Companies exist to create wealth for their shareholders.
It is the shareholders’ hard-earned money that is tied in the assets of the firms.
Wealth maximisation is interpreted to mean a better share price. For firm managers, this means that any decision they make is evaluated in terms of its impact on the share price.
However, given how complex businesses are, it is not expected that owners always have the capacity to run their businesses.
This means that individual owners sometimes rely on professional managers to run their enterprises.
This arrangement has limitations in the sense that the manager may be more informed about the business activities than the owner, in which case an incentive to take advantage of fewer informed investors arises.
Therefore, managers may act in their own interest at the expense of the owners.
For example, managers may opt for a merger even when it is of no value to the firm’s shareholders.
In Kenya, several financial institutions have merged lately.
An example is the merger between KCB and the National Bank of Kenya.
The two banks were formed to bring banking services closer to the Kenyans at an affordable price after independence.
The question then is whether the merger makes economic sense to the shareholders of the two banks as well as the depositors or if it serves the interests of individual managers.
Research shows that a well-managed merger translates to improved share prices driven by reduced costs and a well-diversified company.
However, poorly planned and executed mergers can go horribly wrong. In the US, the largest merger was between American Online (AOL) and Time Warner Inc (TWX). The objective was to create a company to dominate in entertainment, news, the Internet and cable space. This merger, however, failed and the two companies unbundled. Another example was that of Exxam and Mobil merger.
At independence, there were no banks willing to lend money to Africans. This explains why the Government would later adopt a liberalised policy and in the process licensed a number of small banks.
Some of them such as the Equity Bank have grown in leaps and bounds to become some of the biggest banks in the country.
The sustained growth of the banking sector requires stability, and this necessitated a change in regulations. The new regulations require that some banks merge.
It is only fair that merging banks make their objectives known before the merger takes place.
This is meant to enable market players to evaluate the merger at a later date.
The objectives set are evaluated in financial terms. Unfortunately, this might not be the case for the KCB and NBK merger.
The KCB must come out clean on the merger in terms of value creation and resulting efficiency.
A successful merger can’t be a zero-sum game given the huge transaction costs attached to the merging process.
The bank must tell the market how it will handle the NBK directors who will now join its board.
It is also imperative that KCB tells us the share price improvements expected from the merger with NBK. KCB must also be aware that it might not win full cooperation from the employees of NBK.
One study suggests that “acquisition often has a negative impact on employee behaviour, resulting in counterproductive practices such as absenteeism, low morale and job dissatisfaction.”
However, this is unlikely in an economy with high unemployment rates such as Kenya.
We don’t expect much from mergers that are regulation-driven. In any case, the merger is meant to benefit both entities.
The merger must also benefit depositors and borrowers in terms of attractive interest rates.
If there is any benefit to be realised for KCB, it will be in the form of economies of scale associated with NBK’s branch network.
There will be a large customer base that can enhance the former’s market leadership through product differentiation and cost reduction strategy.
NBK shareholders by accepting shares in KCB, on the other hand, have reduced their insolvency concerns. NBK has not been paying dividends to shareholders due to below-average financial performance. Sometimes it pays to buy a poorly performing firm and then turning it around.
The market will be watching the KCB-NBK merger keenly, especially the post-merger financial performance, risk, growth in share price and dividends to shareholders.
However, if the new vehicle becomes too big to be managed, then merger benefits will evaporate, and KCB might decline in value.
-The writer teaches at the University of Nairobi
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World Bank pushes G-20 to extend debt relief to 2021
World Bank Group President David Malpass has urged the Group of 20 rich countries to extend the time frame of the Debt Service Suspension Initiative(DSSI) through the end of 2021, calling it one of the key factors in strengthening global recovery.
“I urge you to extend the time frame of the DSSI through the end of 2021 and commit to giving the initiative as broad a scope as possible,” said Malpass.
He made these remarks at last week’s virtual G20 Finance Ministers and Central Bank Governors Meeting.
The World Bank Chief said the COVID-19 pandemic has triggered the deepest global recession in decades and what may turn out to be one of the most unequal in terms of impact.
People in developing countries are particularly hard hit by capital outflows, declines in remittances, the collapse of informal labor markets, and social safety nets that are much less robust than in the advanced economies.
For the poorest countries, poverty is rising rapidly, median incomes are falling and growth is deeply negative.
Debt burdens, already unsustainable for many countries, are rising to crisis levels.
“The situation in developing countries is increasingly desperate. Time is short. We need to take action quickly on debt suspension, debt reduction, debt resolution mechanisms and debt transparency,” said Malpass.
Kenya’s Central Bank Drafts New Laws to Regulate Non-Bank Digital Loans
The Central Bank of Kenya (CBK) will regulate interest rates charged on mobile loans by digital lending platforms if amendments on the Central bank of Kenya Act pass to law. The amendments will require digital lenders to seek approval from CBK before launching new products or changing interest rates on loans among other charges, just like commercial banks.
“The principal objective of this bill is to amend the Central bank of Kenya Act to regulate the conduct of providers of digital financial products and services,” reads a notice on the bill. “CBK will have an obligation of ensuring that there is fair and non-discriminatory marketplace access to credit.”
According to Business Daily, the legislation will also enable the Central Bank to monitor non-performing loans, capping the limit at not twice the amount of the defaulted loan while protecting consumers from predatory lending by digital loan platforms.
Tighter Reins on Platforms for Mobile Loans
The legislation will boost efforts to protect customers, building upon a previous gazette notice that blocked lenders from blacklisting non-performing loans below Ksh 1000. The CBK also withdrew submissions of unregulated mobile loan platforms into Credit Reference Bureau. The withdrawal came after complaints of misuse over data in the Credit Information Sharing (CIS) System available for lenders.
Last year, Kenya had over 49 platforms providing mobile loans, taking advantage of regulation gaps to charge obscene rates as high as 150% a year. While most platforms allow borrowers to prepay within a month, creditors still pay the full amount plus interest.
Amendments in the CBK Act will help shield consumers from high-interest rates as well as offer transparency on terms of digital loans.
Scope Markets Kenya customers to have instant access to global financial markets
NAIROBI, Kenya, Jul 20 – Clients trading through the Scope Markets Kenya trading platform will get instant access to global financial markets and wider investment options.
This follows the launch of a new Scope Markets app, available on both the Google PlayStore and IOS Apple Store.
The Scope Markets app offers clients over 500 investment opportunities across global financial markets.
The Scope Markets app has a brand new user interface that is very user friendly, following feedback from customers.
The application offers real-time quotes; newsfeeds; research facilities, and a chat feature which enables a customer to make direct contact with the Customer Service Team during trading days (Monday to Friday).
The platform also offers an enhanced client interface including catering for those who trade at night.
The client will get instant access to several asset classes in the global financial markets including; Single Stocks CFDs (US, UK, EU) such as Facebook, Amazon, Apple, Netflix and Google, BP, Carrefour; Indices (Nasdaq, FTSE UK), Metals (Gold, Silver); Currencies (60+ Pairs), Commodities (Oil, Natural Gas).
The launch is part of Scope Markets Kenya strategy of enriching the customer experience while offering clients access to global trading opportunities.
Scope Markets Kenya CEO, Kevin Ng’ang’a observed, “the Sope Markets app is very easy to use especially when executing trades. Customers are at the heart of everything we do. We designed the Scope Markets app with the customer experience in mind as we seek to respond to feedback from our customers.”
He added that enhancing the client experience builds upon the robust trading platform, Meta Trader 5, unveiled in 2019, enabling Scope Markets Kenya to broaden the asset classes available on the trading platform.