Market, business forces drive mergers and acquisitions

With the banking sector seemingly on the verge of facing a merger and acquisition craze, we need to ask ourselves, is it a business strategy inspired by the need to develop a formidable business synergy thus value-maximization or just an infatuation in the banking sector?

Well, there is consensus that most mergers and acquisitions are controlled by the market and business forces, although these forces shouldn’t “bully or compel” an entity to merge or force an acquisition.

Most business models—whether in the banking, financial, or manufacturing sectors—often think of economic change in stark terms; trapped in Neolithic business models swapped from the field with the advent of a new market disruption.

This as such makes reality a nuisance when they see fellow competitors innovate better, stronger business models through mergers or acquisitions.

Once the reality hits and ceases being a nuisance, these Neolithic business entities will for sure look for ways and avenues to stay ahead of the competition, or at the very least, keep up with it.

The trend in Kenya has recently been in the banking sector, which is by all accounts a good thing, as it is notably driven by either market changes, bank failures, regulation and arguably by the interest rate cap that has “bullied” small-size banks into acquisition targets.

Like an author in one of the dailies said “The banking consolidation cycle is now ‘officially’ opened for those with strategic appetite.” The more consolidated the banking industry, the more profitable it is, and affordable for consumers.

Every industry has a consolidation cycle that is often driven by the natural progression of the industry through its life cycle. During this cycle, many companies, with a surgical precision often know where they fall, which is either “Buy, Sell or Get out of the Way!”

The industry, the individual banks in particular, need to design robust strategic mechanisms to sustain growth and improve profitability whilst on this consolidation curve. A bank’s long-term success will depend on how well it rides up the consolidation curve, being that slower and weaker banks will become acquisition targets and most likely disappear.

Large banks on the other hand may form or propose alliances or merger entities with their peers to establish their balance and defend their leading positions.

This curve may similarly be witnessed in the telecommunication industry soon. Though not a consolidation curve in the sector per se, this goes to show that Kenya’s corporate sector is on a merging and acquisition spree: Buy, Sell or Get out of the Way?

Private equity firms are not left behind during the cycle. This is the time the PE firms also become opportunistic and step in to inject funds into failing banks, albeit by acquiring a stake in those banks. Share swap is also common during this industrial cycle.

Regulatory bodies must strictly ensure that all mergers and acquisitions promote public interest. This can simply be done by ensuring that there is protection of consumers and fair competition in the market.

BASTON WOODLAND, advocate of the High Court of Kenya.