ASSESSING THE EFFECT OF MERGERS AND ACQUISITIONS ON REVENUE EFFICIENCY: EMPIRICAL EVIDENCE FROM THE MALAYSIAN BANKING SECTOR

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1 IJER, Vol. 10, No. 2, July-December, 2013, pp ASSESSING THE EFFECT OF MERGERS AND ACQUISITIONS ON REVENUE EFFICIENCY: EMPIRICAL EVIDENCE FROM THE MALAYSIAN BANKING SECTOR FADZLAN SUFIAN Professor at the IIUM Istitute of Islamic Bakig ad Fiace, Iteratioal Islamic Uiversity Malaysia ( JUNAINA MUHAMMAD, BANY ARIFFIN AMIN NOORDIN & FAKARUDIN KAMARUDIN Faculty of Ecoomics ad Maagemet, Uiversiti Putra Malaysia Departmet of Ecoomics, Faculty of Ecoomics ad Maagemet, Uiversiti Putra Malaysia, 43400, SERDANG, Selagor Darul Ehsa, Malaysia. ABSTRACT The paper attempts to examie the effect of mergers ad acquisitios (M&As) o Malaysia baks reveue efficiecy. The data gathered i this study are divided ito two evet widows; the pre-merger ( ) ad post-merger ( ) periods. The sample comprised of 34 commercial baks, icludig the cotrol group of baks, was selected for this study. We employ the Data Evelopmet Aalysis (DEA) method to measure the Malaysia bakig sector s reveue efficiecy durig both the pre ad post-merger periods. The results idicate that the Malaysia bakig sector s reveue efficiecy has ot improved durig the post-merger period compared to the pre-merger period. JEL CLASSIFICATIONS: G21; D24. KEYWORDS: Bak; Mergers ad acquisitios; Data Evelopmet Aalysis, Reveue efficiecy. 1. INTRODUCTION The globalisatio era has altered the structure of the Malaysia commercial bakig sector through greater deregulatio ad liberalisatio.the Malaysia cetral bak, Bak Negara Malaysia (BNM), has ecouraged fiacial istitutios to joi a forced merger scheme so that they ca become more efficiet ad competitive. The forced mega-mergers were eforced by BNM due to three mai factors; competitio from foreig baks, a large umber of domestic commercial baks ad fiacial crisis i Asia. Sice Malaysia opeed up its fiacial sector, foreig baks have become a threat to its domestic couterparts. Upo realisig this BNM has promoted merger ad

2 298 Fadzla Sufia, Juaia Muhammad, Bay A.A. Noordi & Fakarudi Kamarudi acquisitios amog domestic baks i order to ecourage them to icrease their capability. The act was see as a move for local baks to cope with competitio from foreig baks (Chog et al., 2006). Other tha the competitio from foreig baks, the implemetatio of forced mega-merger of domestic commercial baks i Malaysia was also iflueced by two other factors; over-baked umbers ad fiacial crisis (Chog et al., 2006 ad Ahmad et al., 2007). With 58 domestic fiacial istitutios, Chog et al. (2006) asserted that the Malaysia s bakig system was cosidered by the govermet as beig over-baked ad fragmeted. The forced merger scheme was see as a mea to create a larger ad stroger domestic bakig sector with the hope that they would be able to withstad competitio with foreig baks. I 1997, Malaysia ad other Asia coutries were hit with fiacial crisis which had resulted i a ecoomic dowtur. The ecoomic dowfall had ievitably played a major role i cotributig the forced mega-mergers i the Malaysia bakig sector. It ca be see that the merger of the fiacial istitutios had made them more efficiet i facig challeges i deregulatio ad liberalisatio. By 14 th February 2000, 10 achor baks were established as a result of the M&A programme. The mai motive of these M&As is to maximise the shareholders value or wealth by maximisig profit (Chog et al., 2006). The mai problem that cotributes to the lower profit efficiecy comes from reveue iefficiecy. A bak may experiece reveue iefficiecy whe it produces too few outputs for the give set of iputs. It ca also be if it respods poorly to relative prices ad produces too little of a high-priced output ad too much of a low-priced output. Fidigs o previous studies o developed ad developig coutries which practiced volutary ad forced M&As show that the level of the profit is lower tha the level of cost efficiecy due to reveue iefficiecy. The result is supported by Ariff & Ca (2008) ad Housto et al. (2001). Thus, istead of focusig o the effect of bak M&As o profit efficiecy aloe, it would be more useful to compare it with cost efficiecy i order to idetify the existece of reveue efficiecy. This study will add to the curret kowledge o the effects of M&A o reveue efficiecy i the Malaysia bakig sector. Sice umerous studies have mostly examied the effects of M&As o cost ad profit efficiecy to bakig sector uder the volutary scheme, this study attempts to fill the gap o reveue efficiecy i the Malaysia bakig sector uder the forced merger scheme. It examies the baks reveue efficiecy both before ad after the merger periods. The results will clarify which period is more reveue efficiet. 2. THEORETICAL FRAMEWORK AND REVIEW OF RELATED LITERATURE 2.1. Theories o Mergers ad Acquisitios The theory of the syergy or efficiecy i M&As ecourage the maximisig of shareholders wealth for both the target ad acquirer firms to produce positive total

3 Assessig the Effect of Mergers ad Acquisitios o Reveue Efficiecy: 299 gais (Berkovich ad Naraya, 1993). Efficiecy theories focus o fully utilisig the scarce resources i order to produce quality productio or services without ay wastage from the view of ecoomics perspective. The existece of the efficiecy could improve the performace of the firm due to the improvemet i the reductio cost, profitability ad overall operatio (Copelad ad Westo, 1988). I this regards, the operatio of the firm should be efficiet i order to esure a maximum profit with a miimum costs of the firm s productios. This operatioal efficiecy would keep firms to always make the right decisio i productio to gai a high profit. For example, the firm will ot make ay trasactio if the cost of the trasactio is higher tha the projected beefit. Iefficiecy could deteriorate the performace of the firm due to imprudet maagemet by maagers whe settig their goals. Therefore, maagers play importat roles to esure all operatios are well maaged for the beefits of the firms Bak Mergers ad Acquisitios ad Reveue Efficiecy Reveue is defied as how effectively a bak sells its outputs. Maximum reveue is obtaied as a result of producig the output budle efficietly (Rogers, 1998 ad Adogo et al., 2005). I fact, reveue efficiecy is composed of techical ad allocative efficiecy which are related to maagerial factors ad is regularly associated with regulatory factors (Isik ad Hassa, 2002). Hece, i order to ascertai the reveue efficiecy, baks should focus o both techical efficiecy (maagerial operatig o the productio possibilities) ad allocative efficiecy (bak producig the reveue maximizig mix of outputs based o the certai regulatio) (Eglish et al., 1993). However, baks face a dilemma i determiig the reveue efficiecy because i order to icrease the reveue, baks should produce quality outputs or services that require a higher or expesive cost (De Youg ad Nolle, 1996). A icrease i the cost would cotribute to beig iefficiet. However, cost iefficiecy may possibly be compesated by higher or extra reveue obtaied due to the quality services produced (Berger ad Mester, 1997). Aother way to improve the reveue efficiecy proposed by several studies is for baks to produce higher quality services ad charge higher prices ad struggle to avoid ay improper choice of iputs ad outputs quatities ad mispricig of outputs (Adogo et al., 2005, Maudos et al., 2003 ad Rogers, 1998). The reveue iefficiecy could be well idetified via the profit fuctio because this fuctio combies both the cost ad reveue efficiecy to evaluate the profit efficiecy (Lozao, 1997 ad Akhevei et al., 1997). The reveue efficiecy would totally affect the efficiecy of profit eve though the cost efficiecy is high. I essece, the reveue efficiecy would be the major factor that iflueces the efficiecy of the profit efficiecy. Accordig to Berger & Humphrey (1997), Akhavei et al. (1997), ad Bader et al. (2008), there have bee limited studies doe o reveue efficiecy of baks. If the

4 300 Fadzla Sufia, Juaia Muhammad, Bay A.A. Noordi & Fakarudi Kamarudi studies were arrowed dow ito the reveue efficiecy of the bak M&As, there are more likely to be paucity studies that looked ito the evet of M&As. Previous studies mostly measured the reveue efficiecy of baks without this evet. Oly a few studies o the reveue efficiecy of baks M&As geerate a coclusive result but are less defiitive o the impact of the reveue efficiecy to the M&As. To evaluate the effects of M&As i bakig sector i terms of reveue efficiecy, the researcher could also base the fidigs o the profit efficiecy sice there is a positive correlatio betwee profit ad reveue efficiecy (Roger, 1998). It ca be iferred that the reveue efficiecy is more sigificat i those mergers that also experieced reduced cost (Corett et al. 2006). The reveue efficiecy opportuities appear to be most profitable i those mergers that offer the greatest opportuity for cost cuttig activities such as activity focusig ad geographically focusig mergers. Moreover, reveue efficiecy does ot oly deped o maagers decisio but also o the customers behaviour. Thus, reveue efficiecy may be ehaced by raisig prices as market power is expaded, or it might be ehaced whe the merged istitutio restructures its assets mix (Ayadi ad Pujals, 2005). Bak mergers also allow a higher abormal retur besides ehacig the reveue efficiecy (Pilloff, 1996). As see from previous studies, M&As lead to the improvemet o bak s profit efficiecy via improvig the reveue efficiecy durig the post-merger period. However, all the baks that are studied are uder the volutary M&As scheme where most of the studies were coducted i developed coutries. There have bee limited studies that focussed o forced bak M&As. Therefore, the gap is filled i areas where previous studies had ot idetified if the reveue efficiecy could also be improved uder the forced M&As i order to icrease the level of the profit efficiecy. Previous fidigs o volutary M&As i reveue efficiecy will serve as a guide i the uderstadig ad classificatio of forced M&As i the Malaysia bakig sectors o reveue efficiecy improvemet. 3. DATA AND METHODOLOGY This study gathers data from all Malaysia commercial baks from 1995 to The primary source for fiacial data is obtaied from the BakScope database produced by the Bureau va Dijk which provides the baks balace sheets ad icome statemets. Bakscope database cotais specific data o 25,800 baks world-wide, icludig commercial baks i Malaysia. Furthermore, BakScope database presets the origial currecies data of the specific coutries ad provides the optio to covert the data to ay other currecies. The data are updated mothly. Riggit Malaysia (the Malaysia currecy) is used i this study sice the study ivolves commercial baks i Malaysia. The iformatio o the merger programme for the commercial baks i Malaysia was provided by Bak Negara Aual Report. Data are aalysed from those baks which are registered uder the M&As i the Malaysia bakig sector durig the year of mega-merger 2000 (Sufia, 2009 ad

5 Assessig the Effect of Mergers ad Acquisitios o Reveue Efficiecy: 301 Sufia ad Habibullah, 2009). This aalysis look at data two years precedig the year of the merger ad eight years after the merger (-2,8). This evet widow was ispired by Rhoades (1998) who suggested that the three-year time period is optimal because about half of ay efficiecy gais should be realised withi three years (-3,3). This fact is almost uaimously agreed amog the experts iterviewed. I fact, the overall period is covered by Sufia (2009) where he ivestigates the impact of M&As o bak profit efficiecy i Malaysia commercial baks. The etire period starts from 1995 to 2009, but oly 10 years is covered i this study (1995 to 1996 ad 2002 to 2009) because the years of fiacial crisis (1997 to 1999) durig merger period (2000) ad coolig period (2001) are excluded to avoid ay possible biases. The periods are divided ito two evet widows: 1995 to 1996, referred to as pre-merger period, ad 2002 to 2009, cosidered as post-merger period. The actual domestic commercial baks that were affected with the mega-merger i year 2000 were oly 14 baks (7 acquirers ad 7 targets) ad were idicated as seve cases of mega M&As. To be icluded i the sample, both the acquirig ad the target baks must ot have bee ivolved i ay other merger prior to the year of merger period of the year To show a wide represetatio of the Malaysia bakig sector, data were collected from 34 commercial baks i total, icludig several baks that served as the cotrol groups. This is listed o Table 1 (14 domestic commercial baks were ivolved with M&As ad 20 domestic ad foreig commercial baks were ot ivolved with M&As i Malaysia). I order to maitai the homogeeity, oly commercial baks (baks that make commercial loas ad accept deposits from the public) are icluded i the aalysis (Sufia, 2007). Fiace compaies, Ivestmet Baks ad Islamic baks are excluded from the sample Methods of Measuremet The itermediatio approach is also kow as a asset approach whereby the fiacial firms are assumed to act as a itermediary betwee the savers ad borrowers. Baks are see as purchasig labour, materials ad deposits fuds that produce outputs of loas ad ivestmets. The iputs iclude iterest expese, oiterest expese, deposits, other purchased capital, umber of staff (full time equivalet), physical capital (fixed assets ad equipmet), demographics ad competitio. The potetial outputs are measured as the dollar value of the bak s earig assets where the costs iclude both the iterest ad operatig expeses (Berger et al., 1987). Uder this approach, the bak s outputs are foud o the asset side of the balace sheet ad deposits are see as iputs. Avkira (1999) suggested that potetial outputs iclude et iterest icome, o-iterest icome, cosumer loas, housig loas, commercial loas ad ivestmets. Previous bakig efficiecy studies that had adopted this approach are, amog others, Chares et al. (1990), Bhattacharya et al. (1997), Sathye (2001), ad Sufia (2009). They also applied differet accoutig stadards. Thus, the results of the efficiecy scores will be affected ad may vary depedig o the selectio of variables for each of the baks efficiecy. The

6 302 Fadzla Sufia, Juaia Muhammad, Bay A.A. Noordi & Fakarudi Kamarudi DEA method requires bak iputs ad outputs selectio to be a arbitrary issue (Ariff ad Ca, 2008 ad Berger ad Humphrey, 1997). Data Evelopmet Aalysis (DEA) frotier aalysis method, also kow is a liear mathematical programmig approach. It costructs the frotier of the observed iput-output ratios by liear programmig techiques. The liear substitutio is possible betwee observed iput combiatios o a isoquat (the same quatity of output is produced while chagig the quatities of two or more iputs) that was assumed by DEA. Chares et al. (1978) were the first to itroduce the term DEA to measure the efficiecy of each decisio makig uits (DMUs), obtaied as a maximum of a ratio of weighted outputs to weighted iputs. The more the output Acquirer Table 1 List of Malaysia Domestic Commercial Baks durig the Year 2000 Baks Ivolved with M&As Target No Bak No Bak 1 Affi Bak Bhd 2 BSN Commercial Bak Bhd 3 Alliace Bak Bhd 4 Sabah Bak Bhd 5 EON Bak Bhd 6 Orietal Bak Bhd 7 Hog Leog Bak Bhd 8 Wah Tat Bak Bhd 9 Maybak Bhd 10 Pacific Bak Bhd 11 Public Bak Bhd 12 Hock Hua Bak Bhd 13 Souther Bak Bhd 14 Ba Hi Lee Bak Bhd No Bak 15 ABN AMRO Bak Bhd 16 Arab-Malaysia Bak Bhd 17 Bagkok Bak Bhd 18 Bak of America Malaysia Bhd 19 Bak of Chia Bhd 20 Bak of Nova Scotia Bhd 21 Bak of Tokyo Mitsubishi Bhd 22 Bak Utama Bhd 23 Bumiputra Commerce Bak Bhd 24 Chase Mahatta Bak Bhd 25 Citibak Bhd 26 Deutsche Bak Bhd 27 HSBC Bak Malaysia Bhd 28 Iteratioal Bak Malaysia Bhd 29 OCBC Bak Bhd 30 Overseas Uio Bak Bhd 31 Phileo Allied Bak Bhd 32 RHB Bak Bhd 33 Stadard Chartered Bak Bhd 34 Uited Overseas Bak Bhd Sources: Baks Not Ivolved with M&As (1) Bak Negara Malaysia (2) Sufia (2009); Sufia ad Habibullah (2009), ad Sufia (2007).

7 Assessig the Effect of Mergers ad Acquisitios o Reveue Efficiecy: 303 produced from give iputs, the more efficiet is the productio. Sherma ad Gold (1985) were the first to apply DEA method to bakig sectors. Accordig to Bader et al. (2008), the DEA techique is extesively used i may recet bakig efficiecy studies (Drake et al., 2006 ad Sufia ad Habibullah, 2009). Nevertheless, it was Farrell (1957) who origially developed this o-parametric efficiecy approach. This study employs estimates efficiecy uder the assumptio of variable returs to scale (VRS). The VRS model was proposed by Baker, Chares ad Cooper (1984). The BCC model (VRS) exteded the CCR model that was proposed by Chares, Cooper ad Rhodes (1978). The CCR model presupposes that there is o sigificat relatioship betwee the scale of operatios ad efficiecy by assumig costat retur to scale (CRS) ad it delivers the overall techical efficiecy (OTE). The CRS assumptio is oly justifiable whe all decisio makig uits (DMUs) are operatig at a optimal scale. However, firms or DMUs i practice might face either ecoomies or disecoomies of scale. Thus, if oe makes the CRS assumptio whe ot all DMUs are operatig at the optimal scale, the computed measures of OE will be cotamiated with scale iefficiecy (SIE). Baker, Chares, ad Cooper (1984) exteded the CCR model by relaxig the CRS assumptio. The resultig BCC model was used to assess the efficiecy of DMUs characterised by VRS. The VRS assumptio provides the measuremet of pure techical efficiecy (PTE), measurig the efficiecy of the DMU s maagerial. The PTE measures the efficiecy of the DMU s pure maagerial without beig cotamiated by scale. Therefore, VRS results may provide more reliable iformatio o the DMU s efficiecy rather tha the CRS (Coelli, 1996 ad Sufia, 2004). The reveue, cost ad profit efficiecy models are give i Equatios (1) (3) below. As ca be see, the reveue, cost ad profit efficiecy scores are bouded withi the 0 ad 1 rage. Frotier Type Reveue Efficiecy (Eq. 1) Cost Efficiecy(Eq. 2) Profit Efficiecy(Eq. 3) s max o q y r ro r 1 subject to x x i 1, 2,...,m; j ij io VRS j 1 y y r 1, 2,...,s; j rj ro i 1,y 0 j ro 1 j j 1 Source: Zhu (2009) mi j 1 j 1 j j 1 m o i i 1 subject to x x i 1, 2,...,m; j ij io y y r 1, 2,...,s; 1 i o j rj ro io j p x, x 0 j 1 j 1 j 1 s m o o r ro i io r 1 i 1 max q y p x subject to x x i 1,2,..., m y y r 1,2,..., s x x, y y 0 j ij i o j rj ro io io ro ro j j 1

8 304 Fadzla Sufia, Juaia Muhammad, Bay A.A. Noordi & Fakarudi Kamarudi where s m r i q o r p o r y ~ r o x ~ io y ro x io j j y rj x ij is output observatio is iput observatio is s th output is m th iput is uit price of the output r of DMU0 (DMU0 represets oe of the DMUs) is uit price of the iput i of DMU0 is r th output that maximise reveue for DMU0 is i th iput that miimise cost for DMU0 is r th output for DMU0 is i th iput for DMU0 is DMU observatio is th DMU is o-egative scalars is s th output for th DMU is m th iput for DMU By calculatig these three efficiecies cocepts (reveue, cost ad profit), we could observe the effects of the bak M&As o these efficiecy levels ad more robust results could be obtaied. Nevertheless, the reveue efficiecy cocept will be give more focus i this study rather tha the other efficiecies cocepts (cost ad profit) as its focus is o the effect of the bak M&As o the reveue efficiecy Variables Used Accordig to Cooper et al. (2002), there is a rule required to be complied with i order to select the umber of iputs ad outputs. A rough rule of thumb which could provide guidace is as follows: where m s is a umber of DMUs is a umber of iputs is a umber of outputs max {m x s, 3(m+s)} Because this study uses the itermediatio approach, three iputs ad outputs variables were chose. The overall selectio of the variable of baks iput ad output was based o Ariff ad Ca (2008) ad other major studies o the efficiecy of the

9 Assessig the Effect of Mergers ad Acquisitios o Reveue Efficiecy: 305 baks ivolved with the evet of the M&As (Sufia ad Habibulah, 2009; Altubas, 2001; Bader et al., 2008; Isik ad Hassa, 2002; ad Hassa, 2005). The three iput vector variables cosist of x1: Deposits, x2: labour ad x3: physical capital. The iput prices cosist of w1: price of loaable fuds, w2: price of labour ad w3: price of physical capital. The three output vector variables are y1: loas, y2: ivestmet; ad y3: off-balace sheet items. Meawhile, three output prices cosist of r1: Price of loas, r2: price of ivestmet ad r3: price of off-balace sheet items. The summary of data used to costruct the efficiecy frotiers are preseted i Table 2. Table 2 Descriptive Statistics for Iputs, Iputs Prices, Outputs, ad Outputs Prices Variables Miimum Maximum Mea Std. Deviatio (RM mil.) (RM mil.) (RM mil.) (RM mil.) x , , , x , , x , w w w y , , , y , , , y , , , r r r Notes: x1: Deposits (total deposits, moey market ad short term fudig), x2: Labour (persoel expeses), x3: Physical capital (iterest icome o loas ad other iterest icome/ loas), w1: Price of deposits (total iterest expeses/deposits), w2: Price of labour (persoel expeses/ total assets), w3: Price of physical capital (other operatig expeses/ fixed assets), y1: Loas (et loas ad iterbak ledig), y2: Ivestmet (short-term, log term ad etrusted ivestmet or securities), y3: Off-balace sheet items (value of the off-balace sheet activities), r1: Price of loas (iterest icome o loas ad others iterest icome/loas), r2: Price of ivestmet (other operatig icome/ivestmet) ad r3: Price of off-balace sheet items (et fees ad commissios/off-balace sheet items). 4. EMPIRICAL RESULTS Before proceedig with the discussio of DEA results, this study first tested the rule of thumb o the selectio of iputs ad outputs variables suggested by Cooper et al. (2002). Sice the total umber of DMUs (34 baks) i this study is more tha the umbers of iputs ad outputs variables (3 x 3 [3+3]), the selectio of variables are valid sice it complies with the rule of thumb ad allows the efficiecies of DMUs to be measured.

10 306 Fadzla Sufia, Juaia Muhammad, Bay A.A. Noordi & Fakarudi Kamarudi Next, by calculatig all three efficiecies cocepts (reveue, cost ad profit), we could observe the effect of the bak M&As to these efficiecies levels ad further obtai more robust results. As stated, this study focuses o the effect of the bak M&As o the reveue efficiecy, it will explai more o the reveue efficiecy cocept tha the other efficiecies cocepts (such as cost ad profit efficiecies). Table 3 illustrates the reveue efficiecy estimates together with other efficiecy cocepts which are cost ad profit efficiecy durig per-merger ad post-merger period The Malaysia Bakig Sector Durig the Pre-Merger Period Table 3 shows the mea for cost efficiecy, reveue efficiecy ad profit efficiecy of 83%, 79.7% ad 69.5% durig pre-merger period ( ) i the Malaysia bakig sector. Aother way of iterpretig this result is to suggest that these baks have slacked (iefficiet) by ot fully producig the outputs efficietly usig the same iput (reveue iefficiecy) ad by ot fully usig the iputs efficietly to produce the same outputs (cost iefficiecy). Baks are said to have slacked if they fail to fully miimise the cost ad maximise the reveue (profit iefficiecy). The levels of cost iefficiecy, reveue iefficiecy ad profit iefficiecy are show as 17%, 20.3% ad 30.5%. For the cost efficiecy, the result meas that the average bak utilised oly 83% of the resources or iputs to produce the same level of output durig the pre-merger period. I other words, o the average, Malaysia bakig sector has wasted 17% of its iputs, or it could have saved 17% of its iputs to produce the same level of outputs. If the Malaysia bakig sector had fully utilised its iputs, it could have saved o costs durig the pre-merger period. Nevertheless, it was oted that o the average, Malaysia bakig sector was more efficiet durig the pre-merger period i utilisig its iputs compared to its ability to geerate reveues ad profits. For reveue efficiecy, the average bak could oly geerate 79.7% of the reveues, less tha what it was iitially expected to geerate. Hece, reveue is lost by 20.3%, meaig that the average bak loses a opportuity to receive 20.3% more reveue give the same amout of resources, or it could have produced 20.3% of its outputs give the same level of iputs. Obviously, the iefficiecy is o the reveue side, followed by the profits. Similarly, the average bak could ear 69.5% of what was available, ad lost the opportuity to make 30.5% more profits from the same level of iputs. Eve though the cost efficiecy is reportedly highest durig the pre-merger period, the reveue efficiecy is foud to be lower, ad this led to higher reveue iefficiecy. Whe both efficiecies cocepts (reveue ad cost efficiecy) are compared, the higher reveue iefficiecy had cotributed to the higher profit iefficiecy Malaysia Bakig Sector durig the Post-Merger Period Durig the post-merger period ( ) the Malaysia bakig sector had exhibited mea cost efficiecy, reveue efficiecy ad profit efficiecy of 91.4%,

11 Assessig the Effect of Mergers ad Acquisitios o Reveue Efficiecy: % ad 88.8% respectively. The levels of cost iefficiecy, reveue iefficiecy ad profit iefficiecy were 8.6%, 19.3% ad 11.2% respectively (please refer to Table 3). Table 3 Cost, Reveue, ad Profit Efficiecies durig Pre ad Post Merger Periods Pre-merger ( ) Post-merger ( ) Bak CE RE PE CE RE PE ABN AMBRO Bak Affi Bak Alliace Bak Malaysia AmBak (M) Bhd Ba Hi Lee Bak Bagkok Bak Bak of America Malaysia Bak of Chia Bak of Nova Scotia Bak of Tokyo-Mitsubishi Bak Utama BSN Commercial Bak Bumiputra Commerce Bak Chase Mahatta Bak Citibak Deutsche Bak EON Bak Hock Hua Bak Hog Leog Bak HSBC Bak Malaysia Iteratioal Bak Malaysia Maybak OCBC Bak Orietal Bak Overseas Uio Bak Pacific Bak Phileo Allied Bak Public Bak RHB Bak Sabah Bak Souther Bak Stadard Chartered Bak Uited Overseas Bak Wah Tat Bak ALL BANKS Notes: CE: Cost efficiecy, RE: Reveue efficiecy, PE: Profit efficiecy

12 308 Fadzla Sufia, Juaia Muhammad, Bay A.A. Noordi & Fakarudi Kamarudi As for the cost efficiecy, the result meas that the average bak had utilised oly 91.4% of the resources or iputs i order to produce the same level of output durig the post-merger period. I other words, o the average, the Malaysia bakig sector had wasted 8.6% of its iputs, or it could have saved 8.6% of its iputs to produce the same level of outputs. Therefore, there was substatial room for sigificat cost savigs for these baks if had they employed their iputs efficietly. However, similar fidigs are oted i which o the average, the Malaysia bakig sector is also foud to be more efficiet durig the post-merger. It maaged to utilise its iputs to geerate reveues ad profits. For reveue efficiecy, the average bak could oly geerate 80.7% of the reveues tha it was expected to geerate. Hece, there is a slack of 19.3%, meaig that the average bak lost a opportuity to receive 19.3% more reveue, givig the same amout of resources or it had to produce 19.3% of its outputs with the same level of iputs. Noticeably, the highest level of iefficiecy is o the reveue side, followed by the profits. Similarly, the average bak could ear 88.8% of what was available, ad lost the opportuity to make 11.2% more profits whe utilisig the same level of iputs. As a coclusio, all the efficiecies cocepts i Malaysia bakig sector improved after the M&As. Cost efficiecy improved from 83% durig pre-merger to 91.4% durig post-merger period, reveue efficiecy improved from 79.7% to 80.7% ad profit efficiecy rose from 69.5% to 88.8%. Other tha that, result shows that the level of cost efficiecy is higher tha that of profit efficiecy due to the lower reveue efficiecy level or higher iefficiecy from the reveue side. Therefore, the improvemet of the reveue efficiecy o Malaysia bakig sector should be give more cocetratio sice it could cotribute to the lower profit efficiecy of the bak. The improvemet of reveue efficiecy durig pre-merger ad post-merger periods was performed by a series of parametric (t-test) ad oparametric (Ma-Whitey [Wilcoxo]) ad Kruskal-Wallis tests. Coakes ad Steed (2003) suggested that the Ma-Whitey (Wilcoxo) is a relevat test for two idepedet samples comig from populatios havig the same distributio. The most relevat reaso is that the data violate the striget assumptios of the idepedet group s t-test, so it was decided that Ma-Whitey tests should be used. This study used parametric ad o-parametric tests i order to obtai robust results Robustess Tests Table 4 shows the robust result from the parametric ad o-parametric tests of the data. The results of cost ad profit efficiecy from the parametric t-test show that the Malaysia bakig sector exhibits a higher efficiecy mea durig post-merger period (0.914>0.830 ad 0.888>0.695) ad is sigificatly differet. The results from the parametric t-test were further cofirmed by o-parametric Ma-Whitey (Wilcoxo) ad Kruskall-Wallis tests. Therefore, this idicates that the cost ad profit

13 Assessig the Effect of Mergers ad Acquisitios o Reveue Efficiecy: 309 efficiecy o Malaysia bakig sector improved durig post-merger period. Coakes ad Steed (2003) suggest that the Ma-Whitey (Wilcoxo) is a relevat test for two idepedet samples comig from populatios havig the same distributio. The most relevat reaso is that the data violate the striget assumptios of the idepedet groups t-test, so it was decided that Ma-Whitey tests should be used. Table 4 Summary of Parametric ad No-Parametric Tests o Pre ad Post-Merger Periods Parametric test Test groups No-parametric test Idividual tests t-test Ma-Whitey Kruskall-Wallis [Wilcoxo Rak-Sum] test Equality of Populatios test Hypothesis Media Pre-merger = Media Post-merger Test statistics t(prb>t) z(prb>z) X² (Prb > X²) Cost Efficiecy Mea t Mea Rak z Mea Rak X² Pre-merger *** *** *** Post-merger Reveue Efficiecy Pre-merger * * Post-merger Profit Efficiecy Pre-merger *** *** *** Post-merger ***, **, * idicates sigificace levels at 0.01, 0.05, ad 0.10 respectively. However, a iterestig result is obtaied regardig the reveue efficiecy durig pre-merger ad post-merger period i Malaysia bakig sector. Result from parametric t-test exhibited reveue efficiecy as higher durig post-merger period compared to pre-merger periods (0.807>0.797), but statistically, it was ot sigificatly differet. This idicated that the reveue efficiecy o Malaysia bakig sector did ot improve durig post-merger period. Nevertheless, both the o-parametric Ma-Whitey (Wilcoxo) ad Kruskall- Wallis tests suggest that the result is statistically sigificat but oly at 10% level. Eve though this idicates the Malaysia bakig sector exhibited higher reveue efficiecy durig post-merger period but it is statistically sigificat at oly the 10% level. Sice the sigificat level is low, this study cocludes that the reveue efficiecy o Malaysia bakig sector did ot improve durig post-merger period. To verify the differece betwee the merged ad umerged baks or cotrol baks, this study agai performed a series of parametric (t-test) ad o-parametric (Ma- Whitey [Wilcoxo]) ad Kruskall Wallis test. The results are preseted i Table 5.

14 310 Fadzla Sufia, Juaia Muhammad, Bay A.A. Noordi & Fakarudi Kamarudi The results of cost ad profit efficiecy from the parametric t-test show that the Malaysia bakig sector exhibited a lower mea merged bak (0.851<0.912 ad 0.731<0.888) ad sigificatly differet. The results from the parametric t-test were further cofirmed by o-parametric Ma-Whitey (Wilcoxo) ad Kruskall-Wallis tests. Table 5 Summary of Parametric ad No-Parametric Tests o Umerged ad Merged Baks Parametric test Test groups No-parametric test Idividual tests t-test Ma-Whitey Kruskall-Wallis [Wilcoxo Rak-Sum] test Equality of Populatios test Hypothesis Media Pre-merger = Media Post-merger Test statistics t(prb>t) z(prb>z) X² (Prb > X²) Mea t Mea Rak z Mea Rak X² Cost Efficiecy Umerged bak *** *** *** Merged bak Reveue Efficiecy Umerged bak * * Merged bak Profit Efficiecy Umerged bak *** *** *** Merged bak ***, **, * idicates sigificace levels at 0.01, 0.05, ad 0.10 respectively. It is iterestig to ote that the results obtaied from the reveue efficiecy betwee the merged ad umerged baks seemed to suggest that the merged baks were relatively more reveue efficiet (0.808>0.802), but the differece was ot statistically sigificat uder parametric t-test. However, the result was similar through o-parametric Ma-Whitey (Wilcoxo) ad Kruskall-Wallis tests sice the sigificat oly at 10% level. Sice the results from parametric ad oparametric tests showed the same fidigs, this study cocluded that the reveue efficiecy o Malaysia bakig sector did ot improve i merged bak 5. CONCLUSIONS The study was carried out with the mai purpose of idetifyig the effects that M&As have o reveue efficiecy i the Malaysia bakig sector durig the pre- ad postmerger period. To recap, the majority of the researchers have focused more o the effects of M&As o cost ad profit efficiecy i bakig sectors ad oly a few have looked at the effects of M&As o reveue efficiecy. I additio, much of the prior work highlight the volutary bak merger (market-drive) where the acquirers ad

15 Assessig the Effect of Mergers ad Acquisitios o Reveue Efficiecy: 311 targets were ot urged to merge by the govermet, but they did it based o their ow iitiative (Berger et al., 1996 ad Corett et al., 2006). I the Malaysia cotext, bak M&As scheme took place out of order by the regulators; that is, based o a forced merger (Sufia ad Habibullah, 2009 ad Sufia, 2009). Most studies focused more o the improvemet i M&As but they have igored the reveue efficiecy side whe i fact, it should be looked ito i depth. It is because iformatio o reveue efficiecy foud i previous mergers could be used to assist regulators i makig decisios about future mergers that will maximise the profitability ad efficiecy of the overall bakig sector (Corett et al., 2006). The result of this study shows that they are o statistically sigificat differece o reveue efficiecy betwee pre ad post-merger period. To further verify the result, tests o the reveue efficiecy to the merged baks ad umerged bak were performed ad they showed cosistet result with regard to the pre ad post-merger period. This idicates the reveue efficiecy o Malaysia bakig sector did ot improve durig the post-merger period. The fidigs are cosistet with the several studies such as Ariff ad Ca (2008), AL-Sharkas et al. (2007) Huiziga et al. (2001) ad Akhavei et al. (1997). They discover that M&As do ot improve bak s reveue efficiecy sice the level of cost efficiecy is higher tha profit efficiecy. Although cost ad profit efficiecy has improved, baks may still face reveue iefficiecy resultig from producig a small umber of outputs, producig too much or little of a cheaper or expesive output, ad sellig it iefficietly. The research cocludes that fidigs from studies o M&As o reveue efficiecy i the Malaysia bakig sector provide guidace, better iformatio ad fill i the gap i curret literature which ca beefit the regulators, the bakig sector itself, ivestors ad academics whe they make decisios o future M&As. REFERENCES Ahmad, R., Ariff, M. ad Skully, M. (2007), Factors determiig Mergers of baks i Malaysia s bakig sector reform, Multiatioal Fiace Joural, 11, pp Akhavei, J.D., Berger, A.N. ad Humphrey D.B. (1997), The effects of megamergers o efficiecy ad prices: Evidece from a bak profit fuctio, Review of Idustrial Orgaizatio, 12, pp Altubas, Y., Evas, L., & Molyeux, P. (2001), Bak owership ad efficiecy, Joural of Moey, Credit ad Bakig, 33(4), pp Al-Sharkas, A.A., Hassa, M.K. ad Lawrece, S. (2008), The impact of mergers ad acquisitios o the efficiecy of the US bakig idustry: Further evidece, Joural of Busiess Fiace & Accoutig, 35, pp Adogo, J., Strok, C. ad Hasheela, E. (2005), Measurig the alterative profit X-efficiecy of Namibia s Bakig Sector, Nepru Research Report, 36, pp Ariff, M. ad Ca, L. (2008), Cost ad profit efficiecy of Chiese baks: A o-parametric aalysis, Chia Ecoomic Review, 19, pp

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