DEA-based pre-merger planning tool

DEA-based pre-merger planning tool

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Article ID: iaor20106738
Volume: 61
Issue: 10
Start Page Number: 1485
End Page Number: 1497
Publication Date: Oct 2010
Journal: Journal of the Operational Research Society
Authors: ,
Abstract:

Data envelopment analysis (DEA) can be used as a pre-merger planning tool to estimate expected cost and profit efficiency gains. Specifically, in this paper, two alternative DEA models are presented, one to minimize post-merger input cost and the other to maximize post-merger profit. The first model assumes that input prices are known, whereas the second assumes that output prices are known. As both models explicitly consider the possibility of closing existing units, they are especially apt for in-market horizontal mergers, in which considerable overlap may exist among the branches of the merging firms. Indicative efficiency ratios are proposed based on the results of the models. The proposed approach is, in addition, rather flexible, allowing the optional inclusion of a variety of features and constraints, such as incompatibility among units, employment guarantees, etc.

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