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Assessing the Effect of Mergers and Acquisitions on Revenue Efficiency: Evidence from Malaysian Banking Sector
Fadzlan Sufian, Junaina Muhamad, A.N. Bany-Ariffin, M.H. Yahya and Fakarudin Kamarudin Vision: The Journal of Business Perspective 2012 16: 1 DOI: 10.1177/097226291201600101 The online version of this article can be found at: http://vis.sagepub.com/content/16/1/1

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Forster 1
Article

Assessing the Effect of Mergers and Acquisitions on Revenue Efficiency: Evidence from Malaysian Banking Sector
Fadzlan Sufian Junaina Muhamad A.N. Bany-Ariffin M.H. Yahya Fakarudin Kamarudin

Vision 16(1) 111 2012 MDI SAGE Publications Los Angeles, London, New Delhi, Singapore, Washington DC DOI: 10.1177/097226291201600101 http://vision.sagepub.com

Abstract
The article attempts to examine the effect of mergers and acquisitions (M&As) on Malaysian banks revenue efficiency. The data gathered in this study are divided into two event windows: the pre-merger (19951996) and post-merger (20022009) periods. The sample selected for this study comprised 34 commercial banks, including the control group of banks. We employ the Data Envelopment Analysis (DEA) method to measure the efficiency of Malaysian banks during both the pre- and post-merger periods. The results indicate that the Malaysian banks revenue efficiency has not significantly improved during the post-merger compared to the pre-merger period.

Key Words
Bank, Mergers and Acquisitions, Data Envelopment Analysis, Revenue Efficiency

Introduction
The globalization era has altered the structure of the Malaysian commercial banking sector through greater deregulation and liberalization. The Malaysian central bank, Bank Negara Malaysia (BNM), has encouraged financial institutions to join a forced merger scheme so that they can become more efficient and competitive. The forced mega-mergers were enforced by BNM due to three main factors: competition from foreign banks, large number of domestic commercial banks and financial crisis in Asia. Since Malaysia opened up its financial sector, foreign banks have become a threat to their domestic counterparts. Upon realizing this, BNM has promoted merger and acquisitions among domestic banks in order to encourage them to increase their capability. The act was seen as a move for the local banks to cope with competition from their foreign owned banks counterparts (Chong et al., 2006). Other than the competition from foreign banks, the implementation of forced mega-merger of domestic commercial banks in Malaysia was also influenced by two other factors: over-banked numbers and the financial crisis (Ahmad et al., 2007; Chong et al., 2006). With 58 domestic financial institutions, Chong et al. (2006) asserted that

Malaysias banking system was considered by the government as being over-banked and fragmented. The forced merger scheme was seen as a means to create a larger and stronger domestic banking sector with the hope that they would be able to withstand competition with foreign banks. In 1997, Malaysia and other Asian countries were hit with financial crisis which had resulted in an economic downturn. The economic downfall had inevitably played a major role in contributing to the forced mega-mergers in the Malaysian banking sector. Following the deepening of the Asian financial crisis, BNM took stronger measures to force the domestic incorporated banking institutions to merge in a move to minimise the potential impacts of systemic risks on the banking sector as a whole. Among the main objectives of the merger programme was to create a banking sector more efficient in facing challenges of deregulation and liberalization. However, the proposed major restructuring plan for the banking sector caught many by surprise. The merger programme was very unpopular, perceived by the market as impractical and provoked serious criticisms (Chin and Jomo, 2001). Among the controversial issues is that some

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Assessing the Effect of Mergers and Acquisitions on Revenue Efficiency quality production or services without any wastage from the view of economic perspective. The existence of efficiency could improve the performance of firms attributed to improvements in profitability, cost reduction and overall operations (Copeland and Weston, 1988). In this regard, firms should be efficient in their operations in order to ensure maximum profits with minimum production costs. This operational efficiency would ensure that firms make the right production decisions in order to gain high profitability levels. For example, the firms should not commit themselves to transactions of which the projected costs are higher than the benefits. On the other hand, inefficiency could deteriorate the performance of the firm due to imprudent management by managers when setting their goals. Therefore, managers play important roles to ensure that all operations are well managed for the benefits of the firms.

very small banks have to take over larger banks1 while in some cases the size of the anchor banks would not necessarily be much larger than before the merger.2 Furthermore, Chong et al. (2006) argued that the merger programme was not driven by economic reasons. They argued that the forced M&As scheme destroys shareholders wealth in aggregate, while the acquiring banks tend to gain at the expense of the target banks. Chong et al. (2006) among others point out that the main motive of M&As is to maximize shareholders value or wealth by maximizing profit. Similarly, Akhavein et al. (1997) and Cornett et al. (2006) suggest that the main motive for banks to get involved in M&As is that they would be more efficient during the post-merger compared to the pre-merger period. However, findings from the previous studies on developed and developing countries which practised voluntary and forced M&As show that the level of profit efficiency is relatively lower compared to cost efficiency due to revenue inefficiency (e.g., Ariff and Can, 2008; Crouzille et al., 2008; Houston et al., 2001). In this vein, Ariff and Can (2008) and Houston et al. (2001) contend that the main problem that contributes to the lower profit efficiency comes from revenue inefficiency. Till date evidence on the effects of voluntary M&As scheme on cost and profit efficiency to banking sector are abundant in the literature. However, empirical evidence on the impacts of forced M&A is relatively scanty. By employing the Data Envelopment Analysis (DEA) method, the present study attempts to fill in this gap and contributes to the literature on the impact of forced M&As on banking sectors revenue efficiency. Additionally, we also compute a series of parametric and non-parametric univariate tests to examine the difference in the Malaysian banking sectors revenue efficiency during the pre- and post-merger periods. The article is set out as follows: the next section provides a theoretical framework and presents the main literature in regard to bank mergers and acquisitions. The third section outlines the approach to the measurement of bank revenue efficiency and data used to construct the efficiency frontiers. The fourth section discusses the results, and finally, the article concludes in the fifth section.

Bank Mergers and Acquisitions and Revenue Efficiency

Revenue is defined as how effectively a bank sells its outputs. Maximum revenue is obtained as a result of producing the output bundle efficiently (Andogo et al., 2005; Rogers, 1998). In fact, revenue efficiency is composed of technical and allocative efficiency which are related to managerial factors and are regularly associated with regulatory factors (Isik and Hassan, 2002). Hence, in order to ascertain the revenue efficiency, banks should focus on both technical efficiency (managerial operating on the production possibilities) and allocative efficiency (bank producing the revenue maximizing mix of outputs based on the certain regulation) (English et al., 1993). However, banks face a dilemma in determining the revenue efficiency because in order to increase the revenue, banks should produce quality outputs or services that require a higher cost (De Young and Nolle, 1996). An increase in the cost would contribute to being inefficient. However, cost inefficiency may possibly be compensated by higher or extra revenue obtained due to the quality services produced (Berger and Mester, 1997). Another way to improve the revenue efficiency proposed by several studies is for banks to produce higher quality services and charge higher prices and struggle to avoid any improper choice of input and output quantities and mispricing of outputs (Andogo et al., 2005; Maudos et al., 2003; Rogers, 1998). The revenue inefficiency could be identified via the profit function because this function combines both the cost and revenue efficiency to evaluate the profit efficiency (Akhevein et al., 1997; Lozano, 1997). The revenue efficiency would totally affect the efficiency of profit even though the cost efficiency is high. In essence,

Theoretical Framework and Review of Related Literature Theories on Mergers and Acquisitions
The theory of the synergy or efficiency in M&As encourage the maximizing of shareholders wealth for both the target and acquirer firms to produce positive total gains (Berkovich and Narayan, 1993). Efficiency theories focus on fully utilizing the scarce resources in order to produce Vision, 16, 1 (2012): 111

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Fadzlan Sufian et al. revenue efficiency would be the main factor influencing profit efficiency. According to Berger and Humphrey (1997), Akhavein et al. (1997) and Bader et al. (2008), there have been limited studies done on bank revenue efficiency. Furthermore, only few studies have come out with conclusive results on the impact of M&As on banks revenue efficiency. Moreover, if these studies are narrowed down, there is a paucity of studies that looked into the event of forced M&As on bank revenue efficiency. To evaluate the effects of M&As on the banking sector in terms of revenue efficiency, researchers could base their findings on profit efficiency since there is a positive correlation between profit and revenue efficiency (Rogers, 1998). The opportunity to improve revenue efficiency appears to be considerable in voluntary mergers with cost cutting prospects, such as mergers focusing on activities and geographically based mergers. In this regard, Cornett et al. (2006) point out that revenue efficiency is more significant in mergers which experienced reduction in costs. Moreover, revenue efficiency does not only depend on managers decisions, but also on the customers behaviour. Thus, revenue efficiency may be enhanced by raising prices as market power is expanded, or it might be enhanced when the merged institutions restructure its assets mix (Ayadi and Pujals, 2005). As can be seen from the previous studies, M&As could lead to a higher profit efficiency of banks via improvements in revenue efficiency during the post-merger period. However, in all cases, the sample comprised banks involved in voluntary M&As scheme. Furthermore, most of these studies have been conducted in developed countries. On the other hand, empirical studies on forced bank M&As are limited. Moreover, studies performed to examine the impact of M&As on the banking sectors in developing countries is scanty. The present study seeks to fill in this demanding gap in the literature by providing the impact of forced M&As in the Malaysian banking sector.

3 sector. The information on the merger programme for the commercial banks in Malaysia was provided by Bank Negara Annual Report. Data are analyzed from banks which are registered under the M&As in the Malaysian banking sector during the year of mega-merger 2000 (Sufian, 2009; Sufian and Habibullah, 2009). This analysis looks at data two years preceding the year of the merger and eight years after the merger (2, 8). This event window was inspired by Rhoades (1998) who suggests that the three-year time period is optimal because about half of any efficiency gains should be realized within three years (3, 3). This fact is almost unanimously agreed upon among the experts interviewed. In fact, the overall period is covered by Sufian (2009) where he investigates the impact of M&As on Malaysian banks profit efficiency. The entire period starts from 1995 to 2009, but only 10 years is covered in this study (1995 to 1996 and 2002 to 2009) because the financial crisis years (1997 to 1999), during merger period (2000) and coolingoff period (2001) are excluded to avoid possible biases. The periods are divided into two event windows: 1995 to 1996 is referred to as the pre-merger period, while 2002 to 2009 is considered as the post-merger period. The actual domestic commercial banks affected by the mega-merger during the year 2000 were 14 banks (7 acquirers and 7 targets) and were indicated as seven cases of mega M&As. To be included in the sample, both the acquiring and the target banks must not have been involved in any other merger prior to the year of merger period of the year 2000. To show a wide representation of the Malaysian banking sector, data were collected from 34 commercial banks in total, including several banks that served as the control groups. This is listed in Table 1 (14 domestic commercial banks were involved with M&As and 20 domestic and foreign commercial banks were not involved with M&As). In order to maintain homogeneity, only commercial banks (banks that make commercial loans and accept deposits from the public) are included in the analysis (Sufian, 2007). Therefore, Finance companies, Investment banks and Islamic banks are excluded from the sample.

Data and Methodology

This study gathers data from all Malaysian commercial banks from 1995 to 2009. The primary source for financial data is the BankScope database maintained by Bureau van Dijk which provides the banks balance sheets and income statements. BankScope database contains data on 25,800 banks worldwide, including commercial banks in Malaysia. Furthermore, BankScope database presents data on original currencies of the specific countries and provides the option to convert the data to any other currencies. The data are updated monthly. Ringgit Malaysia (the Malaysian currency) is used in this study since the study involves only commercial banks operating in the Malaysian banking

Methods of Measurement
The intermediation approach (also known as the asset approach) assumes financial firms as an intermediary between savers and borrowers. Banks are seen as purchasing labour, materials and deposit funds to produce outputs such as loans and investments. The inputs include interest expense, non-interest expense, deposits, other purchased capital, number of staff (full time equivalent), physical capital (fixed assets and equipments), demographics and competition. The potential outputs are measured as the dollar value of the banks earning assets where the costs include Vision, 16, 1 (2012): 111

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Assessing the Effect of Mergers and Acquisitions on Revenue Efficiency outputs to weighted inputs. In essence, the more outputs produced from given inputs, the more efficient is the production. This study estimates the efficiency scores under the assumption of variable returns to scale (VRS). The VRS model was proposed by Banker, Charnes and Cooper (1984). The BCC model (VRS) extends the CCR model that was proposed by Charnes, Cooper and Rhodes (1978). The CCR model presupposes that there is no significant relationship between the scale of operations and efficiency by assuming constant return to scale (CRS) and it delivers the overall technical efficiency (OTE). The CRS assumption is only justifiable when all decision making units (DMUs) are operating at an optimal scale. However, firms or DMUs in practice might face either economies or diseconomies of scale. Thus, if one makes the CRS assumption when not all DMUs are operating at the optimal scale, the computed measures of OTE will be contaminated with scale inefficiency (SIE). Banker, Charnes and Cooper (1984) extended the CCR model by relaxing the CRS assumption. The resulting BCC model was used to assess the efficiency of DMUs characterized by VRS. The VRS assumption provides the measurement of pure technical efficiency (PTE) without being contaminated by scale inefficiency (SIE). Therefore, results from the VRS assumption provide more reliable information on the (in)efficiency of DMUs compared to the results under the CRS assumption (Coelli, 1996; Sufian, 2004). The revenue, cost and profit efficiency models are given in Equations (13) in Table 2 below. As can be seen, the revenue, cost and profit efficiency scores are bounded within the 0 and 1 range. By calculating the efficiency concepts just discussed, we may be able to observe the effects of forced M&As on banks revenue, cost and profit efficiencies, thus providing a more robust result. However, for the purpose of the present study, the revenue efficiency concept will be given more focus in this study rather than the other efficiency concepts (cost and profit), since the focus of the present study is on the effect of M&As on banks revenue efficiency.

Table 1. List of Malaysian Domestic Commercial Banks during the Year 2000
Acquirer No. Bank 1 3 5 7 9 11 13 Affin Bank Bhd Alliance Bank Bhd EON Bank Bhd Hong Leong Bank Bhd Maybank Bhd Public Bank Bhd Southern Bank Bhd No. Bank 2 4 6 8 10 12 14 BSN Commercial Bank Bhd Sabah Bank Bhd Oriental Bank Bhd Wah Tat Bank Bhd Pacific Bank Bhd Hock Hua Bank Bhd Ban Hin Lee Bank Bhd Target

Banks Not Involved in M&As No. Bank 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 ABN AMRO Bank Bhd Arab-Malaysian Bank Bhd Bangkok Bank Bhd Bank of America Malaysia Bhd Bank of China Bhd Bank of Nova Scotia Bhd Bank of Tokyo Mitsubishi Bhd Bank Utama Bhd Bumiputra Commerce Bank Bhd Chase Manhattan Bank Bhd Citibank Bhd Deutsche Bank Bhd HSBC Bank Malaysia Bhd International Bank Malaysia Bhd OCBC Bank Bhd Overseas Union Bank Bhd Phileo Allied Bank Bhd RHB Bank Bhd Standard Chartered Bank Bhd United Overseas Bank Bhd

Source: Bank Negara Malaysia, Sufian (2009), Sufian and Habibullah (2009) and Sufian (2007).

both the interest and operating expenses (Berger et al., 1987). Under this approach, the banks outputs are found on the asset side of the balance sheet and deposits are seen as inputs. Avkiran (1999) suggest that potential outputs include net interest income, non-interest income, consumer loans, housing loans, commercial loans and investments. Previous banking efficiency studies that adopted this approach are, among others, Bhattacharya et al. (1997), Charnes et al. (1990), Sathye (2001) and Sufian (2009). The Data Envelopment Analysis (DEA) frontier analysis method is also known as a linear mathematical programming approach. The method constructs the frontier of the observed inputoutput ratios by linear programming techniques. The linear substitution is possible between observed input combinations on an isoquant (the same quantity of output is produced while changing the quantities of two or more inputs) that was assumed by the DEA method. Charnes et al. (1978) were the first to introduce the term DEA to measure the efficiency of decision making units (DMUs), obtained as a maximum ratio of weighted Vision, 16, 1 (2012): 111

Variables Used
Because this study uses the intermediation approach, three input and output variables were chosen. The overall selection of banks input and output variables was based on Ariff and Can (2008) and other major studies on the efficiency of banks involved in M&As (Altunbas, 2001; Bader et al., 2008; Isik and Hassan, 2002; Sufian and Habibullah, 2009). The three input vector variables consist of x1: Deposits, x2: labour and x3: physical capital. The input prices consist of w1: price of loanable funds, w2: price of labour and w3:

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Fadzlan Sufian et al.

Table 2. Frontier Type Revenue Efficiency (Eq. 1) max Cost Efficiency (Eq. 2) min Profit Efficiency (Eq. 3) max

r =1

o qr y ro

i =1

pio x io

r =1 j

o qr y ro

p
i =1

o i

x io

subject to

subject to

subject to

j =1 n

j x ij x io i = 1, 2, ..., m; j y rj y ro r = 1, 2, ..., s;

j =1 n j =1

j x ij x io i = 1, 2, ..., m;
y rj y ro r = 1, 2, ..., s;

j =1 n j =1

x ij x io

i = 1, 2,..., m

VRS

i =1 n

j =1 n

j =1 n

y rj y ro r = 1, 2,..., s

j , y ro 0

j , x io 0
j

i =1

=1

=1

x io x io , y ro y ro j 0
j =1

Source: Zhu (2009).

Where S is output observation M is input observation R is sth output I is mth input qor is unit price of the output r of DMU0 (DMU0 represents one of the n DMUs) poi is unit price of the input i of DMU0 y ro is rth output that maximize revenue for DMU0 x i is ith input that minimize cost for DMU0 yro is rth output for DMU0 xio is ith input for DMU0 n is DMU observation j is nth DMU j is non-negative scalars yrj is sth output for nth DMU xij is mth input for nth DMU

price of physical capital. The three output vector variables are y1: loans, y2: investment; and y3: off-balance sheet items. Meanwhile, three output prices consist of r1: price of loans, r2: price of investment and r3: price of offbalance sheet items. The summary of data used to construct the efficiency frontiers are presented in Table 3.

Empirical Results
Before proceeding with the discussions on the DEA results, this study first tested the rule of thumb on the selection of inputs and outputs variables suggested by Cooper et al. (2002)3. Since the total number of DMUs (34 banks) in this study is more than the number of input and output variables (3 3 @ 3 [3 + 3]), the selection of variables are valid since it complies with the rule of thumb and allows the efficiencies of DMUs to be measured. Next, by calculating all three efficiency concepts (revenue, cost and

profit), we may be able to observe the effect of forced M&As on banks efficiency levels and obtain more robust results. As stated, this study focuses on the effect of forced M&As on banks revenue efficiency. Therefore, it will explain more on the revenue efficiency concept compared to the other efficiency concepts (such as cost and profit efficiencies). Table 4 illustrates the revenue efficiency estimates together with other efficiency concepts, i.e., cost and profit efficiencies during pre- and post-merger periods.

The Malaysian Banking Sector During the Pre-Merger Period

From Table 4 it can be observed that the Malaysian banking sector has exhibited a mean cost efficiency, revenue efficiency and profit efficiency of 83 per cent, 79.7 per cent and 69.5 per cent respectively during pre-merger period (19951996). Another way of interpreting this result is to Vision, 16, 1 (2012): 111

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Assessing the Effect of Mergers and Acquisitions on Revenue Efficiency

Table 3. Descriptive Statistics for Inputs, Inputs Prices, Outputs and Outputs Prices
Variables x1 x2 x3 w1 w2 w3 y1 y2 y3 r1 r2 r3 Minimum (RM mil.) 190.10 3.60 0.70 0.005 0.002 0.286 38.30 39.70 4.60 0.034 0.001 0.001 Maximum (RM mil.) 243,132.00 61,176.00 1,420.00 0.130 6.336 15.971 185,783.20 61,677.50 129,453.30 2.512 1.194 3.630 Mean (RM mil.) 27,953.10 471.753 226.940 0.034 0.031 2.148 19,848.644 5,758.159 13,283.386 0.143 0.360 0.030 Std. Deviation (RM mil.) 41,139.726 3,739.649 331.046 0.016 0.387 2.507 29,665.862 8,673.051 18,945.448 0.213 0.472 0.221

Source: Banks annual reports (Bank Negara Malaysia 19952009) and authors own calculations. Notes: x1: Deposits (total deposits, money market and short term funding), x2: Labour (personnel expenses), x3: Physical capital (interest income on loans and other interest income/loans), w1: Price of deposits (total interest expenses/deposits), w2: Price of labour (personnel expenses/total assets), w3: Price of physical capital (other operating expenses/fixed assets), y1: Loans (net loans and interbank lending), y2: Investment (shortterm, long term and entrusted investment or securities), y3: Off-balance sheet items (value of the off-balance sheet activities), r1: Price of loans (interest income on loans and others interest income/loans), r2: Price of investment (other operating income/investment) and r3: Price of off-balance sheet items (net fees and commissions/off-balance sheet items).

Table 4: Cost, Revenue and Profit Efficiencies during Pre- and Post-Merger Periods Bank ABN AMBRO Bank Affin Bank Alliance Bank Malaysia AmBank (M) Bhd Ban Hin Lee Bank Bangkok Bank Bank of America Malaysia Bank of China Bank of Nova Scotia Bank of Tokyo-Mitsubishi Bank Utama BSN Commercial Bank Bumiputra Commerce Bank Chase Manhattan Bank Citibank Deutsche Bank EON Bank Hock Hua Bank Hong Leong Bank HSBC Bank Malaysia International Bank Malaysia Maybank OCBC Bank Oriental Bank Overseas Union Bank Pacific Bank Phileo Allied Bank Public Bank RHB Bank Sabah Bank Southern Bank Standard Chartered Bank United Overseas Bank Wah Tat Bank All Banks CE 0.767 1.000 0.847 1.000 0.674 1.000 0.739 0.970 1.000 1.000 0.751 0.853 0.996 1.000 0.885 0.749 0.790 0.742 0.793 0.880 0.569 1.000 0.938 0.755 0.965 0.764 0.647 0.636 1.000 0.672 0.703 0.837 0.855 0.650 0.830 Pre-merger (19951996) RE 0.801 1.000 0.774 1.000 0.755 0.820 0.575 0.892 1.000 0.911 0.741 0.634 0.991 1.000 0.856 0.757 0.861 0.746 0.763 0.962 0.516 1.000 0.912 0.807 0.922 0.819 0.367 0.709 1.000 0.683 0.773 0.795 0.551 0.582 0.797 PE 0.492 1.000 0.540 1.000 0.489 1.000 0.616 0.899 1.000 1.000 0.714 0.371 1.000 1.000 0.872 0.501 0.600 0.537 0.502 0.877 0.296 1.000 0.860 0.548 0.898 0.582 1.000 0.424 1.000 0.418 0.519 0.730 0.382 0.318 0.695 CE 0.801 0.859 0.863 0.857 0.878 0.919 1.000 0.979 1.000 0.890 1.000 0.727 0.970 1.000 0.920 0.858 0.812 1.000 0.969 0.853 0.949 0.866 0.999 0.940 0.914 Post-merger (20022009) RE 0.583 0.734 0.729 0.726 0.739 0.939 0.842 0.805 1.000 0.925 1.000 0.377 0.899 0.592 0.720 0.913 0.779 1.000 0.865 0.838 0.898 0.834 0.988 0.848 0.807 PE 0.739 0.776 0.705 1.000 0.905 0.923 1.000 1.000 1.000 0.760 1.000 0.543 0.981 1.000 0.749 0.894 0.737 1.000 1.000 0.811 0.951 0.821 1.000 0.959 0.888

Source: Banks annual reports (Bank Negara Malaysia 19952009) and authors own calculations. Notes: CE: Cost Efficiency, RE: Revenue Efficiency, PE: Profit Efficiency.

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Fadzlan Sufian et al. suggest that these banks have been inefficient by not fully producing outputs efficiently by using the same input (revenue inefficiency) and by not fully using the inputs efficiently to produce the same outputs (cost inefficiency). Banks are said to have slacked if they fail to fully minimize the cost and maximize the revenue (profit inefficiency). The levels of cost inefficiency, revenue inefficiency and profit inefficiency are shown as 17 per cent, 20.3 per cent and 30.5 per cent, respectively. For cost efficiency, the results indicate that on an average, Malaysian banks have utilized only 83 per cent of the resources or inputs to produce the same level of output during the pre-merger period. In other words, on average, the Malaysian banking sector has wasted 17 per cent of its inputs, or it could have saved 17 per cent of its inputs to produce the same level of outputs. If the Malaysian banking sector had fully utilized its inputs, it could have saved on costs during the pre-merger period. Nevertheless, it was noted that on average, the Malaysian banking sector has been more efficient during the premerger period in utilizing its inputs compared to its ability to generate revenues and profits. For revenue efficiency, the average bank could only generate 79.7 per cent of the revenues, less than what it was initially expected to generate. Hence, revenue is lost by 20.3 per cent, meaning that the average bank loses an opportunity to receive 20.3 per cent more revenue given the same amount of resources, or it could have produced 20.3 per cent of its outputs given the same level of inputs. Obviously, the inefficiency is on the revenue, followed by the profit side. Similarly, the average bank could earn 69.5 per cent of what was available, and lost the opportunity to make 30.5 per cent more profit from the same level of inputs. Even though the cost efficiency is reportedly highest during the pre-merger period, the revenue efficiency is found to be lower, and this has led to higher revenue inefficiency. When both efficiencies concepts (revenue and cost efficiency) are compared, revenue inefficiency seems to be the main factor for the high profit inefficiency.

7 average, the Malaysian banking sector had wasted 8.6 per cent of its inputs, or it could have saved 8.6 per cent of its inputs to produce the same level of outputs. Therefore, there was substantial room for significant cost savings for these banks if they had employed their inputs efficiently. For revenue efficiency, the average bank could only generate 80.7 per cent of the revenues than it was expected to generate. Hence, there is a slack of 19.3 per cent, meaning that the average bank lost an opportunity to receive 19.3 per cent more revenue, giving the same amount of resources or it had to produce 19.3 per cent of its outputs with the same level of inputs. Noticeably, the highest level of inefficiency is on the revenue, followed by the profits side. Similarly, the average bank could earn 88.8 per cent of what was available, and lost the opportunity to make 11.2 per cent more profits when utilizing the same level of inputs. In conclusion, all the efficiency concepts in the Malaysian banking sector have improved during the post-merger period. Cost efficiency improved from 83 per cent during pre-merger to 91.4 per cent during post-merger period, revenue efficiency improved from 79.7 per cent to 80.7 per cent and profit efficiency rose from 69.5 per cent to 88.8 per cent. Other than that, the results indicate that the level of cost efficiency is higher than that of profit efficiency due to the lower revenue efficiency level or higher inefficiency from the revenue side. Therefore, improvements on the revenue efficiency of the Malaysian banking sector should be given more concentration since it may contribute to lower profit efficiency levels. The difference in the revenue efficiency of the Malaysian banking sector during the pre- and post-merger periods was performed by using a series of parametric (t-test) and non-parametric (Mann-Whitney [Wilcoxon] and KruskalWallis) tests. Coakes and Steed (2003) suggest that the Mann-Whitney (Wilcoxon) is a relevant test for two independent samples coming from populations having the same distribution. The most relevant reason is that the data violate the stringent assumptions of the independent groups t-test, so it was decided that Mann-Whitney (Wilcoxon) test should be used. This study employs both parametric and non-parametric tests in order to obtain robust results.

Malaysian Banking Sector during the Post-Merger Period

From Table 4, it can be observed that the Malaysian banking sector has exhibited mean cost efficiency, revenue efficiency and profit efficiency of 91.4 per cent, 80.7 per cent and 88.8 per cent respectively during the post-merger period (20022009). Accordingly, the levels of cost inefficiency, revenue inefficiency and profit inefficiency were 8.6 per cent, 19.3 per cent and 11.2 per cent, respectively. As for the cost efficiency, the results seem to suggest that the average bank had utilized only 91.4 per cent of the resources or inputs in order to produce the same level of output during the post-merger period. In other words, on

Robustness Tests
Table 5 shows the robustness test results. The results of cost and profit efficiencies from the parametric t-test show that the Malaysian banking sector has exhibited a higher mean cost and profit efficiencies during post-merger period (0.914 > 0.830 and 0.888 > 0.695) and is significantly different at the 1 per cent level. The results from the parametric t-test were further confirmed by non-parametric MannWhitney (Wilcoxon) and Kruskall-Wallis tests. Therefore, Vision, 16, 1 (2012): 111

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Assessing the Effect of Mergers and Acquisitions on Revenue Efficiency

Table 5. Summary of Parametric and Non-Parametric Tests on Pre- and Post-Merger Periods Test Groups Non-parametric Test Mann-Whitney [Wilcoxon Rank-Sum] Test Kruskall-Wallis Median Pre-merger = Median Post-merger Equality of Populations Test z(Prb > z) X (Prb > X) Mean Rank z Mean Rank X 91.35 134.43 109.68 127.81 87.25 135.91 4.423 1.809 5.491 91.35 134.43 109.68 127.81 87.25 135.91 19.56 3.273 30.153

Individual Tests Hypothesis Test Statistics Cost Efficiency Pre-merger Post-merger Revenue Efficiency Pre-merger Post-merger Profit Efficiency Pre-merger Post-merger

Parametric Test t-test t(Prb > t) Mean t 0.830 0.914 0.797 0.807 0.695 0.888 4.033

0.271 5.736

Source: Banks annual reports (Bank Negara Malaysia 19952009) and authors own calculations. Note: , , indicate significance levels at 0.01, 0.05 and 0.10, respectively.

the results clearly indicate that the cost and profit efficiencies of the Malaysian banking sector improved during post-merger compared to the pre-merger period. However, an interesting result is obtained regarding the revenue efficiency of the Malaysian banking sector during pre-merger and post-merger periods. The results from the parametric t-test indicate that revenue efficiency of the Malaysian banking sector is higher during post-merger compared to pre-merger period (0.807 > 0.797). However, the results should be interpreted with caution since the difference is not statistically significant at any conventional levels. The results seem to suggest that the revenue efficiency of the Malaysian banking sector has not improved during the post-merger period. On the other hand, both the

non-parametric Mann-Whitney (Wilcoxon) and KruskallWallis tests indicate that the Malaysian banking sector has exhibited higher revenue efficiency levels during postmerger period (statistically significant at 10 per cent level). Since the significant level is low, this study concludes that the Malaysian banking sectors revenue efficiency has not significantly improved during post-merger compared to the pre-merger period. To verify the difference between the merged and unmerged banks or control banks, this study again performed a series of parametric (t-test) and non-parametric (MannWhitney [Wilcoxon] and Kruskall Wallis) tests. The results are presented in Table 6. The results from the parametric t-test indicate that banks which were involved in the forced

Table 6. Summary of Parametric and Non-Parametric Tests on Unmerged and Merged Banks Parametric Test t-test t(Prb > t) Mean Cost Efficiency Unmerged bank Merged bank Revenue Efficiency Unmerged bank Merged bank Profit Efficiency Unmerged bank Merged bank 0.912 0.851 0.802 0.808 0.888 0.731 t 3.065 Test Groups Non-parametric Test Mann-Whitney [Wilcoxon Rank-Sum] Test Kruskall-Wallis Median Pre-merger = Median Post-merger Equality of Populations Test z(Prb > z) X (Prb > X) Mean Rank z Mean Rank X 138.120 138.120 5.048 25.487 91.830 91.830 1.828 0.165 4.902 128.630 111.380 138.740 90.540 5.777 128.630 111.380 138.740 90.540 3.342 33.375

Individual Tests Hypothesis Test Statistics

Source: Banks annual reports (Bank Negara Malaysia 19952009) and authors own calculations. Note: , , indicate significance levels at 0.01, 0.05 and 0.10, respectively.

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Fadzlan Sufian et al. M&As have exhibited a lower mean cost and profit efficiencies (0.851 < 0.912 and 0.731 < 0.888) and is significantly different at the 1 per cent level. The results from the parametric t-test were further confirmed by non-parametric Mann-Whitney (Wilcoxon) and Kruskall-Wallis tests. It is interesting to note that the merged banks have been relatively more revenue efficient compared to the unmerged banks (0.808 > 0.802). However, it can be observed from Table 6 that the difference is not statistically significant under the parametric t-test and is only significant at the 10 per cent level under the non-parametric Mann-Whitney (Wilcoxon) and Kruskall-Wallis tests. Since the results from parametric and non-parametric tests showed similar findings, this study concludes that the merged banks revenue efficiency has not significantly improved from the forced M&As.

9 outputs, producing too much or little of a cheaper or expensive output, and selling it inefficiently. Acknowledgements
We would like to thank the editors and the anonymous referees of the journal for constructive comments and suggestions, which have signicantly helped to improve the contents of the article. The usual caveats apply.

Notes
1. For example, Perwira Afn Bank and Multi Purpose Bank have to acquire banks which are many times their size leading to accusations of unfairness. 2. For example, Southern Bank remains many times smaller than the pre-merger size of Malaysias largest bank, Maybank. This raised concern that the bank may not survive the effects of nancial market liberalization. 3. According to Cooper et al. (2002), the rule of thumb to be complied with in order to select the number of inputs and outputs is: n max {m x s, 3(m + s)} where: n is the number of DMUs m is the number of inputs s is the number of outputs.

Conclusions
This study is carried out to identify the effects of forced M&As on banks revenue efficiency. To recap, the majority of the researchers have focused more on the effects of M&As on cost and profit efficiency of banking sectors. On the other hand, empirical evidence on the effects of M&As on revenue efficiency is relatively scarce. In addition, much of the prior work highlight the voluntary bank merger (market-driven) where the acquirers and targets were not forced to merge by the government, but they did it based on their own initiative (Berger et al., 1996; Cornett et al., 2006). In the Malaysian context, the bank M&As scheme took place out of order by the regulators, that is, based on a forced merger (Sufian, 2009; Sufian and Habibullah, 2009). The results from this study show that the forced M&As have no statistically significant influence on Malaysian banks revenue efficiency during the post-merger compared to the pre-merger period. To further verify the results, tests on the revenue efficiency of the merged banks and unmerged banks were performed and they showed consistent result with regard to the pre- and post-merger periods. In essence, the results seem to suggest that the revenue efficiency of the Malaysian banking sector has not significantly improved during the post-merger compared to the pre-merger period. The findings from this study are consistent with the earlier studies by Ariff and Can (2008), Al-Sharkas et al. (2007), Akhavein et al. (1997) and Huizinga et al. (2001), among others. They discover that M&As do not improve banks revenue efficiency since the level of cost efficiency is higher than profit efficiency. Although cost and profit efficiency has improved, banks may still face revenue inefficiency resulting from producing a small number of

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Assessing the Effect of Mergers and Acquisitions on Revenue Efficiency

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appeared in more than 100 local and international journals. His research concerns performance banking and financial sector performance measurement. Junaina Muhamad (mjunaina@econ.upm.edu.my) holds a B.Sc. in Business Administration (Finance) and an MBA (Financial Management) from California State University, USA. She received her Doctor of Business Administration (DBA) in Finance from University Kebangsaan Malaysia. Since 1998, Junaina has been a full-time lecturer at the Faculty of Economics and Management, University Putra Malaysia, teaching Finance, Islamic Finance and Banking subjects. Junainas research interests are Islamic Financial and Capital Market Management, Banking and Derivatives. A.N. Bany-Ariffin (bany@putra.upm.edu.my) is an Associate Professor at the Department of Accounting and Finance, Faculty of Economics and Management, Universiti Putra Malaysia. He holds a Doctor of Business Administration (DBA) qualification in the area of Corporate Finance from the National University of Malaysia in 2006. He has a Master degree in Finance and Bachelor of Business Administration majoring in Finance and

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Economics from University of Oklahoma, USA. His scholarly articles have been published in reputable international and local academic journals. Among those are International Review of Financial Analysis Journal, Studies in Economics and Finance, Asian Economics Review, Asia Pacific Journal of Economics and Business. His current research interests include corporate finance, firms internationalization process, ownership structure, asset valuation and corporate governance. M.H. Yahya (mohdhisham@putra.upm.edu.my) obtained his Doctorate in Finance from Universiti Kebangsaan Malaysia (UKM), in 2004. He joined the Faculty of Economics and Finance at Universiti Putra Malaysia in 2009 and currently lectures Financial Management, International Finance, and Banking. Fakarudin Kamarudin (fakarudin84@gmail.com) obtained his Master of Science (MSc) in Finance from Graduate School of Management (GSM), Univesiti Putra Malaysia (UPM) in 2010. He joined the Faculty of Economics and Finance at UPM in 2008 and he currently conducts tutorial on Financial Management, Introduction to Planning and Use of Financial Information and Introductory Accounting.

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The Secrets of Business Success & Company Longevity Genre

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