Estimation of potential gains from bank mergers: A novel two-stage cost efficiency DEA model

Abstract

This paper develops a novel two-stage cost efficiency model to estimate and decompose the potential gains from Mergers and Acquisitions (M&As). In this model, a hypothetical DMU is defined as a combination of two or more candidate DMUs. The hypothetical DMU would surpass the traditional Production Possibility Set (PPS). In order to solve the problem, a Merger Production Possibility Set (PPS M ) is constructed. The model minimizes the total cost of the hypothetical DMU while maintaining its outputs at the current level, and estimates the overall merger efficiency by comparing its minimal total cost with its actual cost. Moreover, the overall merger efficiency could be decomposed into technical efficiency, harmony efficiency, and scale efficiency. We show that the model can be extended to a two-stage structure and these efficiencies can be decomposed to both sub-systems. To show the usefulness of the proposed approach, we applied it to a real dataset of top 20 most competitive Chinese City Commercial Banks (CCBs). We concluded that (1) there exist considerably potential gains for the proposed merged banks. (2) It is also shown that the main impact on potential merger gains are from technical and harmony efficiency. (3) As an interesting result we found that the scale effect works against the merger, indicating that it is not favorable for a full-scale merger.

An alternative approach to decompose the potential gains from mergers

“…competitive CCBs in 2012 as the candidate DMUs. We also used the same inputs and outputs measures proposed in Wang et al (2014) and Shi et al (2017) without considering the network structure and the undesirable output (i.e., bad loan). As a result, here are two inputs and two outputs: inputs includes fixed assets (x 1 ), which refers to the assets value of physical capital, and employee expenses and other operating expenses (x 2 ), which refers to the payment to full-time employees and the expenses generated during the operating process of CCBs.…”

“…Prime contributions were made by Bogetoft et al (2003) and Bogetoft and Wang (2005) (hereafter BW), where they focused on the potential production economic effects and proposed admirable production economic models to estimate and decompose the potential gains from mergers. Based on their rationale, Ray (2004), Bagdadioglu et al (2007), Kristensen et al (2010), Blancard et al (2011Blancard et al ( , 2016, Wu and Birge (2012), Peyrache (2013), Wu et al (2011Wu et al ( , 2014, and Shi et al (2017) worked deeper on this issue in many different contexts. So far, the rationale proposed by BW has been regarded as the basis of estimation and decomposition of the potential gains ex-ante.…”

Prevaluating efficiency gains from potential mergers and acquisitions in the financial industry with the Resample Past–Present–Future data envelopment analysis approach

“…The results show that there is a positive relationship between the effect of technology cooperation and merger. Shi, Li, Emrouznejad, Xie, and Liang (2017) collected data on the top 20 most competitive commercial banks in China in 2012. Using two‐stage DEA model analysis, they presented that the potential merger of the bank can indeed obtain a larger return.…”

Unveiling the Endogenous Relationship Between Technical Efficiency and Value Creation in Mergers and Acquisitions in Nigeria

“…Consequently, there have been numerous studies in many developed economies examining the potential gains to be made from mergers (Bogetoft and Wang, ; Bogetoft and Otto, ; Gattoufi et al , ; Shi et al , ; Chen et al , ). However, to decrease the high failure rate of M&A activities, one of the critical steps that should be taken by a bidding company trying to identify suitable target companies prior to an M&A is to determine whether the prospective partner can offer synergies and the relevant attributes needed to complement those of the takeover company.…”