POLITICS AND M&A

Politics, in simple terms, refers to the activities surrounding a country’s governance. In the context of a large democratic country like India, politics becomes really complicated. When two firms shake hands to operate jointly in future then politics in and around the firms gets shaken, both internal and external political factors affect the success, failure, growth or decline of the newly formed business.?

“In politics nothing happens by accident. If it happens you can bet it was planned that way.”?

Internal Politics

Employees coming from different organizational cultures may have completely different set of behaviors. For example, employees from an organization with core company values such as conservatism, efficiencies and playing it ‘safe’ will be very different from companies that are daring, diverse and creative. These two companies could fundamentally be different on every level, including formality, philosophies and operating styles. With a change in employee’s comfort circumstances so changes the internal politics in the form of groupism, biasness,?culture differences etc.

During these processes, employees and management are generally left in the dark. Consequently, fear and lack of answers prevent top leaders from providing the information that employees need and expect. Most employees will ask themselves: “Why is our company is merging?”;?“How will the merger affect my job (job insecurity)?”; “What support will I receive during the merging process?”?

Such poor communication creates distrust and uncertainty in the workplace, and it often leads to lower employee engagement and productivity levels. Therefore, it is crucial to align employees from both sides and help them work together.?

External Politics

The business operating environment is significantly affected by the political decisions made by regulatory institutions and politicians. The aspect of political risk in M&A and the associated due diligence is harder to understand because of a few reasons:?

1. It is a lot more subjective than economic risk; while economic risk is country’s ability to pay back its debt, political risk is the willingness to do so.
2. It is influenced by law, government leaders, movements, even personalities and their actions.
3. While political risk needs a framework to understand (focus of this article), it needs deep country level expertise (not the focus of this article) to execute.
4. The bias of political analysts that tend to skew towards their areas of interest and subject matter.
5. There tends to be a lot of information and analysis, but not much when it comes to M&A?specific strategic and tactical, execution-oriented advice.
6. Political analysis is very reactive, and event driven, there is limited ability to predict or generate foresight.

Impact of Corruption on Business Combinations

Political corruption has important implications for corporate policies, such as firm liquidity, capital structure, and capital expenditures and even mergers and acquisitions. The levels of corruption in acquirer areas relate positively to the bid premiums and negatively to the likelihood of deal completion. The risks will vary depending on the buyer, the target and the structure of the transaction.

The main risks are:

• Acquiring a company that is tainted by corruption, and therefore assuming criminal and civil liability.
• Paying too much for the acquired company or business, to the extent that part of the revenue and/or profit is based on corrupt behavior, and is therefore not sustainable.
• Risk to reputation of the buyer. In addition, there is the risk associated with the drain on management of resolving any issue along these lines that does show up. It can be expensive, time consuming, and distracting.?

Conclusion

In short, political risk is the impact of politics on economic value and markets. Hence basing deal value purely on economic risk can lead to ignoring more serious issues. Even if a country’s economy is strong, if the political climate is unfriendly (or becomes unfriendly) to outside investors, the risk of diluting M&A value is high. Early warnings are critical, reading about political risk in the media is often very late to manage the impact. Political due diligence is not a matter of compliance with corporate governance rules, but a strategic intent to protect the buyer’s brand, minimizing economic risk while executing within the environment to create value.