Eco-efficiency outcomes of mergers and acquisitions in the European electricity industry

Abstract

The European electricity industry was recently liberalized. In response, there was a surge of mergers and acquisitions (M&As). This study addresses the effects of M&As on the eco-efficiency of European electricity producers in 2005–2013. The environmental production technology comprises CO2 emissions as an undesirable output. I compute eco-efficiency using data envelopment analysis (DEA) and the Malmquist-Luenberger productivity index, which are both based on radial directional distance function. I observe a decreasing trend in average eco-efficiency, which contradicts the previously documented moderate efficiency gains of liberalization. The effects of M&As are isolated using second-step fractional regression. The domestic horizontal M&As, which are systematically regulated by the European Commission, have no impact. Although one cross-border horizontal deal has a same-year effect of roughly −3%, this effect becomes approximately +1.5% over a two-year timespan. Vertical domestic M&As have a short-run negative impact of 3.6% that does not persist over time. Vertical international M&As reduce the eco-efficiency by 2.1% two years after their completion. Limited evidence suggests that the conglomerate deals are at least not harmful. The policy implication is that the merger regulation should be based on DEA eco-efficiency measures. Regulators should devote more attention to cross-border M&As and particularly to vertical deals.