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Value Creation within the Construction Industry

A Study of Strategic Takeovers

Series:

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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3 Strategic Bidders and Long-Run M&A Success Beyond Monopolistic Power 37

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37 3 Strategic Bidders and Long-Run M&A Success Beyond Monopolistic Power Abstract The M&A success of strategic consolidation in various industries can be at least partly explained by increased market power, some potential for collusion or mo- nopolistic price-setting capabilities. This is not the case within the construction industry. This industry is characterized by high fragmentation, very low market shares of even the largest corporations and hardly any potential for gaining sig- nificant market power through acquisitions. Nevertheless, the construction in- dustry shows intensive M&A activity, and the question arises whether these transactions are favorable for the shareholders of the bidding companies. The examination documents a remarkably positive long-run stock price per- formance for acquirers within the construction industry. The evidence not only accounts for strategic bidders, but also for construction firms diversifying their business by conglomerate acquisitions. The success is mainly driven by the transaction characteristics of profitability, capital structure, payment media and the kind of takeover. 38 3.1 Introduction There has been plenty of research about the stock returns of bidding firms an- nouncing M&A transactions. Most short-run event studies report either signifi- cant negative or sometimes insignificant abnormal returns for the acquirers around the takeover announcements (Andrade et al., 2001; Bruner, 2002; Campa and Hernando, 2006; Swanstrom, 2006). Subsequent to these short-term exami- nations, some studies extend the observation period to a long-run horizon. While Loughran and Vijh (1997) document positive wealth effects for the subsample of cash bidders on a five-year horizon,...

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