Do Mergers and Acquisitions Improve Efficiency of the Banks? - DEA approach in the case of European banks

Abstract

After the introduction of the Euro, a steady banking system in the European Union was abstractedly ensured through consolidation and over the 1990s, the volume and the number of bank mergers and acquisitions (M&As) increased rapidly. Measuring the efficiency gains from M&As in the banking industry is in the spotlight of managers and shareholders. This study covers domestic bank M&As examining relative pre- and post-merger technical efficiencies of 134 individual bidder banks in 11 EU countries, in the 1994 to 2001 period. The non-parametric Data Envelopment Analysis (DEA) approach is applied to detect potential efficiency gains resulting from bank mergers. The study employs the intermediation model of the production process of the banking firm. We find that consolidation in the banking sector is beneficial and mergers appear to have improved efficiency. The analysis also indicates that savings banks have benefited the most from M&As and that the German banks have experienced smaller efficiency increases compared to the banks of the other countries of study.