Cross-Border Mergers and Acquisitions amid Political Uncertainty

Abstract

This paper examines the effects of political uncertainty surrounding national elections on cross-border mergers and acquisitions activity. Using a sample of completed cross-border mergers and acquisitions among 43 countries announced during 1990-2011, I find that the volume of cross-border mergers and acquisitions between two countries significantly declines when there is a forthcoming national election in the target country. This result suggests that political uncertainty regarding future government policy is an important determinant of cross-border acquisition activity. In addition, industry characteristics play a role in explaining the pattern of cross-border mergers and acquisitions amid increasing political uncertainty: firms in industries that are more dependent on the quality of contract enforcement, labor, and government spending are less likely to be acquired during national election years. I further test the valuation effects of policy uncertainty. I find that acquirers offer a lower bid premium when a cross-border deal is announced during the target country’s election year. Further analysis reveals that the acquirer captures a greater fraction of merger gains relative to the targets in such a deal, which indicates that the target’s bargaining position in merger negotiations is weakened during its national election year. Political uncertainty also has an effect on the method of payment in cross-border acquisitions. The likelihood of an all-cash offer is significantly lower in the face of the target country’s election.