Assessing Degree of Overall Prospect for Merger and Acquisition of Managed Funds: A Relative Performance Perspective

Abstract

The objective of this research is to analyze the merger and acquisition potential of managed funds as distinct endeavors and evaluate their overall prospects separately. Initially, the pre-merger performance is evaluated employing data envelopment analysis (DEA) under the variable returns to scale assumption. Merged fund performance is evaluated similarly after augmenting the sample with the merged fund. A fund pair is considered a merger prospect when both demonstrate the potential to enhance DEA-efficiency based rankings. Similarly, prospective acquisition targets are identified, albeit meeting different criteria. Improvement in rankings is categorized as high, medium, or low on an ordinal scale. The overall merger prospect of a given fund is determined by a weighted sum of the number of its prospective merger candidates and the frequency of the fund in question enhance their performance at the high, medium, and low level. Overall prospects serve as indicators of a fund’s potential to merge and acquire within the industry. Studies generally compute efficiency gain focusing on one merger. We propose a novel method to aggregate efficiency gain. This approach is new to the literature. In an investigation of a sample of Australian superannuation funds with 2021 annual cross-sectional data reveals that, on average, industry funds exhibit more merger and acquisition prospects within their own category compared to retail, corporate, and public sector funds. Notably, corporate funds show no such prospects. These findings have important policy implications.