Mergers And Acquisitions: Case Studies In The Microfinance Industry


By Caroline Karanja

Mergers and acquisitions essentially involve an equity transaction between companies.

In business or economics, a merger is a (commonly voluntary) combination of two companies into one larger company. This involves stock swap or cash payment to the target. It is therefore a tool used by companies for the purpose of expanding their operations often aiming at increasing their long term profitability. Usually, mergers occur in a friendly setting where executives from respective companies participate in a due diligence process to ensure a successful combination of all parts.

They involve the combination of two or more companies to form a single entity, while acquisitions involve the purchase of an equity stake in a company, be it minority or majority, by another.

In this context, the cardinal equation follows that one plus one is greater than two, the rationale being the advantages of pulling together will lead to value creation for all stakeholders.


An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. An acquisition may be private or public, depending on whether the acquiring or merging company is  listed in public markets or  not.  An acquisition may be friendly or hostile. Whether a purchase is perceived as friendly or hostile depends on how it’s communicated and received by the target company’s board of directors, employees and shareholders.

In the case of a friendly transaction, the companies cooperate in negotiations. Nevertheless, in the case of a hostile deal, the takeover target is unwilling to be bought or the target’s board has no prior knowledge of the offer. Hostile acquisitions can, and often do, turn friendly at the end, as the acquirer secures the endorsement of the transaction from the board of the acquiring company which may require an improvement to the offer made. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keeps  its name for the combined entity. This is known as a reverse takeover. Another type of acquisition is reverse merger which enables a private company to get publicly listed in a short period of time. This occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets.

Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome. There is also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications.

Trends in the Market

Some of the trends in the Merger and acquisition market in Kenya suggest that the ­financial services sector has shown high growth in recent years. This is because Kenya is the regional leader in the East African Merger and Acquisition market. It is the preferred entry point for companies wishing to expand further in the region due to its strategic geographical location, well established private sector, favourable government incentives, developed infrastructure and robust human capital.

Most of the noted merger and acquisition deals are in the financial, telecommunications, industrial and health sectors. Analysts say the region’s changing economic fortunes over the past two years have seen struggling companies who look for partners in a bid to raise new capital, create synergies and build economies of scale to tackle increasing competition.

The emerging trend has seen deal makers flock to the region to get a slice of the growing business, with an increased number of foreign corporates making major bids over the past two years. Stiff competition and a difficult operating environment have forced struggling companies to look for merger and acquisition deals to ensure that they don’t close shop.

Case Studies in the Microfinance Sector

In 2010 and 2014, the microfinance sector witnessed two mergers and acquisition deals between City Finance Bank (CFB) and Jamii Bora Kenya Ltd (JBK) as well as Old Mutual and Faulu Microfinance Bank.

City Finance Bank (CFB) and Jamii Bora Kenya Ltd

Jamii Bora Kenya (JBK) was established in 1999 as an initiative of 50 street families in Nairobi, and registered as a charitable Trust on November 22, 1999.

City Finance Bank (CFB) was a small private financial services provider which, in the past, had provided services to large corporations and high-net-worth individuals.

The Acquisition

City Finance Bank (CFB) officially acquired Jamii Bora Kenya Ltd, in 2010. Jamii Bora Kenya was then the country’s fastest growing microfinance institution. In this case the deal came through after the shareholders of the two institutions separately agreed to a share-swap arrangement which allowed them to share the risk involved in the deal. The acquisition was geared to change the bank’s business model by shifting focus from middle-sized and high net-worth customers to small savers. The sale, the purchase and transfer of the assets and assumptions of the liabilities of Jamii Bora Kenya (JBK) Ltd to City Finance Bank Ltd was approved and took effect on February 11 2010. Baraka Africa Fund (BAF) and other individual investors acquired a 51 per cent interest in City Finance Bank, with intentions of restructuring the institution through injection of fresh capital, appointing competent and professional management and re-branding. The 14 year old bank was looking for strategic investors to sharpen its competitive edge in the market, and shore up its capital base severely eroded by years of loss making. It was understood that under the new arrangements, the bank would take over Jamii Bora Kenya (JBK) assets and liabilities including the members, who would be promoted to bank depositors. City Finance Bank, had been on a loss-making streak since 2000, and was expected to use the microfinance institution to turnaround and register positive returns to shareholders. City Finance Bank acquired Jamii Bora Kenya and took on the name of its new acquisition.

Today Jamii Bora Bank is one of Kenya’s fastest growing banks with a dedicated customer base of over 360,000 with 26 fully fledged Central Bank of Kenya approved branches.

Old Mutual and Faulu Kenya

Faulu Microfinance Bank Limited was founded in 1991 by Food for the Hungry International (FHI) a Christian organization as a organization (NGO) whose main objective was to provide credit to lower income households and micro-enterprises in Nairobi. It received funding from various donors, among them the Department for International Development (DFID) and the United States Agency for International Development (USAID). Faulu Kenya grew over the years to a level of near financial self-sufficiency. In order to have more access to commercial funding, Faulu Kenya was incorporated into a private company in 1999.

In 2008, Faulu Microfinance became the first micro-finance institution to obtain a deposit taking license from the Central Bank of Kenya and is ranked as the second largest microfinance bank in the country after Kenya Women microfinance bank.

Faulu Kenya became a Kiva partner on July 18, 2009. This gave it access to funding through the Kiva network of partners. As at July 2014, Faulu Kenya had raised over USD 2.8 million in loans through Kiva.

The acquisition

In April 2014, Old Mutual completed the acquisition of a   67% stake in Faulu Microfinance Bank through a Kshs.  2.8 billion capital injection. The acquisition gave Old Mutual a greater market reach through the Faulu Microfinance Bank branches across Kenya.  Faulu on the other hand got more   capital to meet its statutory requirements. The injection would  also enable  the bank to expand its  services and insurance products to more Kenyans who are financially excluded in the micro, small and medium enterprises space.

This process was therefore anticipated to deliver significant mileage in its efforts to expand distribution and product proposition in the region. The move also meant that Faulu Microfinance Bank had met the regulator’s requirements of a diversified ownership   which bar investors who are not banks, foreign finance companies or the government from owning more than 25% stake in   local banks.


Going by the two case studies above, it is clear that mergers and acquisitions are all about creating value. Before taking part in such a transaction, one should consider the upsides for all parties. Also, look for synergies, that is, one plus one is greater than two, growth opportunities, increased market power, acquiring technical capabilities, improve governance amongst others. In addition to this, companies should always ensure that they have competent and experienced merger and acquisition advisers holding their hands through the process to ensure that there is no value leakage. One of the most critical parts of the merger and acquisition process is the due diligence because it helps to identify potential issues early enough,   rather than later. This also allows the buyer and seller to address the risks appropriately.  If there is failure to do that, some mergers may not go through due to many reasons including:  lack of management foresight, inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations. However as noted, successful mergers and acquisitions produce synergy, leading to better use of complementary resources as well as   geographical or other diversifications .This smoothens the earning of a company, which over the long term smoothens its stock price, giving conservative investors more confidence in investing in it.