Politics may seem to play a minimal role in business, but research from the University of Exeter Business School suggests that it is extremely important when it comes to cross-border mergers.  Indeed, the researchers found that investors tend to frown upon mergers where there is little evidence of political affinity.

The researchers examined how important political affinity was in judging whether the premium paid to secure the deal was worth it or not.  In total, they looked at 1,183 cross-border deals that took place between 1999 and 2018.  The analysis made the somewhat surprising finding that political affinity seemed to align with investor sentiment about the deal.

Political affinity

It should be said that this is not so much political affinity between the two firms, but rather the two countries the firms are based in.  For instance, a merger between firms in the US and UK would be looked on more favorably than one between firms in the US and China.

The political nature of a country was gauged by examining the voting behavior of that nation at the UN General Assembly.  This allowed the researchers to determine how closely aligned two nations were politically across a range of issues.

“The findings show there’s a heavy cost to firms when you have too much disagreement between nations, with cross-border acquisitions leading to value to be wiped off a company’s share price,” the researchers explain.

“Governments that want to maintain a healthy and open capital market should be aware of this, and businesses, when they acquire other companies must remember to be careful who they select and factor in that investors, will react more negatively if, for example, a US company is buying a Chinese firm as opposed to a UK one.”

The researchers cite the example of Microsoft’s aborted attempt to buy a stake in Chinese social media giant TikTok as an example of how political issues can interfere in commercial endeavors.

“It goes to show that all that we see now, with tensions in countries such as Russia, the Ukraine and China, is costly for the capital market and costly for acquiring and target firms alike,” the authors conclude.