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 (PPSM) 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.
Highlights
Providing financial services for small–medium-sized enterprises (SMEs), Chinese City Commercial Banks (CCBs) play an important role in the regional economic development in China
CCBs are always called as the third echelon as compared to 4 state-owned commercial banks (SOCBs) and 12 joint-stock commercial banks
After eliminating technical inefficiency by learning from best practice individually, only 138, 133, and 137 hypothetical decision-making units (DMUs)’ pure merger efficiency scores are less than one for the whole system, deposit-producing process (DPP) and profit-earning process (PEP), respectively. This indicates that the scale effects do not favor the merger which our results are consistent with Bogetoft and Wang (2005) that the gains from merging are considerably less under the variable returns to scale (VRS) assumption
Summary
Providing financial services for small–medium-sized enterprises (SMEs), Chinese City Commercial Banks (CCBs) play an important role in the regional economic development in China. The overall potential gains were decomposed to technical, scale, and harmony gains They found that the hypothetical DMU may probably surpass the Production Possibility Set (PPS) constructed by candidate DMUs when using the input-oriented DEA model to estimate potential merger gains. We propose to construct a Merger Production Possibility Sets (PPSM) to solve the problem We extend this to a twostage structure to estimate the merger efficiency of a hypothetical DMU for the overall system and both subsystems, and decompose the merger efficiency into technical, harmony, and scale efficiencies for the whole system and both sub-systems.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
