Risky Business: How Politics is Reshaping M&A Strategies

By Prof. Gaoguang ZHOU

Donald TRUMP’s return to the White House is a wake-up call for global markets. After years of deferring to the Washington Consensus—where globalisation ruled and markets set the agenda—power is shifting back to governments. For firms weighing major moves like mergers and acquisitions (“M&As”), political risk is now impossible to ignore – just ask Tik-Tok. But how do political considerations shape acquisition decisions? A recent paper[1] sheds light on the way political forces impact finance and offers valuable clues to dealmakers about how to deal with them.

From interest rates and supply chain disruptions to tech shifts and labour disputes, companies are juggling multiple layers of risk. Political uncertainty has long influenced corporate decisions—from investments to capital expenditures—but it’s often treated as a one-size-fits-all challenge. Yet, elections and economy-wide indicators don’t affect every firm equally, and political risk is anything but uniform, especially when it comes to M&A. While broad political instability tends to suppress dealmaking, firms are using different strategies to hedge against it. Overseas M&As help mitigate systemic risks like domestic political turmoil, while firm-specific risks can sometimes be addressed through domestic deals. But can M&As be a tool for firms to systematically manage risks tied to their own unique political exposure?

Analysing thousands of M&A deals closed between 2003 and 2016, the study combines accounting data, stock prices, and returns to assess how political risk shapes dealmaking. Looking beyond financial constraints and free cash flow, it factors in non-financial elements like lobbying, government contracts, and corporate social responsibility—often seen as a hedge against political risk. The takeaway? The more politically exposed a firm is, the less likely it is to pursue M&A deals after controlling for broader economy-wide political risk. Just a moderate increase in firm-specific political risk results in a 1.21% drop in deal activity —equivalent to a nearly 6% decline relative to typical M&A activity. Even after accounting for broader policy uncertainty, it is clear that firm-specific political risk represents a major hurdle for dealmakers. Meanwhile, companies with weaker financial positions are more likely to delay acquisitions in the face of political uncertainty, while firms with strong government ties or stellar reputations are less affected.

That said, firms aren’t without tools to manage this risk. Unlike economy-wide political uncertainty, firm-specific risks can be managed. Some firms use lobbying and political connections to navigate uncertainty, while acquisitive firms facing high political risk may target companies with lower political and financial risks or opt for vertical integration to improve their prospects. The rewards for savvy dealmakers are clear: post-M&A performance of firms improves, but only when they acquire low-risk targets, so corporate financiers and investment bankers should choose their targets wisely.

As dealmakers search for inspiration, they could do worse than refresh their knowledge of The Art of the Deal—especially since we’ll be living in a TRUMP world, at least for the next few years!

Reference:

[1]  Chen, X., Shi, H., Zhou, G., & Zhu, X. (2024). Dance with wolves: Firm-level political risk and mergers and acquisitions. Review of Quantitative Finance and Accounting, 63(2), 715–752. https://doi.org/10.1007/s11156-024-01274-4