Mergers and acquisitions during politically uncertain times can deliver outsized returns – if the deals are strategically sound and dealmakers “rewire” their approach, a firm-level study concludes.
The analysis from Bayes Business School (part of City St George’s, University of London), arrives as the global economy and businesses are buffeted by geo-political turbulence – including President Donald Trump’s weaponisation of tariffs, huge fiscal deficits in many big western nations, conflict in the middle east and the ongoing war in Ukraine. The paper concludes that firms with a flexible approach can pick up bargains when less confident rivals are wary of high interest rates, uncertain supply lines, market access and committing to a major investment. Well-executed deals can also boost the reputation of acquirers and their leaders as the market recognises effective risk management and strategic thinking.
Lead author Dr Valeriya Vitkova, Senior Lecturer in Corporate Finance at Bayes, said: “Acquisitions can actually be a strategic hedge against political risk by reducing reliance on a single country or policy regime. They can also improve supply chains or market access to protect against future political disruption.”
Adapt to survive
Published by Bayes’ M&A Research Centre, the study concludes that political risk shapes every stage of the M&A process and that “acquirers and dealmakers should rewire the entire M&A playbook”. Bidding firms who successfully navigate political turbulence tend to:
- Use stock rather than cash to fund the purchase – not least so they can keep a stockpile of cash as a buffer in uncertain times. Stock deals also share risk across buyer and seller shareholders and leaders and commit them 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.
The researchers analysed 3079 acquisitions in the United States between 2002 and 2019 to reveal firm level patterns: earlier studies have focussed on the impact of political flux or uncertainty on a particular sector or economy. The approach also allowed the researchers to identify differences based on whether the acquirer or the target was facing greater political uncertainty.
Lead author Dr Valeriya Vitkova, Senior Lecturer in Corporate Finance, said: “Favouring stock over cash in M&A transactions in politically uncertain times reflects a deliberate blend of financial prudence, disciplined risk management and thoughtful strategic signalling. It underscores how political risk influences not only whether a firm chooses to pursue acquisitions but the deal’s structure, financing and governance to ensure resilience and long-term success.”
Not all political risks are equal
Having defined eight types of political risk, the academics found that bidders were most anxious about uncertainty or flux around economic policy, trade, tax and environmental regulation.
Co-author Dr Lani Chunyu said: “The common thread across those risks is that they have a direct and tangible impact on cash flow forecasts, cost structures, integration plans and core value drivers that underpin M&A transactions. Upheaval around the political process, health, security and technology risks are seen as more manageable as they don’t have that direct, tangible impact.”
However, the study found that returns were typically 1 per cent lower and deal synergies 3 per cent lower for completed acquisitions where the target firm had significant exposure to political uncertainty. The authors suggest this could be due to:
- Sudden changes in labour laws, tax policies or trade rules
- Extra spending on public affairs, risk management and compliance
- Delayed regulatory approvals – which sometimes also strain relationships or cause friction between the acquirer and target, as happened in the Syopsys-Ansys deal
- Higher risk of regulatory intervention
- Over-confidence of senior leaders in their ability to manage political risk – especially if they are navigating complex, foreign regulatory regimes.
Comprehensive due diligence and horizon scanning should include mitigating shocks with live ‘policy shock dashboards’ that provide integration teams with instant alerts on policy changes around tax, labour, trade and capital controls. The study also recommends having backup plans for supply chains, finances and legal structures in case policies and regulations change.
