their firm was not a success Table 4.12: Whether the Respondents Would Recommend a Merger or an Acquisition Again Frequency Yes No Total Source, Author (2010) 36 14 50 Percent 72.0 28.0 100

The respondents were therefore asked whether they would you recommend a merger or an acquisition again. From the study, the majority of respondents as shown by 72% said that they would recommend a merger or an acquisition again, while 28% of the respondents felt that they would not recommend a merger or an acquisition again. 4.2.4 Regression Analysis A multivariate regression model was applied to determine the relative importance of each of the five variables with respect to establish the effects of mergers and acquisitions on financial performance of companies. The regression model was as follows:

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y = 0+ 1X1 + 2X2 + 3X3 + 4X4 + 5X5 Where: y = merger and acquisition 0 = Constant Term 1= Beta coefficients X1= market share X2= profitability of the company X3= diversification of risk X4= Achievement of Synergy X5= Return on Investment

Table 4.13: Model Summary Change Statistics Std. Error R Adjusted of the Model R Square R Square Estimate 1 .087(a) .090 .881 4.223 Source, Author (2010) R Square Change .009

F df Change 1 .009 1

df 2 1

Sig. F Change .938

a Predictors: (Constant), market share, profitability of the company, diversification of risk , Achievement of Synergy and Return on Investment. Adjusted R2 is called the coefficient of determination and tells us how merger and acquisition varied with the market share, profitability of the company, diversification of risk, Achievement of Synergy and Return on Investment. From data in the table above, the value of adjusted R2 is 0.881. This implies that, there was a variation of 88.1% of merger and acquisition with market share, profitability of the company, diversification of risk, Achievement of Synergy and Return on Investment at a confidence level of 95%. 53

Table 4.14: Coefficients results Model 1 (Constant) market share profitability diversification of risk Achievement of Synergy Return on Investment Source, Author (2010) a Predictors: (Constant), market share, profitability of the company, diversification of risk , Achievement of Synergy and Return on Investment. From the data in the above table, there is a positive relationship merger and acquisition and the predictor factors which are market share, profitability of the company, diversification of risk, Achievement of Synergy and Return on Investment. The established regression equation was Y = 0.833 + 0.771 X1 + 0.216 X2 + 0.358 X3 + 0.574 X4 + 0.314X5 From the above regression model, merger and acquisition of companies would be 0.833, holding the predictors factors constants. it was also established that a unit increase in market share would cause an increase in merger and acquisition by a factor of 0.771, a unit increase in profitability would cause an increase in merger and acquisition by a factor of 0.216, also a unit increase in diversification of risk would cause an increase in merger and acquisition by a factor of 0.358,further unit increase in achievement of synergy would cause an increase in merger and acquisition by a factor of 0.574, also a unit increase in return on investment would lead to increase in merger and acquisition by a factors of 0.314. This infers that there exist positive relationships between merger and Unstandardized Coefficients B Std. Error 0.833 1.156 0.771 .061 0.216 .018 0.358 .311 0.574 .418 0.314 .319 Standardized Coefficients t Beta 1.839 .097 .094 .090 .097 .087 .097 .094 .090 .097 .091 .317 .938 .923 .978 .967 .312 Sig.

54

acquisition and predictor factors which are market share, profitability of the company, diversification of risk, achievement of synergy and return on investment.

55

CHAPTER FIVE: 5.0 DISCUSSION CONCLUSION AND RECOMMENDATION 5.1 Introduction This chapter presents the discussion of the findings from chapter four, conclusions and also recommendations based on the objectives of the study. The study had sought to establish the effects of mergers and acquisitions on financial performance of companies. 5.2 Discussion The study established that the name of the firm before merger were; Bidco(K) Ltd, Elianto (K) Ltd, Crown Berger ltd , Barclays Holdings, Securicor Security Services ltd, Express Escorts, Smith Kline Beecham , Glaxo Wellcome (K) Ltd, Lonrho Motors E.A. Ltd , Toyota E. A. Ltd, Lelkina Dairies Ltd , Brookside Dairies Ltd, Africa Online Ltd , Net 2000 Ltd , SCB , Bullion Bank, Paramount Bank, Universal Bank, Unilever , Best Foots Ltd, Barclays Trust Investment , Old Mutual As Asset Managers, Bank of India , India Finance Ltd and Bank of India and India Finance Ltd. On the date of incorporation of the company, the study found that date of incorporation ranged from 30th June 1968 to 23rd September 1990. On the name of the company after merger and take over, the study found that these names were; Bidco (K) Ltd, Crown Berger, Securicor Security Services, Smith Kline Beecham & Glaxo Wellcome (K) Ltd, Toyota E. A. Ltd, Brookside Dairies Ltd, Africa Online Ltd, SCB & Bullion Bank, Paramount Bank, Unilever Ltd, Old Mutual Trust Investment, Bank of India Ltd. On whether the respondent company had completed the merger or acquisition to its conclusion, the study revealed that all the companies had completed merger and acquisition to its conclusions. 56

On the legal structure of the firm, the study established that majority of the firms were partly private and partly public as shown by 53.3% of the respondent,28.4% of the respondents indicated that their firms were publicly owned and those companies that their legal structure was partnership was shown . The study also found that majority of the firms was locally owned as shown by 62% of the respondents and those that were both local and foreign owned were shown by 38% of the respondents. The study found that majority of organization were in manufacturing sector as shown by 54%, those were in the service sector were shown by 38% of the respondents while 18% of the respondents indicated that their firms were in agriculture sector. It was also revealed by the study that all firms their firms were mergers. The study also established that the sort of merger or acquisition that their companies undertook were horizontal merger as shown by 54% , vertical merger as shown by 32% 10% of were conglomerate, while a small proportion of respondents as shown by 6% reported that their firms undertook a concentric merger.

The study also establishes the reasons for organizations to take the merger. According to the findings, 78% of the respondents said in order to increase market share, 68% said to enter to a new geographical area, 66% said to diversify in a growth business, the respondents who said to acquire state- of -the art technology and to comply with new legislation were shown by 60% each, 52% said to acquire brand loyalty, while 42% of the respondents reported that they took a merger in order to overcome entry barrier. The study found that it took the firms a minimum of 3 months and a maximum of 13 months to receive an approval from the commissioner of monopolies and price. On whether their

57

firms were subjected to appeal to the tribunal. The study found that the majority of respondents 76% reported that their firms were subjected to appeal to the tribunal, while 24% said that their firms were not subjected to appeal to the tribunal. On the duration it took the firms for the appeal to be concluded by the tribunal, the study established that it took a minimum of 5 and a maximum of 12 months. On whether the firms appealed to high court, the study found that majority of the respondent as shown by 62% said that their firms appealed to the high court, while 38% reported that their firms did not appeal to the high court. The reasons why firms appeal to the high court include; where the authority blocks a merger the parties can appeal its decision to the High Court, appeal against a board decision against them, the merging parties may also challenge a merger decision imposing a remedy and complains by the minority shareholders of the involved firms. On the duration it took the firms that appealed to the high court a minimum of 2 and a maximum of 14 months to conclude the appeal in the high court. It was also revealed that it took the firms 3-6 months to conclude negotiations with the other firm. The study also established the estimate of the merger or acquisition budget. According to the study, the budget ranged between Kshs 500, 000-2M. On indicate the degree that they involved managers in the acquisition or merger process. It was revealed that most of the respondents as indicated by 74% reported that they involved their managers a lot in the acquisition or merger process, 16% reported that they moderately involved the, while 10% of the respondents said that they involved them to a very little extent.

58

On the general assessment of merger ,the study found that

the majority of the

respondents as indicated by 93.3% termed the merger or acquisition undertaken by their firm a success, while a small proportion of respondents as indicated by 6% reported that the merger or acquisition undertaken by their firm was not a success. On whether the respondents would recommend a merger or an acquisition again, majority of respondents as shown by 72% said that they would recommend a merger or an acquisition again, while 28 % of the respondents felt that they would not recommend a merger or an acquisition again. The study also established a regression equation which was; Y = 0.833 + 0.771 X1 + 0.216 X2 + 0.358 X3 + 0.574 X4 + 0.314X5 From the above regression model, merger and acquisition of companies would be 0.833, holding the predictors factors constants. it was also established that a unit increase in market share would cause an increase in merger and acquisition by a factor of 0.771, a unit increase in profitability would cause an increase in merger and acquisition by a factor of 0.216, also a unit increase in diversification of risk would cause an increase in merger and acquisition by a factor of 0.358,further unit increase in achievement of synergy would cause an increase in merger and acquisition by a factor of 0.574, also a unit increase in return on investment would lead to increase in merger and acquisition by a factors of 0.314. This infers that there exist positive relationships between merger and acquisition and predictor factors which are market share, profitability of the company, diversification of risk, achievement of synergy and return on investment.

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5.3Conclusion From the above discussion the study concludes that mergers and acquisitions increase the market share of companies the firms entered into new geographical areas, diversify business growth, acquire states of art and technology, comply with new legislation, acquire brand loyalty and overcome entry barriers. The study concludes that as result of merger the company acquired larger market share thus increased profitability. The study also concludes that mergers and acquisitions assisted in the attainment of returns on investment in companies, the study also concludes that the benefits of synergy that is achieved through adoption of merger and acquisition were; increased market share, acquiring state of technology, complying with new regulation , acquire brand loyalty and overcome entry barriers . The study also established a regression equation for the study was; Y = 0.833 + 0.771 X1 + 0.216 X2 + 0.358 X3 + 0.574 X4 + 0.314X5 This infers that there exist positive relationships between merger and acquisition and predictor factors which are market share, profitability of the company, diversification of risk, achievement of synergy and return on investment. 5.4Recommendation From the above discussion, conclusion the researcher recommends that small companies should adopt merger and acquisition as this will help them in entering into new geographical areas, diversify their business growth, acquire states of art and technology, comply with new legislation, acquire brand loyalty , overcome entry barriers, increase their profitability and return on investment. The study recommends an in-depth study to investigate the challenges affecting merger and acquisition of companies. 60

REFERENCES Anslinger, P.I., & Copeland, T.E. (1996). Growth through acquisitions: A fresh look. Harvard Business Review, 74, 126-135. Baker,J.B.(1999).Unilateral competitive effects: Theories in merger analysis. Massachussetts: Edward Elgar. Berger, K. O. (1999). Review of financial studies. Journal of Financial Economics, 37 , 39-65. Bresman, J. B., & Nobel, R.(1999). Knowledge transfer in international acquisitions. Journal of International Business Studies, 30, 439-462. Buono, A.S., & Bowditch, J.I. (1989). The human side of mergers and acquisitions. San Francisco: Jossey-Bass. Kisero J. (2005).Cases(6th ed.).New Delhi, India: Prentice Hall. Caves, R.H.(1989). Mergers, takeovers and economic efficiency : Foresight vs. Hindsight. International Journal of Industrial Organization, 7, 150-172. Chakrabati, A.K. & Burton, J. (1983). Technological characteristics of mergers and acquisitions in the 1970s in manufacturing industries in the US. Quarterly Review of Economics and Business, 23, 81-90. Chesang(2002). Merger restructuring and financial performance of commercial banks in Kenya. Unpublished MBA Project: University of Nairobi. Cohen,W.M. & Levin, R.C.(1989). Empirical studies of innovation and market structure. Handbook of Industrial Organization, 2, 1059-1107. Cosh, A.,Hughes, A., Lee, K., & Singh, A. (1989). Institutional investment, mergers and the market for corporate control. International Journal of Industrial Economics. 73-100. Datta, D.K. (1991). Organizational fit and acquisition performance: Effects of postacquisition integration. Strategic Management Journal, 12, 281-297. Dosi, G.(1988) .Sources, procedures and microeconomic effects of innovation. Journal of Economic Literature. 26, 1120-1171. GoK. (1986). Restrictive trade practices, monopolies and price control Act :Cap. 504 .Laws of Kenya. Hamed, M. (1999).Conglomerate mergers: An economic reconsideration. Chicago. 61

Haspesh,M. P., & Jemison,D.(1991). Managing acquisitions: Creating value through corporate renewal. New York: Free Press. Hitt, M.A., Harrison, J., Ireland, R.D., & Best,A. (1998). Attributes of successful and unsuccessful acquisitions of US firms. British Journal of Management, 19, 91-114. Hoskisson , R.E., & Hitt, M.A.(1994). Downscoping : How to Tame the Diversified Firm. New York: Oxford University Press. Ikedo, K., & Doi, N.(1983). The performance of merging firms in Japanese manufacturing industry; 1964-1975. Journal of Industrial Economics, 31, 257-266. Jemison. H.B., & Sitkin, S.B.(1986). Corporate acquisitions. Academy of Management Review,11, 145-163. Jong, H.W.(1976). Theory and evidence concerning mergers: An international comparison: John Wiley & Sons. Krallinger,J.C. (1997). Mergers and acquisitions: Managing the Transaction: McGrawHill . Kusewitt J.B. (1985). An exploratory study of strategic acquisition factors relating to performance. Strategic Management Journal, 6, 151-169. Legal Notice No. 126. (2002). The Capital Markets Authority (Take-Overseas and Mergers) Regulations. Lev, B., & Mandelker.G. (1972). The Micro-economic consequences of corporate mergers .Journal of Business, 45, 85- 104. Lewis ,B .(1993). Regression analysis. London: Sage Publications. Lichtenberg, F. R., & Donald, S. (1990). The effects of leveraged buyouts _on productivity and related aspects of firm behavior. Journal of Financial Economics 27, 165-94. Lubatkin, M. (1987). Merger strategies and stockholder value. Strategic Management Journal, 8, 39-53. Lucey A. T., (2000). Management accounting(2nd ed.).: Ashford Colour. Manne, H.(1965). Mergers and the market for corporate control. Journal of Political Economy, 110-120.

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Mantel. M. I., & Eudema, J.D. (2000). Mergers and acquisitions, research & teaching .Chicago: Harper Books. Margaret, B. (1993). The deal decade. What Takeovers and Leveraged Buyouts Mean for Corporate Governance. Washington:Brookings Institution Press. Mintzberg, L., & Quinn, J.B. (1991). The strategy process. Concepts, contexts and cases (2 nd ed.).New Jersey:Prentice Hall. GOK. Monopolies and Prices Commission Annual Reports 2000, 2001, 2002, 2003, 2004: The Government Printers. Montgomery,C.A & Wilson,V.A. (1986). Mergers that last: A predictable pattern. Strategic Management Journal, 7, 91-96. Mueller, D.C., (1986), The modern corporation : profits, power, growth and performance. Brighton: Wheatsheaf Books. Mugenda O.M. & Mugenda A. G. (2003). Research methods: Quantitative and qualitative approaches.Nairobi: Acts Press. Nachmias, C.I., & Nachmias, D. (2003). Research method in the social sciences(5 th ed.). Kundli, India:Replica Press Nelson, R.R. and S.G. Winter, (1982), An evolutionary theory of economic change. Cambridge : Belknap Press. Nihat,A., Eric, B., & Roll, R.(2004). European merger & acquisition regulation is protectionist. Journal of Financial Economics. Oster, S.M , (1994), Modern competitive analysis. New York. Oxford University Press. Owino,A.(2005).Barclays Bank acquires ABSA .MI Banking Survey,151-152. Pandey ,I.M. (1999). Financial management (8 th ed.). New Delhi,India Vikas Publishing Patrick, A .,& Gaughan,T.(2006). Mergers, acquisitions, and corporate restructuring( 2nd ed.). New York. John Wiley & Sons. Pike, R., & Neale, B. (2002). Corporate finance and investment : Decision and strategies(2 nd ed.): Prentice Hall ,New Delhi ,India. Porter ,M. (1980). Competitive strategy.New York: The First Press.

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Porter, M . E . (1987). From competitive advantage to corporate strategy. Harvard Business Review, May-June, 43-5 Ravenscraft D.J., & Scherer, F.M.(1987). Life after takeover. Journal of Industrial Economic , 36, 147-157. Reid, S.R . (1968). Mergers, managers and the economy. New York.McGraw-Hill. Riungu ,C.(2005) .Business Week, 2005, 3 - 7. Robert, C.,& Claude,L.B. (1992). Achieving post-merger success: A stakeholder, guide to cultural due diligence, assessment, and integration. New Jersey. Rumelt, R.R. (1974). Strategy, structure, and economic performance. Boston. Harvard Business Press. Schumpeter. (1942). Capitalism, socialism and democracy. New York: Harper French Books. Sharpe, G.,Alexander,.J. ,& Bailey,J.V. (1999). Investments.London. Prentice Hall. Sherman,A.J. (1998). Mergers and acquisitions from A to Z: Strategic & practical guidance for small & middle-market buyers and sellers. New York :Macmillan. Singh, H. & Montgomery, C.A.(1987). Corporate acquisition strategies and economic performance. Strategic Management Journal, 8, 377-386. Stacey R.D. (1990). Dynamic strategic management for the 1990s.U.K: Kogan Page. The Economist . (2000). July 22. How Mergers go Wrong, 20 The Economist (2005). The Rise of the Super Brands, Vol 374 ,No. 8412, 60-62. The Restrictive Trade Practises, Monopolies and Price Control Act; CAP 504. Laws of Kenya: The Government Printers. Thomas, E.C., & J.F Weston,J.F. (1992). Financial theory and corporate policy(3 rd ed.). London:Wesle Thurston, H., & Beate P. (2003). General equilibrium foundations of finance : Springer. Tomlison, R.(2005). Europe Businessman of the year. Fortune( Europe Ed.). 29-32.

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APPENDICES Appendix I: Introduction Letter

Kennedy Murithi P.O Box ............. NAIROBI Dear Respondent,

REQUEST TO FILL THE QUESTIONNAIRE FOR RESEARCH PURPOSE This is to request you to kindly fill in the attached questionnaire for research purpose. The research topic is: - An Investigation into Effects of Mergers and Acquisitions on Financial Performance of Companies in Kenya (2003 - 2007).

The information sought from you will be treated with utmost confidence, and results of this study will be available for your use/reference.

Thank you. Yours sincerely,

Kennedy Murithi

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Appendix II : Questionnaire PART ONE PERSONANAL DATA 1. Please indicate; a) Name of organization .... b) What is your Designation .. c) State your Gender (Tick where appropriate) Male ( ) Female ( )

d) Number of Years served (Tick where appropriate) 0-5( ) 5-10 ( ) 10-15 ( ) Over 15 years ( )

e) Educational Level (Tick where appropriate) Diploma ( ) Degree ( ) Post Graduate Degree ( )

f) Location of the main office . g) When the organization was established h) How many outlets does the organization have . 2. Indicate the answer that best represents the ownership composition of your company (Tick where appropriate) Local ( ) Part Local/ Part Foreign ( ) Foreign ( ) Governmental ( )

3. Kindly indicate whether your company is: Privately owned ( ) Part private/part public ( )

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Publicly owned ( )

Parastatal ( )

PART TWO FIRMS PROFILE (1)


Name

of the firms before the merger or take over.

..................................................................................................................... (2) Date of incorporation of your firm. (3) Name of the firm after the merger or take over. ............................................................................................. (4) Did your company complete the merger or acquisition to its conclusion? (Tick appropriately)

Yes

No

If No, please state the reason/s ..................................................................................................................................... ..................................................................................................................................... .....................................................................................................................................

If yes, then proceed and complete the remaining part of this questionnaire.

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(5)

State the legal structure of your firm(Tick appropriately) (i) (ii) (iii) Partnership ( ) Privately owned company ( Publicly owned company ( ) )

If your firm is (i) or (ii) above, please complete (6) below.

(6)

How would you classify your organization in terms of ownership?

(Tick appropriately). (a) (b) (c) Locally Owned ( ) Foreign Owned ( ) Both Local/Foreign Owned ( )

(7) The sector your organization is operating in (Tick appropriately).

Manufacturing Agriculture Service

PART THREE EXPERIENCE OF THE FIRM (1) Could you say if your firm was a Merger (M) or a Takeover (T)? (Tick appropriately). M( ) T( )

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(2)

What sort of merger or acquisition did your company undertake? (Tick appropriately). Horizontal Merger Vertical Merger Concentric Merger Conglomerate Merger

(3)

Please state reason/s why your organization undertook the merger

(Tick where appropriate) (a) Increase market share (b) Acquire state- of -the art technology (c) To diversify in a growth business (d) Overcome entry barrier (e) Acquire brand loyalty (f) Enter to a new geographical area (g) Comply with new legislation. (f) Any other (specify)................................................................................. Approval Process within the framework of Kenya competition law. (a) How long did you take to receive an approval from the Commissioner of Monopolies and Price'? Months

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(b)

Was your firm subjected to appeal to the Tribunal? Yes No

(Tick appropriately).

(c)

If ye, how long did it take for the appeal to be concluded by the tribunal? Months

(d) Yes

Did you appeal to the High Court? (Tick appropriately). No

If yes, reasons for appeal............................................................ (e) For how long did it take to conclude the appeal in the High Court? Months

Negotiation with the target firm (a) How long did your firm take to conclude the negotiation with the other firm? Months (b) Give an estimate of the Merger or Acquisition budget. Kshs

(c)To what degree did you involve your managers in the acquisition or merger process? (Please indicate by a tick on the table overleaf using the following scale). Not at all Very little Moderately A lot Intensively 1

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General Assessment (a)Would you term the merger or acquisition undertaken by your firm a success? (Please tick where appropriate). Yes No

(b)Would you recommend a merger or an acquisition again? ( Tick where appropriate)

Yes

No

This area is only for those firms which have gone through a takeover. (a)How did you manage the takeover process? ( Tick as appropriate) Agreeing with major shareholder Buying stock in the market Obtaining proxies from the shareholders (b)State how your firm managed the resistance from other shareholders or management ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

THANK YOU FOR YOUR COOPERATION

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Appendix III: Time Plan DURATION PHASE 1) 2) 3) 4) Total duration 4 Months ACTIVITY Proposal writing and presentation for supervision Instrumentation a) Pilot taking b) Administration of questionnaires Data analysis Write up and presentation to the department for Examination (WEEKS) 3 Weeks 2 Weeks 2 weeks 2 weeks 3 weeks 3 weeks

Appendix IV: Budget Estimate

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ITEM NO. 1 2 3 4 5 6 7

ITEM DESCRIPTION

ESTIMATED

REMARKS

COST (KSHS.) Stationary & Other Consumables 3,000.00 Field Visits for Research Assistants 40,000.00 Field Visits for Self 6,000.00 Subsistence Allowances 10,000.00 Data Analysis 2,000.00 Report Writing 30,000.00 Overheads & Incidental Expenses 12,000.00 TOTAL 103,000.00

Source: Researcher (2008)

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APPENDIX V: MERGER CONTROL NOTIFICATIONS- SOURCE MPC ANNUAL REPORTS 2001 - 2004 Name of Institution Sector Affected 1 2 3 4 5 6 7 g 9 Bidco(K) Ltd. & Elianto (K) Ltd Crown Berger & Barclays Holdings Johnson & Johnson Ltd & Direct Sales and Distribution Raymond Woollen Mills & Heritage Woollen Mills Securicor Security Services & Express Escorts Elf Oil (K) Ltd & Total (K) Ltd Smith Kline Beecham & Glaxo Wellcome (K) Ltd Crescent Construction Receivership Cooking Fat and Edible Oils Paints Baby Care Products Textiles Private Security Petroleum Pharmaceuticals/ Healthcare products

Ltd & Cabro Works Ltd. Building & Construction Motor Industry Dairy Hotel Agriculture Telecommunications Hotel Banking Legal Consultancy Manufacturing (Brewing) Agriculture Financial (Banking)

Lonrho Motors E.A. Ltd & Toyota E. A. Ltd.

10 Lelkina Dairies Ltd & Brookside Dairies Ltd 11 Lonrho Hotel Africa & Starwood Hotel 12 Lonrho Motors & Lima Farm Machinery 13 Africa Online Ltd & Net 2000 Ltd 14 Maasai Mara Sopa Lodge & Safari Retreat 15 SCB & Bullion Bank 16 Kapila Anjarwalla & Khama 17 EABL & UDV Ltd 18 Kaitet Tea Estate & Eastern Produce Kenya Ltd 19 Paramount Bank & Universal Bank

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20 Kakuzi Ltd & Socfinaf Ltd 21 Unilever & Best Foots Ltd 22 Kenya Breweries & Castle Brewing 23 Iseme Kamau & Maema Advocates 24 Barclays Trust Investment & Old Mutual As Managers 25 Bank of India & India Finance Ltd 26 Stewart Scott Motors & Mitsubishi Motors Ltd. 27 ABN-AMRO Bank & City Bank Ltd. 28 Fidelity Bank & Southern Credit Ltd Manufacturing Manufacturing Legal Consultancy Asset Financial Financial Automotive Financial Financial

29 Nampak S. Africa/Carnaud Metal Box & Crown Cork Manufacturing Ltd. 30 Masai Mara Sopa Ltd & Tunu Ltd. Hotel

31 Aventis Crop Science & Agro Chemical Business of Agricultural Chemicals Bayer E.A. ltd 32 Co-op Bank & Co-op Merchant Bank Ltd. 33 BASF & High Chem E. A. Ltd 34 Primarosa, Mwaridi, Stone Athi & King'orani 35 Hotel Span & Spire Properties 36 Kenya Commercial Bank & Savings and Loans Banking Agriculture (Agro-Chemical) Agriculture Hotel Industry Financial Services

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37 Securicor Services & Falcon & Karen Langata Guards 38 Trust Finance Ltd & Trust Bank Ltd 39 Africa Online & Three Mice Interactive Media Ltd. 40 Kenol Kobil (K) Ltd & Mid Oil Africa 41
CROWN

Security Services Banking Sector IT (Internet Service Provision) Petroleum Manufacturing Pharmaceutical

Berger (K) Ltd & Unibuilt (K) Ltd

42 SJ Johnson Wax & Bayer East Africa

43 Brac Budget Rent A Car International & Avis Europe Plc Transport 44 Eustoma K. Ltd & Penta Tancom Ltd Penta flowers 45 East African Packaging 46 Canadian Overseas Packaging industry Manufacturing 2003 47 Manu Spices and Millers Ltd & Spice World (K) Lid. 48 1CL( K) Limited & Sameer ICT Ltd 49 Resort (K) Ltd & MS Family Town 2002 Ltd. 50 Nairobi Bottlers & Anspar Beverages Ltd Food Information Technology Hotel Industry Soft Drink Horticulture

51 Beta Healthcare International & Shellys Pharmaceutical Pharmaceutical Ltd 52 Alexander Forbes Financial Services E. A Ltd. Bank of Insurance India and Pension Trust Services 53 Flower Wings K. Ltd & Etcoville Investments Ltd Horticulture

54 Pan African General Insurance Ltd & Apollo Insurance Insurance Company Ltd 55 Crown Berger & Devas Ltd & Aziz Tanners 56 Gfccnlands Dairy & Westlands Dairy Ltd 57 Alexander Forbes & Hyman Robertson (K) Ltd Manufacturing Dairy Insurance

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58 Muva & Ass. & Koimburi Tucker Associates 59 Group 4 FALCK and Securicor Plc 60 Trans-Century Ltd & Cable Holdings Ltd

Accountancy Security Services Manufacturing

61 Bank of Africa Kenya Ltd & Credit A)'ricole Indosuez Banking Service Kenyan Branch 62 MSKK Guards Security Group & EARS Group Ltd. Security

63 MTN International Mauritius Ltd. & Kenyan Telcom B.V. Telecommunication (Ken Cell) 64 Kemia International Ltd & Poly Synthetics Eastern Africa Manufacturing Ltd. 65 Sameer Telecom Ltd & Kenya Telecom BV 66 Shell and BP Malinda and Oil Com. 67 Homegrown Kenya Ltd & Kijabe Ltd(Kijabe) 68 Dawa Pharmaceutical Ltd & Medisel (K) Ltd. 69 Fresh Del Monte Produce Inc. & Del Monte Kenya Ltd 70 Coast Silos (K) Ltd and Kenya Ports Authority 71 ALICO & CFC Group Telecommunication Petroleum Horticulture Pharmaceutical Horticulture Transport Insurance

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