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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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7. Wealth Creation of Corporate Divestiture: An Industry Perspective


7.  Wealth Creation of Corporate Divestiture:An Industry Perspective

7.1  Introduction

It is often noted that asset sales cluster in time and across industries. Anecdotal evidence also suggests that the success of asset reallocation from a shareholder wealth perspective differs over the market cycle and between industries. This intuition implies that industry characteristics not only influence the decision to sell assets but also determine the value creation potential of these divestments from a seller's perspective.

Previous research finds empirical evidence for industry specific factors that influence M&A activity. Significant effects have been found, e.g., from changes in demand, variations in investment requirements, and productivity changes (Mitchell and Mulherin 1996, Andrade et al. 2001, and Harford 2005). The results imply that companies in industries that undergo structural change can efficiently address these changes with M&A. Maksimovic and Phillips (2001) include corporate divestitures in the analysis of industry determinants of corporate restructuring. They find based on a simple production model that changes in demand in an industry affect the decision to sell parts of firm operations. Recent studies by Yang (2008) and Warusawitharana (2008) further develop this model by relating asset sales to an optimal asset allocation on firm level. The optimal amount of productive assets a company aims to operate is determined by productivity, demand development, profitablity, and investment needs. Yang (2008) and Warusawitharana (2008) find that these factors are largely determined by specific characteristics and trends of a firm’s industry....

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