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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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4 The Deteriorating Wealth Effect of National Acquisitions in Fragmented and Declining Markets 67

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67 4 The Deteriorating Wealth Effect of National Acquisitions in Fragmented and Declining Markets Abstract The majority of M&A research documents positive bidder wealth effects from horizontal acquisitions within the domestic market. These findings also account for acquisitions conducted in declining national markets. Increasing market dominance and the option to redeploy resources efficiently explain these bene- fits. Nevertheless, I argue that in declining markets, in combination with a high level of fragmentation, these benefits are not achieved, and corporate wealth is destroyed. Because the German construction industry saw a high fragmentation and de- creasing market volumes in the period 1995–2004, I use this market for the analysis. Within the market I investigate the third biggest German construction firm, the Walter Bau AG, which uses domestic horizontal acquisitions to realize redeployment synergy yields and to strengthen its market position in the declin- ing market. I show that the expected positive impacts from these transactions vanish quickly and that detrimental wealth effects result for the Walter Bau AG. 68 4.1 Introduction In the period 1988–2008, the worldwide M&A transaction volume rose by 227% from a total value of 868bn USD to 2,842bn USD. Not surprisingly, extensive studies have addressed the question of the wealth effect for shareholders in rela- tion to mergers and acquisitions (M&A). Most studies document strong positive yields for the target shareholders around the announcement of the acquisition (Jovanovic and Barguinsky, 2004; Campa and Hernando, 2004; Danbolt, 2003; Andrade et al., 2001). Contrarily,...

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