Methods of payment in US banks’ acquisition: efficiency perspectives

Abstract

ABSTRACTDoes the efficiency classification of acquirers have any effect on the method of payment they select for their acquisition, and does the selected method of payment have any future efficiency consequences? These two questions have never been answered. The objective of this article is to examine the effect of the medium of exchange that US banks use on the consequent cost, revenue, and profit efficiencies of mergers and acquisitions for the period from 1992 to 2003. The results indicate that highly efficient acquirers lose less efficiency when using stocks in financing their acquisitions, while the least efficient acquirers only gain efficiency when mixing stocks with cash in financing their acquisitions. The distributional dynamics in the results of the acquirers’ post-merger profit efficiency show no changes in profit efficiency over time when banks use stock financing but trends towards efficiency loss when using pure cash financing and loses the most when mixing stocks with cash. The contribution of this article is a guideline on the characteristics of efficiency to decision-makers for selecting the medium of exchange in friendly acquisitions given the consequent changes in strategic efficiency after acquisitions.