Deal-to-deal marginal efficiency dynamics of serial US banking acquirers

This study investigates the changes in the marginal cost, revenue, and profit efficiencies after a series of deals by US acquiring banks for the period from 1992 to 2007 using the nonparametric data envelopment analysis (DEA) method and the market reaction model. All the efficiency measures show increases in the first two deals but show significant decreases in the next two to three deals and substantial efficiency increases for the last two acquisitions. The efficiency losers are those that engage in just four mergers. Banks that undertake six to seven acquisitions recover their earlier efficiency losses to achieve a net 12.5% cumulative profit efficiency. The results of the market reaction model show that acquirers lose the most by the time they announce their third and fourth deals, 25.8% and 23.9% respectively, while targets gain the most when they acquire their fourth deal, 34.5%. The efficiency dynamics results show consistency with both the managerial hubris theory, where efficiency gains occur in early deals (first and second), and the learning theory where efficiency measures form a U-shape curve. These results show that the theories are complementary rather than contradictory. Moreover, frequent acquirers tend to be highly profitable, but most importantly they are externally attracted to finding targets with specific characteristics like a relatively small size, high percentage of operating assets, and a high cost efficiency.