Strategic Fit and Potential Gains of Mergers and Acquisitions in Ethiopian Insurance Industry: An Emerging Market Perspective
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Date
2021-05
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A.A.U
Abstract
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.
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Keywords
Data Envelopment Analysis (DEA), Insurance companies