Acquisitions efficiency impact of acquisitions in literature is

Acquisitions

The
literature related to the effects of acquisitions in general is vast, and a
number of research studies can be found in variety of sources. The study by Andrade et al. gave the conclusion of
event studies, which revealed that acquisitions make value for the stockholders
of the combined firms while the major benefits are realized by the stockholders
of the target firms. In contrast, Scherer and
Ross (1990) assessed the methodology of event study critically and summarize
the data on the real longer term profit and productivity effects of acquisitions
in all industries generally.

There
are various studies that conclude that acquisitions end up in extensive
failure, substantial weakness, and infrequent successes. Recently, the study of Gugler et al. on the profit and sales
effects of acquisitions concluded that majority of the acquisitions taking
place in the world from the last 15 years are proved to be anti-welfare. Hall’s (1999) performed an analysis of the causes and forces behind acquisitions and the actual effects of acquisitions for a huge, multi-industry sample consisting
of manufacturing firms from the period of 1957 and 1995. They used a tendency
score to manage for pre acquisitions features when observing the effects of acquisitions.

Efficiency and
Acquisitions

Efficiency
impact of acquisitions has been a topic of significant discussion in empirical
and practical research. However, the evidence
concerning the efficiency impact of acquisitions in literature is diverse. Resultantly, the acquisitions in both financial and
non-financial sectors got thrust which resulted in a noteworthy interest in
investigating and exploring the efficiency impact of financial sector acquisitions
from diverse angles. Rhodes (1993) suggests that
efficiency impact on acquisitions became the central focus in the literature in
late 1980s.

Acquisitions Improve Efficiency

A
large number of research studies reported enhancement in efficiency due to acquisitions. Berger and Humphrey (1992) explored the efficiency
effect of acquisitions by taking a sample of 57 bank acquisitions. They adopted the performance measures of X-efficiency
rank and total efficiency rank. The study concluded that efficiency gains are
created when a more efficient bank takes over the less efficient bank, otherwise
no improvement in the efficiency is realized after the acquisitions. Cornett
and Tehranian (1992) analyzed 30 large US bank acquisitions to find the gains
from this acquisitions activity. They found the
general benefits from acquisitions by calculating various ratios.

Peristiani
(1993) studied the acquisitions in which there is some local market overlap
before acquisitions. He reported that acquirer
banks are more profitable than targets but little efficiency gains were
realized. Shaffer (1993) studied bank
acquisitions using simulation and found that large X-efficiency gains were
achievable if the best practice banks acquire and reform the practices of the
less efficient banks. Vennet (1996) investigated the impact of acquisitions on
the efficiency of European Union banking industry by using some major financial
ratios and stochastic frontier analysis for the period of 1988-93 and concluded
that acquisitions improve the efficiency of acquiring banks.

Acquisitions and Cost Efficiency

Freiet
al. (1996) concluded that the cost efficiency effects of acquisitions depend on
the type of acquisition and the motives behind
this activity and the mode used by the management to implement its strategy. De Young (1997) conducted a study and found that 58%
out of a sample of 348 acquisitions in the period from 1987 and 1989 generated
little cost efficiencies. The findings of De
Young (1997) point out that acquisition of banks of same size capture lesser
than average cost efficiencies. Huizinga et al
(2001) conducted a study by taking a sample of 52 horizontal acquisitions of
European banks taking place during the time span of 1994-1998 using Stochastic
Frontier Analysis and showed positive impact on cost efficiency but the
advancement in profit efficiency was only minor.

Wen
(2002) recognized important advancement in technical and allocative efficiency
and unimportant cost efficiency advancement after bank acquisitions in Taiwan
using DEA. Worthington (2001) calculated the
difference between pre-acquisition and post-acquisition efficiency of the
non-financial institutions. He used the discrete
choice regression model and his results revealed that there was significant
improvement in efficiency of Australian credit unions after the acquisitions
during the time period of 1993-95. Halkos and
Salamouris (2004) used a DEA model without using inputs to examine the effect
of acquisitions on the efficiency levels of banks. They
observed that acquisitions that involved large banks increased the efficiency
levels of banks. Sufian & Fadzlan (2004) used the non-parametric frontier
strategy of Data Envelopment Analysis (DEA) to explore the technical and scale
efficiency of domestic integrated Malaysian commercial banks during the period
of 1998 to 2003. Their findings showed improvement in efficiency in the post acquisitions
period.

Gourlay
et al (2006) observed efficiency gains from bank acquisitions in India by using
the technique of Data envelopment Analysis. Cummins
and Xie (2006) found considerable positive abnormal returns for both the target and acquirer
firms by using the event study method
to observe the effects of acquisitions on publicly traded property-liability insurers. Though,
most takeover targets in the
property-liability insurance
industry are not publicly traded, the DEA technique used in his paper added value by studying
both traded and non-traded firms. Al-Sharkas et al.
(2008) used the techniques of Stochastic Frontier Analysis (SFA) and Data
Envelopment Analysis (DEA) to inspect the effect of acquisitions on cost and
profit efficiency of the US banking sector. Their results suggest the
confirmation of enhancement in both types of efficiencies after the acquisitions.

Acquisitions and Profit Efficiency

The
intellectual literature has made little development in determining the basic
source of profitability gains related with bank acquisitions. Regardless of the
advantages of the profit efficiency over cost efficiency, there are few studies
in banking or any other industry about the efficiency effects of acquisitions.
Many researchers have studied changes in profitability ratios due to acquisitions
but these studies cannot determine the level of increase in profitability which
is due to an improvement in profit efficiency.

Cybo-Ottone
and Murgia (2000) conducted a study taking a sample of 54 large deals taking
place in a period of 1988-1997 in Europe. He concluded that performance of the
bidder and target is very important at the announcement date. The result showed a great deal of variation cross-sectionally,
the abnormal returns related with the domestic bank to bank deals on average
were significantly positive. There are a number of studies which contrast bank
profitability ratios before and after acquisitions with those peer banks that
did not undergo acquisitions. Some studies found enhanced profitability ratios
related with acquisitions (Cornett and Tehranian, 1992) but others found no
significant improvement (Piloff, 1996; Akhavein et al, 1997).

Vander
Vennet (1996) used cost and profit ratios to scrutinize the performance effects
of takeovers in a sample of 492 European banks over a period of 1988-1993. Domestic acquisitions of equal-sized banks were found
to improve the profitability of acquirer banks. Domestic takeovers resulted in
the lack of performance improvements just after the acquisition while the
target banks showed inferior performance measures just before the takeover. The
problem while inferring conclusion from profitability ratios is that they
include both changes in market power and operational efficiency, which cannot
be altered without controlling efficiency. This
problem can be overcome by investigating the profit efficiency effect of acquisitions. Akhavein et al (1997) and Berger (1998) found that US
bank acquisitions taking place between 1980s and early 1990s enhanced profit
efficiency. This improvement was due to the
enhanced diversification of risks of acquisition banks.