The Economics Of Equity vs. Safaricom

safequityThe battle between Equity Bank and Safaricom seem to just have started. Even after the CAK approved the issuing of the slim SIM cards by Equity Bank for a trial period of one year, the parliamentary committee on Energy, Information and Communication on Wednesday differed with them and requested for a technical audit to be done first before the commercialization of the project.

It appears that Equity Bank has the regulator’s backing whereas Safaricom is lobbying through parliament. Whoever wins this battle is yet to be determined as the tag-of-war continues to take new shape everyday. However, the economic implications of the same can easily be forecasted.

In the event that Equity Bank gets its wishes granted and the roll out of the slim SIM cards is successful, the bank will see its top line (read revenues) increase. With efficient management of its costs, the bank will also experience a growing bottom line (read profits). As investor sit and watch the top and bottom line expand, their appetite for Equity Bank shares will be aroused and as they demand more of it, its share price will shove up.

Things will not be bright for Safaricom in this case as it loses its customers to Equity Bank on the money transfer business line (Mpesa). Both its top line and bottom lines will shrink significantly bearing in mind that Mpesa contributes about 36% of its total revenues. The investors watching this stock will opt to shift their money to other investment vehicles or better still to other growing stocks in the market. The obvious outcome of this shift will be a decline in Safaricom’s share price and this goes down together with its shareholders’ wealth.

In my opinion, the one year trial period is too long and Equity Bank will do all it can to make sure that it registers as many clients as possible to the new slim SIM card within the given time frame. Once numbers are large enough, the project will be too big to terminate for any “minor” errors that might be noticed during the trial period. Simply put, once Equity Bank launches the slim SIM card registration, the project will be as good as sealed into perpetuity and Safaricom will have to look for other innovative ways of combating the threat and maintain its revenue growth trajectory.

However, the two companies are not the only players in their industries. The threat will be felt by other banking sector and telecommunication sector players who will in return come up with counter measures to secure their market shares and profitability. It therefore means the battle is wider than it appears with only the two leading players representing their various sectors in the just began corporate war.

For investors, its time to go back to your financial planner and take a strategic position before its too late. Remember, you make money when buying and not when selling!

 

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