Type: Research Essays
Sample donated: Christina Santos
Last updated: May 18, 2019
AcquisitionsTheliterature related to the effects of acquisitions in general is vast, and anumber of research studies can be found in variety of sources. The study by Andrade et al. gave the conclusion ofevent studies, which revealed that acquisitions make value for the stockholdersof the combined firms while the major benefits are realized by the stockholdersof the target firms. In contrast, Scherer andRoss (1990) assessed the methodology of event study critically and summarizethe data on the real longer term profit and productivity effects of acquisitionsin all industries generally.
Thereare various studies that conclude that acquisitions end up in extensivefailure, substantial weakness, and infrequent successes. Recently, the study of Gugler et al. on the profit and saleseffects of acquisitions concluded that majority of the acquisitions takingplace 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 consistingof manufacturing firms from the period of 1957 and 1995. They used a tendencyscore to manage for pre acquisitions features when observing the effects of acquisitions.Efficiency andAcquisitionsEfficiencyimpact of acquisitions has been a topic of significant discussion in empiricaland practical research. However, the evidenceconcerning the efficiency impact of acquisitions in literature is diverse.
Resultantly, the acquisitions in both financial andnon-financial sectors got thrust which resulted in a noteworthy interest ininvestigating and exploring the efficiency impact of financial sector acquisitionsfrom diverse angles. Rhodes (1993) suggests thatefficiency impact on acquisitions became the central focus in the literature inlate 1980s. Acquisitions Improve EfficiencyAlarge number of research studies reported enhancement in efficiency due to acquisitions. Berger and Humphrey (1992) explored the efficiencyeffect of acquisitions by taking a sample of 57 bank acquisitions. They adopted the performance measures of X-efficiencyrank and total efficiency rank. The study concluded that efficiency gains arecreated when a more efficient bank takes over the less efficient bank, otherwiseno improvement in the efficiency is realized after the acquisitions.
Cornettand Tehranian (1992) analyzed 30 large US bank acquisitions to find the gainsfrom this acquisitions activity. They found thegeneral benefits from acquisitions by calculating various ratios. Peristiani(1993) studied the acquisitions in which there is some local market overlapbefore acquisitions. He reported that acquirerbanks are more profitable than targets but little efficiency gains wererealized. Shaffer (1993) studied bankacquisitions using simulation and found that large X-efficiency gains wereachievable if the best practice banks acquire and reform the practices of theless efficient banks. Vennet (1996) investigated the impact of acquisitions onthe efficiency of European Union banking industry by using some major financialratios and stochastic frontier analysis for the period of 1988-93 and concludedthat acquisitions improve the efficiency of acquiring banks.
Acquisitions and Cost EfficiencyFreietal. (1996) concluded that the cost efficiency effects of acquisitions depend onthe type of acquisition and the motives behindthis 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 generatedlittle cost efficiencies. The findings of DeYoung (1997) point out that acquisition of banks of same size capture lesserthan average cost efficiencies. Huizinga et al(2001) conducted a study by taking a sample of 52 horizontal acquisitions ofEuropean banks taking place during the time span of 1994-1998 using StochasticFrontier Analysis and showed positive impact on cost efficiency but theadvancement in profit efficiency was only minor. Wen(2002) recognized important advancement in technical and allocative efficiencyand unimportant cost efficiency advancement after bank acquisitions in Taiwanusing DEA. Worthington (2001) calculated thedifference between pre-acquisition and post-acquisition efficiency of thenon-financial institutions. He used the discretechoice regression model and his results revealed that there was significantimprovement in efficiency of Australian credit unions after the acquisitionsduring the time period of 1993-95.
Halkos andSalamouris (2004) used a DEA model without using inputs to examine the effectof acquisitions on the efficiency levels of banks. Theyobserved that acquisitions that involved large banks increased the efficiencylevels of banks. Sufian & Fadzlan (2004) used the non-parametric frontierstrategy of Data Envelopment Analysis (DEA) to explore the technical and scaleefficiency of domestic integrated Malaysian commercial banks during the periodof 1998 to 2003. Their findings showed improvement in efficiency in the post acquisitionsperiod.
Gourlayet al (2006) observed efficiency gains from bank acquisitions in India by usingthe technique of Data envelopment Analysis. Cumminsand Xie (2006) found considerable positive abnormal returns for both the target and acquirerfirms by using the event study methodto observe the effects of acquisitions on publicly traded property-liability insurers. Though,most takeover targets in theproperty-liability insuranceindustry are not publicly traded, the DEA technique used in his paper added value by studyingboth traded and non-traded firms. Al-Sharkas et al.
(2008) used the techniques of Stochastic Frontier Analysis (SFA) and DataEnvelopment Analysis (DEA) to inspect the effect of acquisitions on cost andprofit efficiency of the US banking sector. Their results suggest theconfirmation of enhancement in both types of efficiencies after the acquisitions.Acquisitions and Profit EfficiencyTheintellectual literature has made little development in determining the basicsource of profitability gains related with bank acquisitions. Regardless of theadvantages of the profit efficiency over cost efficiency, there are few studiesin banking or any other industry about the efficiency effects of acquisitions.Many researchers have studied changes in profitability ratios due to acquisitionsbut these studies cannot determine the level of increase in profitability whichis due to an improvement in profit efficiency. Cybo-Ottoneand Murgia (2000) conducted a study taking a sample of 54 large deals takingplace in a period of 1988-1997 in Europe.
He concluded that performance of thebidder 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 averagewere significantly positive. There are a number of studies which contrast bankprofitability ratios before and after acquisitions with those peer banks thatdid not undergo acquisitions. Some studies found enhanced profitability ratiosrelated with acquisitions (Cornett and Tehranian, 1992) but others found nosignificant improvement (Piloff, 1996; Akhavein et al, 1997).
VanderVennet (1996) used cost and profit ratios to scrutinize the performance effectsof takeovers in a sample of 492 European banks over a period of 1988-1993. Domestic acquisitions of equal-sized banks were foundto improve the profitability of acquirer banks. Domestic takeovers resulted inthe lack of performance improvements just after the acquisition while thetarget banks showed inferior performance measures just before the takeover.
Theproblem while inferring conclusion from profitability ratios is that theyinclude both changes in market power and operational efficiency, which cannotbe altered without controlling efficiency. Thisproblem can be overcome by investigating the profit efficiency effect of acquisitions. Akhavein et al (1997) and Berger (1998) found that USbank acquisitions taking place between 1980s and early 1990s enhanced profitefficiency. This improvement was due to theenhanced diversification of risks of acquisition banks.