An investigation of the impact of corporate restructuring on the shareholder value: a case study of companies quoted on the Nairobi stock exchnage

Abstract

In the recent past difficult operating conditions have motivated companies to restructure by retrenching staff and downsizing their scope of operations. However it is unclear whether restructuring has resulted in improvements in financial performance given the difficult operating environment that have prevailed in the country. It is uncertain whether there has been an enhancement of shareholder value of the restructured companies given the plummeting Nairobi Stock Exchange Index.

The objectives of this research project were to determine if there was an improvement in financial performance of the restructured companies, to determine whether there was an improvement in shareholder value of the restructured companies, to examine the changes made as companies restructured, and to report the findings making necessary recommendations.

Sixteen companies quoted on the Nairobi Stock Exchange were sampled, ten of which responded by filling a questionnaire in which they verified whether or not they had restructured and also reported the changes the made as they restructured. From this data it was found out that restructured companies implemented significant changes including reduction of the number of employees, delayering the organizational hierarchy, outsourcing none-core services, changing work processes by assigning employees more tasks, and requiring them to learn new skills, and changing their remuneration policy such that employees are now remunerated on the basis of individual, workgroup and/or company performance. The companies also attempted to focus on delivering greater customers satisfaction.

To determine the extent of improvements in financial performance and shareholder value of the respondent companies, data on net cash flow, earnings per share, dividends per share, and market price per share was collected and analyzed to isolate trends in the variables. It was observed that in a majority of the restructured companies, net cash flow, earnings pers hare, dividends per share, and market price per share had improved. This implied that restructuring contributed to the improvement in financial performance and enhancement of shareholder value.

Further it was found that there existed a relatively strong positive correlation/association between earnings per share and market price per share, and also between dividends per share and market price per share. This implied that shareholders had an affinity for current dividends and earnings over future dividends and earnings. Thus if a company wanted to increase its shareholder value it had to pay regular dividends to it's shareholders.

On the basis of these findings it was recommended that it is necessary for a company to pay regular dividends in order to enhance shareholder value. It was recommended that prospective shareholders invest their funds in firms that have a good track level in creating shareholder wealth. It was recommended that the government should improve the quality of public services, improve the country's infrastructure, and create conditions that are conducive to economic growth. It was recommended that the regulatory agents of the government should exercise their mandate professionally to avoid exerting undue regulatory pressure on private sector firms. It was also recommended that the government should strictly enforce controls over counterfeit, pirated and untaxed goods to ensure that there is fair completion with above board products.