We propose a new approach to evaluate and compare ex-ante the risk-adjusted efficiency gains or losses of potential mergers and acquisitions (M &A). We test our methodology in the banking sector by estimating a latent class stochastic frontier model to account for the unobserved heterogeneity. We show that post-prospective M &A financial institutions can be better equipped to withstand potential adverse economic conditions. We highlight that similarities in strategic characteristics are vital in the creation of post-consolidation cost efficiency surplus. Our results are consistent after various robustness tests. Our findings have important policy implications in light of the challenges the traditional banking business model faces in the current digitalisation era.