How M&A dealmakers can ride out geopolitical storms
Periods of political upheaval – while disruptive – can offer major opportunities in M&A as long as bold dealmakers adapt their strategies, says Dr Valeriya Vitkova
Was Trotsky right after all?
Since the double whammy of Brexit and the first Trump election victory in 2016, much of the developed world and its politicians, businesses and financial markets have endured their own form of ‘permanent revolution.’
A permanent pandemonium perhaps?
And the revolution is, if anything, accelerating. President Donald Trump’s three month pause in ‘reciprocal tariffs’ expires this week. Meanwhile, just last week huge deficits and national debt triggered political turmoil in both the US and the UK – the ‘big beautiful bill’ in the former, derailed benefit cuts in the latter.
I and my colleagues have studied what this political turbulence and uncertainty might mean for M&A dealmakers and companies, and for private funds with an acquisition strategy. Our study was unusual in looking at firm level patterns rather than at the sector or national level.
The main takeaway from our analysis of more than 3000 completed deals in the US is: Political uncertainty creates opportunity for the fleet of foot – if they are ready to adapt the M&A playbook.
We found that deals completed during times of great political uncertainty can produce outsized profits. In part this can be explained by the caution of others: there are few rival bids, and the target is more likely to be under-valued.
Well-executed acquisitions can also be a strategic hedge against political risk and uncertainty. They reduce reliance on a single country or policy regime. Companies can also improve their supply chains or market access.
What’s more, and this may be a welcome boon for City PM readers working on the M&A frontline, markets see deals in turbulent times as evidence of good governance, appropriate ambition and effective risk management.
How to navigate political uncertainty
It’s important, however, to rewire the M&A playbook. Bidding firms who successfully navigate political turbulence tend to:
- Fund the deal by using stock rather than cash – not least to keep their cash as a buffer in uncertain times. Stock deals also share risk between the buyer and target and commit leaders to creating long-term value.
- Reshape the deal structure to contractually reallocate risk between the shareholders of the acquirer and those of the target firm
- Develop contractual arrangements that can absorb policy shocks without destroying the deal
- Identify possible policy changes or other external upheavals post-merger that could disrupt integration plans – and map possible solutions.
Having defined eight types of political risk, we found that bidders were most anxious about uncertainty or flux in economic policy, trade, tax and environmental regulation.
The common thread across those risks? They have a direct and tangible impact on cash flow forecasts, cost structures, integration plans and core value drivers.
By contrast, uncertainty around the political process or concerns around health regulation and safety issues, security and technology risks are seen as more manageable as they don’t have that direct, tangible impact.
There is an important caveat to all the above, however.
Where it was the target firm that had significant exposure to political uncertainty, returns were typically one per cent lower and deal synergies three per cent down. This could be due to sudden changes in labour laws, tax policies or trade rules, the costs of extra public affairs and risk management , or delays in regulatory approvals that can strain relationships between acquirer and target.
There is a strong argument for having live ‘policy shock dashboards’ that provide integration teams with instant alerts on policy changes around tax, labour, trade and capital controls. Due diligence and horizon scanning – which is standard best practice in M&A – are particularly important in times of uncertainty.
Let’s end where we began: after all, Trotsky did (for a time) thrive in a period of massive geopolitical flux.
He said: “The depth and strength of a human character are defined by its moral reserves. People reveal themselves completely only when they are thrown out of the customary conditions of their life, for only then do they have to fall back on their reserves.”
Dr Valeriya Vitkova is senior lecturer in corporate finance at the M&A Research Centre, Bayes Business School, London