Mergers and acquisitions strategic fit in Middle Eastern banking: an NDEA approach

Banking in Middle Eastern countries is well-known for its heterogeneity, small scale, and regulatory diversity. This paper presents an assessment of the strategic fit of mergers and acquisitions (M%A) in Middle Eastern banks. A network DEA approach is adopted to assess how several types of efficiency scores of the resulting virtually merged banks are impacted by contextual variables: global (merger), technical (learning), harmony (scope), and scale (size) efficiencies. When two banks are 'virtually merged' in our analysis this means that the inputs and outputs of pairs of separate banks are 'virtually' combined to test the efficiencies of the 'virtually merged' entity, in an attempt to better understand the industry. The impact of contextual variables related to the ownership of the bank, its type, and origin is tested using a set of several robust regressions to handle dependent variables bounded between zero and one: tobit, simplex, and beta. The results reveal that bank type, origin, and ownership impact virtual efficiency levels; however, the findings also show that harmony and scale effects have a negative impact on merged institutions due to the heterogeneity, regulatory diversity, and small scale size that prevail in the region.