The impact of the method of privatization used on a firm's financial performance: a study of privatized firms

Abstract

Privatization policy was recommended by the World Bank and officially adopted by the Kenya government in 1991. Since 1991 over 140 of the 207 former state owned Enterprises earmarked for privatization have been private. Different methods or techniques have been employed to privatize these state owned enterprises (SOEs).

This study aimed at finding out whether the method employed in divesting from these SOEs does impact on the post divestiture financial performance of the said enterprises. To this end two methods were considered namely: - Privatization through public share floatation at Nairobi Stock Exchange - Sale via competitive bidding.

To achieve this objective information was sought from Nairobi Stock Exchange (NSE) secretariat library, other post-privatization studies and the executive secretariat and technical units (ESTU) parastatal Reform Programme Committee. The most important information was company's financial reports.

Financial ratios for the prior and post privatization period for the selected firms were calculated. The means of these financial rations were computed and these firms were categorized based on the method of privatization and their prior and post privatization financial ratio means compared. The profit after tax ratio mean for complains privatized via public share floatation and that of the companies privatized via competitive bidding were tested to find out whether they were significantly different.

The analysis revealed that after privatization financial performance improved marginally though this was not a significant change at 95 percent confidence interval. This may be due to the change in management policies, may be due to change in the composition of their board of directors (without any government appointed director).

The result indicate that post Privatization financial performance of Enterprises divested via public floatation were better compared to those of companies privatized via competitive bidding, since the post profit after tax was significantly higher for public share floatation than the competitive bidding category.

Further public floatations appear to have attracted considerable many buyers as indicated by the over subscription for their shares. It is therefore recommended that public share floatation technique be employed more when privatising state Owned Enterprises. More recommendations are given in the last chapter of this report.