An alternative approach to decompose the potential gains from mergers

Abstract

Bogetoft and Wang (2005) proposed admirable production economic models to estimate and decompose the potential gains from mergers. They provided a good platform to quantify the merger efficiency and related it to relevant organizational changes ex-ante. In this paper, we develop an alternative approach to decompose the potential overall gains from mergers into to technical effect, size effect and harmony effect. The proposed approach uses strongly efficient projections, and consistently calculates radial input based measures of these three effects based on the pre-merger aggregated inputs. In addition, the proposed approach is of vital significance in two special cases where the aggregated projected inputs are not proportional to the pre-merger aggregated inputs and where the production sizes are very different for the original decision making units (DMUs). Finally, an application to the City Commercial Banks (CCBs) in China is provided to illustrate the usefulness and efficacy of the proposed approach. The application shows that there exist significant merger efficiency gains for these top 20 CCBs. Further, both the technical effect and harmony effect favor mergers, whereas the size effect would work against most mergers. Thus, in most cases the full-size merger with "organizational sense" is not proper.

Data-driven approach to find the best partner for merger and acquisitions in banking industry

“…Bogetoft and Wang (2005) used the DEA model to examine the gains from a merger and further decomposed the gains into a technical efficiency index, a harmony index and a size index. Based on Bogetoft and Wang's approach, Li et al (2018a) proposed a DEA-based alternative approach to re-decompose the potential overall gains. Johnes and Yu (2008) evaluated the merger efficiency of Chinese higher education by proposing DEA models.…”

Carbon emission abatement quota allocation in Chinese manufacturing industries: An integrated cooperative game data envelopment analysis approach

“…Since its seminal work in Charnes et al (1978) and Banker et al (1984), the DEA methodology has attracted more and more attention from scholars all over the world, and the DEA methodology and its applications have been extensively studied in the literature (Emrouznejad, 2014;Emrouznejad & Yang, 2018). On the application aspect, the literature has witnessed DEA-based approaches in different areas from public sector such as universities, hospitals, sports, and disaster relief operations to private sector such as banks, supply chains, manufacturing industries, and mergers and acquisitions (An, Meng, Ang, & Chen, 2018;Li, Liang, Li, & Emrouznejad, 2018a;Li, Zhu, & Zhuang, 2018e). On the methodology aspect, many innovative concepts and models have been proposed to extend and enrich the DEA theory.…”

Merging decision-making units with interval data

“…A two-phase method suggested to estimate of the potential merger efficiency of a hypothetical unit from the cost viewpoint by Shi et al [43]. Also, a new method is proposed for analyzing the potential overall gains from mergers into technical, size, and harmony effects by Li et al [36]. According to this study, it was concluded that the technical and harmony effects would work favor mergers, while the size effect would work against most mergers.…”