Value Creation of Corporate Restructuring

A Market Cycle and Industry View

by Ulrich Erxleben (Author)
©2016 Thesis XVI, 195 Pages


The study offers a contribution to the debate about shareholder wealth creation following corporate restructuring transactions. Including market cycle and industry factors, it provides an analysis of merger and acquisition (M&A) and corporate divestiture success between 1989 and 2008 in Europe. The first part of the study focuses on effects of market valuation levels and market cycles on the value creation potential of corporate restructuring. The second part discusses mergers and acquisitions and divestment success from an industry perspective. The results provide surprising insights into drivers of shareholder value creation.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the Author
  • About the Book
  • This eBook can be cited
  • I. List of Contents
  • 1. Introduction
  • 2. Corporate Restructuring in Europe - Starting Point and Motivation
  • 2.1 Corporate restructuring in Europe between 1998 and 2009
  • 2.2 Corporate restructuring across European industries
  • 3. Research Foundation
  • 3.3 Corporate restructuring, M&A, and corporate divestiture
  • 3.4 Previous research
  • 3.5 Measuring success of corporate restructuring
  • 3.5.1 Event studies
  • 3.5.2 Accounting studies
  • 3.5.3 Research approach
  • Section A: Wealth Creation of Corporate Restructuring across Market Cycles
  • 4. Wealth Creation of Mergers in Downturn Markets
  • 4.1 Introduction
  • 4.2 Literature and hypotheses
  • 4.2.1 Related literature
  • 4.2.2 Specific predictions
  • 4.3 Data and methodology
  • 4.3.1 Applied data
  • 4.3.2 Classification of market valuation levels
  • 4.3.3 Approach to determine quality of M&A transactions
  • 4.4 Empirical results
  • 4.4.1 Overall value creation in different market environments
  • 4.4.2 Transaction characteristics in different market phases
  • 4.4.3 Value creation of different transaction sub-samples
  • 4.4.4 Regression analysis
  • 4.5 Conclusion
  • 4.6 Appendix
  • 4.6.1 Summary Statistics
  • 4.6.2 Robustness to value weighting of long-term results
  • 4.6.3 Analysis of transactions size
  • 5. Wealth Creation of Corporate Divestitures: A Market Cycle Perspective
  • 5.1 Introduction
  • 5.2 Related research and hypotheses
  • 5.2.1 Literature overview
  • 5.2.2 Specific predictions
  • 5.3 Data and methodology
  • 5.3.1 Applied data
  • 5.3.2 Classification of market valuation levels
  • 5.3.3 Approach to determine shareholder wealth creation
  • 5.4 Results
  • 5.4.1 Value creation in different market valuation phases
  • 5.4.2 Value creation of different divestment strategies
  • 5.4.3 Multiple regression
  • 5.5 Conclusion
  • 5.6 Appendix
  • 5.6.1 Summary statistics
  • 5.6.2 4-factor calendar-time results
  • 5.6.3 Operative performance effects (AROA)
  • Section B: Wealth Creation of Corporate Restructuring across Industries
  • 6. Industry Characteristics and M&A Value Creation
  • 6.1 Introduction
  • 6.2 Literature review and hypotheses
  • 6.2.1 Literature review
  • 6.2.2 Specific predictions
  • 6.2 Data and Methodology
  • 6.2.1 Industry M&A Data
  • 6.2.2 Industry fundamental data
  • 6.2.3 Research design
  • 6.2.4 Multiple regression model
  • 6.3 Results
  • 6.3.1 Industry differences in M&A activity and value creation
  • 6.3.2 Industry determinants of M&A activity
  • 6.3.3 Industry determinants of M&A value creation
  • 6.4 Conclusions
  • 6.5 Appendix
  • 6.5.1 Robustness to alternative industry classifications
  • 6.5.2 Overview of industry characteristics
  • 7. Wealth Creation of Corporate Divestiture: An Industry Perspective
  • 7.1 Introduction
  • 7.2 Literature review and hypotheses
  • 7.2.1 Literature review
  • 7.2.2 Predictions
  • 7.3 Data and Methodology
  • 7.3.1 Industry M&A Data
  • 7.3.2 Industry Fundamental Data
  • 7.3.3 Approach to determine value creation
  • 7.3.4 Multiple regression model
  • 7.4 Results
  • 7.4.1 Divestment activity
  • 7.4.2 Value creation of corporate divestitures
  • 7.5 Conclusions
  • 7.6 Appendix
  • 7.6.1 Overview of data sample
  • 7.6.2 Results for inter- and intra-industry divestments
  • 7.6.3 Univariate results
  • 7.6.4 Robustness to calendar time long-term returns
  • 7.6.5 Panel regression results
  • 8. Summary and Conclusion
  • References
  • Series Index

1.  Introduction

Corporate restructuring is perhaps the most decisive strategic decision a management team can face. This applies to the choice to acquire a new business or to sell a part of the existing operations. M&A activity involves a significant amount of a firm's resources. This comprises financial capital as well as human capital. Therefore, shareholders become cautious when corporate restructuring transactions are discussed in boardrooms. Previous studies have shown that this caution is justified. Results propose that most acquisition announcements do not increase and often even reduce shareholder wealth (Bruner 2002, Jensen and Ruback 1983). The majority of divestments, however, yields positive announcement effects and, thus, increases the wealth of sellers' shareholders from a short-term perspective (e.g., Schlingemann et al. 2002, Bates 2005).

The success of corporate restructuring is closely related to the motives of managers that lead to corporate restructuring decisions. Two competing views exist with regard to these decisions.

The neo-classical perspective identifies M&A as a rational investment choice by managers to increase the value of their firms. Value enhancing effects of acquisitions can be, e.g., efficiency increases through operative synergies, financial synergies, the replacement of uneffective management, or increased market power (Jensen and Ruback 1985, Morck at al. 1990, Shahrur 2005, Devos et al. 2009). Asset sales, on the other hand, can be motivated by an attempt to remove negative synergies (John and Ofek 1995) or to refocus operations on core businesses. Another reasons is the need to generate liquidity from the sale of business units to weather bad market condition or finance unfunded growth projects (Lang et al. 1995). These rational explanations of corporate restructuring imply positive effects on shareholder wealth.

The competing view argues from a behavioral perspective. Behavioral motives are hubris and empire building of managers (Roll 1986). Further behavioral explanations are, e.g., the fear of managers to lose their position after being acquired by a competitor that leads to an eat or be eaten reaction (Gorton et al. 2009) or envy with regard to higher compensation of executives in larger companies (Goel and Thakor 2010). Behavioral explanations for M&A activity imply agency costs and, hence, negative economic effects from a buyer's shareholder perspective (Jensen 2005). Behavior motives with regard to divestments are less frequently advanced in behavioral research. The decision to sell parts of the business is not consistent with most behavioral explanations. Managers can, however, choose how to deploy the proceeds from asset sales. Management discretion can ← 1 | 2 → result in agency costs when proceeds are invested in value decreasing projects instead of being returned to shareholders (Lang et al. 1995).

Empirical evidence appears to support behavioral explanations for M&A and the neo-classical view for corporate divestiture. Results, however, show large variations in magnitude and even in the sign of abnormal returns following takeovers and divestments. Numerous studies, therefore, argue that not all M&A and divestment transactions have equal value creation potential but that success depends on a number of endogenous and exogenous factors. Often discussed determinants are, e.g., industrial and geographical diversification or refocusing, payment method, and transaction type.

Recent literature proposes that especially the prevailing market phase (Bouwman et al. 2009) and industry dynamics (Yang 2008) can affect the value creation potential of M&A and divestments. An initial analysis of corporate restructuring in Europe over the last two decades appears to support this view. The results show that not only activity levels but also the value creation of transactions differ significantly across time periods and between industry sectors.

With regard to the effects of market phases, recent findings shed light on the correlation between market valuation, merger activity, and value creation (Harford 2005, Bouwman et al. 2009, Chidambaran et al. 2010). These studies show that acquisitions in booming markets create less value for shareholders of the acquiring firm than transactions in weak markets. Explanations for this finding are predominantly behavioral and refer to agency costs of overvaluation and excess cash in strong markets (Jensen 2005). No clear view exists to date on the determinants of M&A success in weak markets and implications of market valuation levels on the success of corporate divestiture. The intuition based on observations during the last boom and subsequent recession is that M&A in weak markets profits from sounder investment decisions in the absence of market valuation induced agency costs and potentially benefits from pressure on sellers to restructure.

The reverse view on asset disposals consequently implies that sellers in weak markets are often forced to sell for a considerable discount when liquidity concerns increase. Managers in weak markets are more likely to sell in order to increase liquidity rather than operational efficiency of their firms. Depressed markets also reduce investment opportunities for proceeds. This leads to the prediction that divestments in weak markets tend to reduce shareholder wealth.

The first part (Section A) of my thesis, therefore, examines the effects of market valuation phases on corporate restructuring success. Emphasis is on determinants of value creation especially in weak market environments. This focus is motivated by a research gap in this particular field as well as by the experience of the recent recession and the intense debate about drivers and benefits of corporate restructuring in current literature. ← 2 | 3 →

With regard to industry effects, some evidence is provided by recent studies of corporate restructuring in single industries. The results propose large variations in value creation potential that are related to specific industry characteristics. Possible explanations advanced in recent literature are, e.g., reduced value capturing in R&D intensive industries (Wang and Chung 2009), larger synergies in industries with high capital investment requirements (Devos et al. 2009), reduced value creation from M&A in industries with high concentration levels (Shahrur 2005), and the interdependency effects from industry wide productivity changes and asset realaocation (Yang 2008 and Warusawitharana 2008).

Previous research has mainly focused on individual firm charateristics to explain corporate restructuring success. Thus, little empirical evidence exists with regard to general industry factors on value creation potential. Based on the insight from recent research, it appears relevant to further examine the determinants of corporate restructuring success from a cross-industry perspective. The second part of my thesis (Section B) focuses on an analysis of industry characteristics in order to explain industry variations in corporate restructuring success.

The presented analysis contributes to current research in different ways. It provides a comprehensive analysis of value effects from corporate restructuring in Europe including M&A as well as corporate divestiture. Previous research mostly focuses on the earlier perspective while the later has seen relatively little attention from a value creation perspective so far. The presented study also provides empirical evidence based on a large European transaction sample. Empirical analyses of M&A based on large transaction samples across European markets are very rare and with regard to corporate divestiture non-existent. Corporate restructuring research is predominantly US-focused. Recent studies of M&A in European countries, however, indicate that value effects from M&A indeed differ in some aspects from US results (Martynova et al. 2006, Lee and Lin 2008). The large sample size also allows evaluating different determinants of corporate restructuring success in transaction subsamples.


XVI, 195
ISBN (Hardcover)
Publication date
2015 (December)
Merger & Acquisitions (M&A) Divestments Shareholder Value Corporate Finance
Frankfurt am Main, Berlin, Bern, Bruxelles, New York, Oxford, Wien, 2015. XVI, 195 pp., 9 b/w fig., 42 tables

Biographical notes

Ulrich Erxleben (Author)

Ulrich Erxleben holds a Ph.D. from the Technical University of Darmstadt, Germany.


Title: Value Creation of Corporate Restructuring
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214 pages