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Value Creation of Corporate Restructuring

A Market Cycle and Industry View


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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5. Wealth Creation of Corporate Divestitures: A Market Cycle Perspective


5.  Wealth Creation of Corporate Divestitures: A Market Cycle Perspective

5.1  Introduction

Corporate restructuring through mergers and acquisitions (M&A) is a two-fold process. Firms can decide to acquire new assets or sell business segments. The value implications accompanying these decisions have seen large interest from researchers and practitioners alike. The current consensus is, despite variations in empirical results, that acquisitions on average destroy shareholder value for acquirers' shareholders12 while divestments create value13 for sellers’ shareholders. The negative results for M&A are often explained by selfish behavior of management that leads to agency costs (Roll 1986, Gorton et al. 2009, Goel and Thakor 2010). Positive effects on sellers’ shareholder wealth are explained by increased operational efficiency through refocusing of operations (Berger and Ofek 1995, John and Ofek 1995, Desai and Jain 1999).

Recent findings for M&A shed light on the correlation between market valuation, merger activity, and wealth creation for shareholders (Harford 2005, Bouwman et al. 2009, Chidambaran et al. 2010). A number of studies show that acquisitions in booming markets create less value for shareholders of the acquiring firm than transactions in weak markets due to increased agency costs of overvalued equity (Jensen 2005, Goel and Thakor 2010).

Based on results for M&A, the question emerges whether divestment success also shows variations across market phases. Following the intuition that asset sales are less exposed to agency costs in boom markets than acquisitions while increased...

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