Within the year 1990 and 2001, significant changes in European banking industry conducive to local as well as cross-border mergers and acquisitions (M&A) happened. There are several literatures that cited and concluded a set of corporate motivational theories of the banking industry consolidation among industry players aside from compatible environment. Thus, both external and internal forces that drive M&A behavior between European banks are in place. In this study, however, our concern is the internal side of corporate motivation with emphasis on x-efficiency from M&A. Specifically, it will address the following two general questions:
· What are the roles of x-efficiency in M&A decisions and results?
· What are the impacts of x-efficiency in the European banking industry?
· What are the implications of M&A with other theory such as neo-classical, monopoly and anti-trust issues?
The main objective of the paper is to prove whether M&A are improving the banking efficiency or otherwise. Specifically it will address the following:
According to Leibenstein (1966), x-efficiency is the general efficiency of the firm in transforming inputs at minimum cost into maximum profits which is judged through managerial and technological criterion (pp. 392-415).
Peristiani (1997) focused on M&A activities of US banks occurred in 1980-1990. He found that firms who undergone M&A received small decline in x-efficiency while the control sample that did otherwise resulted to significant losses. In arriving in this specific conclusion, he used efficiency measures such as changes in x-efficiency (XEFF), ranking of x-efficiency (RANXEFF) and scale efficiency (SEFF). X-efficiency is crucial to firms because the study showed that x-efficient firms are more profitable on the average, have lower credit risk and operating costs, and likely to obtain positive bank rating on managerial efficiency. To achieve beneficial merger in general and attainment of x-efficiency in particular, participants should be small and the existence of wide performance gap between the acquirer and target (p. 326+).
This study proposed that our research can not only provide insight on the role of M&A to x-efficiency performance of sample firms but also other important conditions that are required to ensure that the M&A effects will hold. Due to this, there is a need to adopt certain bank classification among a pool of European samples. There is also a need to specify the time frame in which performance measures would be magnified. In the study, x-efficiency is also compared to financial rations like asset size, return on assets and non-interest expenses to evaluate changes in bank performance (p. 326+). Thus, bank's data are vital to the completion of our study not only those underwent on M&A agreements but also those who did not for the purposes of having control sample. Analysis of data can be filtered using formulas and computer applications like SPSS and Microsoft Excel.
In view of Peristiani research, our findings in the current study would tend to be original in the sense that the samples will belong to European banking industry. Aside from the difference of cultural and political factors, the study can serve as a follow-up to the decade in which Peristiani findings are enclosed. Our study will focus on performance of samples that underwent M&A agreements that emerged during 1990 to 2001. Since e-commerce achieve its potential during this stage, the time frame in which the study is attached can be useful in defining bank performance during technological improvements underway. The findings of Peristiani study may not hold during this decade especially when technology has the capability to give substantial efficiency to transacting firms.
In the study of Clark & Siems (2002), he suggested that off-balance-activities (OBS) play important role in making consistent x-efficiency estimate for corporate performance as well as inter-bank comparative operations. The presence of OBS data in the analysis led to higher cost and profit x-efficiency due to larger volume of sample banks with loan commitments, lines of credit and credit guarantees. With more derivative activities, banks are less robust and tend to have lower cost and profit x-efficiency. More importantly, OBS are found not to be systematically related to cost and profit x-efficiency estimates (pp. 987). This can be a limitation in our study because our intention is to draw data from the balance sheet of the sample to arrive at analysis and conclusions for convenience. In effect, OBS activities can be overlooked.
The study about bank consolidation and bank efficiency in
The data of this study came from Fitch Bank Scope database which have convenience and function advantages. In addition, the data of banks are pulled from the unconsolidated format as well as adjustment to Euro and inflation is done to ensure comparability of data. These processes can aid our current research towards reliability and consistency. Input prices and output data are applied with intermediation approach. For example, three inputs like labor, funds and physical capital are used to produce there outputs like loans, earning assets and deposits. The input data reflected the key areas in banking process such as bank personnel and management expertise (labor), fund collection (funds), and offices/ branches/ computer hardware (physical capital). Lastly, random errors between large and small banks are normalized using equity control to arrive at standardized and accurate findings.
With regards to this study, the current research calls for banks within European countries not segmented by their home country rather the existence of M&A activities through 1990-2001. The former studied 1996-2003 banks' data while the latter will focus on the prior years in which it is acknowledged that there were significant changes in European banking industry conducive to local as well as cross-border mergers and acquisitions (M&A). This is accorded to single market program and EU formation stated in early 1990s. As observed the current study will not only differ in time frame but also the organization of data and results. And more importantly, the current research will intend to be more articulate in claiming obvious and supported implications of the results not merely defining them.
Further, the methodology of Fu & Hefferman (2005) can bring about understanding about analyzing bank data. Our concern is not
In a different finding, Adongo, Stork & Hasheela (2005) stated that the most inefficient bank in their Namibia study is the First National Bank of Namibia in which attributed to its M&A activity. They also accepted that Nedbank Namibia would have been imposed by the same adverse effects in efficiency when it did not manage and regulate its newly merged subsidiary which is a micro-lending firm. Another important feature of their study is the use of profit x-efficiency to conclude that the mean level of
The profit x-efficiency function takes the form, P = P (w, y, z, v) + i where P = variable profits, w = variable input prices, variable output quantities, z = fixed netputs vector, v = environmental factors and i = x-inefficiency and random term. In the current study, we will incorporate both cost and profit x-efficiencies although in separate presentations. This will be beneficial to maximize our analysis on x-efficiencies of the European banking industry. There could be discrepancies between the capacity of the industry to be cost or profit x-efficient. In addition, we can also have separate analysis with the European banking industry as well as individual (extreme cases) banks.
In as study by Altunbas & Ibanez (2004), they found that there are improvements in performance in European Union after the merger especially in cross-border M&A. They also concluded that there is significant difference in the success rate of local and cross border M&A among European banks. For domestic mergers, the merged firm will be infused by a negative effect on performance when there are dissimilarities in earnings, loan and deposit strategies for the two firms. On the other hand, variability in capitalization and investment on technology and financial innovation between firms can enhance performance. For cross-border M&A, the situation is different. The diversity of loan and credit risk strategies improved performance while the same scenario applied in capitalization, technology and financial innovation reduced performance of the merged firm.
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