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Value Creation of Corporate Restructuring

A Market Cycle and Industry View

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Ulrich Erxleben

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.
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1. Introduction

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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...

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