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Value Creation within the Construction Industry

A Study of Strategic Takeovers


Joachim Vogt

Mergers & Acquisitions (M&A) are important strategic business options for corporations. Yet, the understanding of industry-specific drivers of M&A transactions is more than limited. Characterized by highly fragmented markets, cross-company production structures and increasing international business scope, the construction industry represents an attractive field of research to address questions on M&A motives. Based on comprehensively selected datasets and state-of-the-art empirical methods, the study illustrates the motives, the strategy and the effects of M&A transaction within the construction industry. Overall the analyzed M&A transactions tend to lead to an increase of corporate wealth. Important factors for a positive development comprise the peculiarities of the construction industry, the general market conditions and the nature of many takeovers. Still, the M&A transactions may also cause significant value destruction and may even lead to a failure of a company if an inappropriate strategy is applied.


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2 Consolidation, Value Chain Extension and Outside Industry Investors – Value-Generating M&A Strategies in the Construction Industry 7


72 Consolidation, Value Chain Extension and Outside Industry Investors – Value- Generating M&A Strategies in the Construction Industry Abstract The construction industry belongs – with a share of 10% of the global GDP – to the biggest industry sectors worldwide but faces serious challenges due to strong price competition, small profit margins and a highly fragmented market. To overcome these challenges, several construction companies intend to augment their market power by conducting Mergers and Acquisitions (M&A). In addi- tion, many construction firms become a takeover target by firms from outside the construction industry. This study examines, on the one hand, the value effects for construction firms when engaging in M&A. On the other hand, it surveys the wealth effects for non-construction firms when purchasing construction companies. Overall, the results suggest that these takeovers are beneficial for the bidder shareholders. However, the wealth benefits depend strongly on the strategic and geographical focus as well as the general stock market developments. Profitability and growth expectations of the bidder firm account for further relevant success factors. 82.1 Introduction Now, more than ever, the construction industry faces numerous challenges on a global and local scale (Rice, 2007). The complexity of most construction pro- jects poses high operational and financial risks. Construction companies can only approximate these risks, because most projects are unique, vary in size and characteristics and require always a project-specific monitoring, since the con- stellation of subcontractors usually differs (Black et al., 2000). The risks inher- ent to construction projects can be...

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