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Mr. Gichinga is Chief Economist at Mentoria Economics

Fifth Estate

The importance of public mergers and acquisitions

By Ken Gichinga

As the prospects of an economic recovery begin to take shape, there is a deep desire among Kenyans to rebuild wealth in the new economy.  For many, there is a great need to diversify beyond the traditional assets and venture into new areas. Most Kenyans will fondly remember with great nostalgia Safaricom’s Initial Public Offer in 2008 which was oversubscribed by 532%, attracting 860,000 applicants, most of whom have been handsomely rewarded from this investment. The country is eager to return to this golden era of vibrant participation and wealth creation through publicly listed companies. While good IPOs might be few and far between, the economic environment is pointing towards industry consolidation and a rise in public mergers and acquisitions. These too can have considerable benefits to local investors if well executed. For this to happen there needs to be a smooth collaboration between all the relevant institutions in the ecosystem, not least the courts, industry regulators and other state agencies.

Building a strong tradition of well-managed, public mergers and acquisition is a worthwhile goal that can inspire confidence and position Nairobi to be a global financial centre where complex transactions are effectively managed. Critical institutions such as the courts will need to function at the highest possible level, providing effective direction in a timely fashion. A judicial framework that is frequently updated on emerging trends in mergers and acquisition could provide investors with much-needed confidence if any court petition were to arise. During the acquisition of National Bank of Kenya by KCB Group, a petition was filed in court on the grounds that the deal was marred with irregularities and that most of the details on the merger were scanty. Fortunately, the court was swift in its ruling and determined that the petition lacked merit as it failed to understand the independent legal framework for the acquisition of shares in publicly listed companies under the Capital Markets Act and Capital Markets (Take-overs and Mergers) Regulations 2002.

Regulators also have a key role in fostering smoother mergers and acquisitions. Institutions such as the Competition Authority are particularly important in ensuring there is no unwarranted concentration of economic power. Given the diversity of issues that frequently come before regulators, it becomes imperative that there is constant engagement and communication to sensitize investors on regulatory developments in M&A. Such efforts ensure there is predictability and standardization within the regulatory regime. In the NIC – CBA merger, the Competition Authority demonstrated great prudence and diligence in ensuring employees from both banks were retained for at least one year thereby preventing any hurdles that would have arisen in future.

While the above measures might go a long way in ensuring efficient mergers and acquisitions, the most urgent conversation needs to be about the role of local investors. As it stands, foreign participation accounts for over 70% of trading at the Nairobi Securities Exchange thus contributing to significant volatility particularly during periods such as late last year when there was mass selling of equities in search of better prospects abroad. Moreover, a high degree of foreign participation in Kenya’s capital markets fosters the repatriation of profit to other foreign countries leaving the country without any opportunity for capital formation. Aside from this, the concentration of transaction activity to about 4 counters which control over 80 percent of trading activity is one of the imbalances that can be cured by incentivizing local investors who appreciate the diverse aspects of the Kenyan economy.

There has been muted activity on the Nairobi Securities Exchange in recent years. However, the winds of change are likely to usher in new opportunities for local investors to benefit such as in the proposed Carbacid offer to acquire BOC Kenya which could unlock much-needed liquidity and stimulate trading across many other counters at the NSE. This has been the journey that most developed markets have had to make with the result being a sustainable path to broad-based wealth creation – an outcome that is very much within Kenya’s reach.

Mr. Gichinga is Chief Economist at Mentoria Economics

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