Strategic Fit and Potential Gains of Mergers and Acquisitions in Ethiopian Insurance Industry: An Emerging Market Perspective

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The aim of this paper is to measure the efficiency of insurance companies in Ethiopia using data envelopment analysis (DEA), and to evaluate to determine the potential gains and strategic fit from potential insurance companies Mergers & Acquisitions. This study is crucial because the wave of liberalization and deregulation may cause an industry shock in the insurance industry sooner because of the ongoing economic reform in the country. It has been employed an Inputoriented Data Envelopment Analysis with both Constant Returns to Scale (CRS) and Variable Returns to Scale (VRS) model is adopted to analyze the potential gains. The data were taken from financial statements of 17 Local banks and 3 foreign insurance companies for the period from 2016 to 2020. Contextual variables are used based on insurance size and Ownership structure. To address this critical issue the research was guided by the following research question: identify the potential efficiency gains that would be formed in future Ethiopian insurance industry; identify the types of M&A that yield potential strategic fits in future Ethiopian insurance industry M&A; determine insurance size contribution for the success of strategic fit; determine ownership type contribution for the success of strategic fit and determine financial performance contribution for the success of strategic fit of the future M&As in the Ethiopian insurance industry. Stata 14 and Ms-Excel Solver Add in were used to organize and analyze the data captured from financial statement of identified samples. Descriptive statistics were used to explain the potential gain in the insurance industry in Ethiopia. Data envelopment analysis (DEA) was also used to calculate the efficiency measures. Finally, the results have shown that some local insurance companies would have been benefited with M&A activities in the study period. Though the identified foreign insurance industries were relatively efficient, it is expected further study to M&A activities. The researcher recommends local insurance companies merger and acquisitions between themselves instead with the foreigners; and that would provide efficiency gain by producing the insurance premium with the minimum operational and administration expenses.



Data Envelopment Analysis (DEA), Insurance companies