An Exploratory Study of the Impact of Valuation Methods on Effectiveness of Privatization of Hospitals through Mergers and Acquisitions in Kenya

Abstract

This paper examines the privatization of hospitals through M&A using Kenya as a country of focus. It shows that M&A activities are increasing in Africa and there is a history of privatization of state-owned enterprises (SOEs) / parastatals in Africa and Kenya in particular, which started in the 1990s.

Privatization of hospitals has been popular in North America (U.S., Canada) and Europe (Germany, England) which have included public and not-for-profit (NFP) hospitals. Privatization and M&A activities of hospitals in other countries such as India, China, Saudi Arabia, Africa and Kenya have also increased.  The reasons for these trends are industrialization of developing countries, changing lifestyles, aging populations, longer life expectancy, technological advancement, development of new drugs, growth of the middle class, increase of non-communicable diseases (NCDs) and inefficiency of public health systems. With the changing dynamics, it would appear like there is a need for African countries to expand their private sectors, and privatization of healthcare is an attractive area for private equity firms and private hospital chains. Due to growth of the economy and the middle class, higher demand for healthcare services and particularly expansion of NHIF (National Hospital Insurance Fund) coverage in Kenya, privatization of hospitals makes economic sense.

An important aspect of privatization of public or not-for-profit hospitals is determination of fair market value. Therefore, literature concerning theory of valuation, cash flow, agency cost, assumption of discounted cash flow and indirect / direct valuation and cross boarder valuation were investigated.

The research philosophy, methodology and design of this study was based on exploratory, post positivism, deduction and utilization of mixed method (qualitative and quantitative) with focus on verifying the hypothesis.  The population of this research included Level 4, 5 and 6 hospitals in Kenya, consisting of 268 hospitals with equal to or more than 50 bed, and sample size of 158 hospitals. Proportionate stratified random sampling methodology was used to determine sample size of each hospital level (Level 4, 137 hospitals, Level 5, 14 hospitals, and Level 6, 7 hospitals).

The hypothesis that there is a negative relationship between valuation methods (X) and the effectiveness of privatization of hospitals (Y) through M&A was tested, there was moderate and positive relationship between the dependent and independent variables and regression model was found to be reliable. The null hypothesis was rejected because of the result of the T-test.

It is recommended that similar studies be conducted in East and South Africa to explore and enable researchers to perform comparative analysis in order to improve the body of knowledge in this area.