Getting by with a Little Help from My
Friends: Does Political Affinity Lead to
Lower M&A Premiums?
"What would you think if I sang
out of tune, Would you stand up
and walk out on me... I get by with
a little help from my friends"
Lennon/McCartney, 1967
Olivier Bertrand, SKEMA Business School
Marie-Ann Betschinger, NRU HSE
Alexander Settles, NRU HSE
Motivation

Wikileak cables and the revelation of political intervention
abroad (Lipton, Clark, and Lehren, 2011)

Role of bilateral country relation and foreign policy for
business deal making
◦ Investigation of the importance of political affinity (Gartzke,
1998) – an underlying driver of ‘special’ relationship
between countries

Focus on large cross-border acquisitions and decision-making
during the M&A process
◦ Effect on the initial bid premium offered by acquirers
 Strategic parameter in deal-making (Eckbo, 2009)
2
Main Contribution
Introducing
international relations
into M&A research
◦ Does the willingness of
countries to pursue a
cooperative or conflictual
relationship with a partner
country explain its actions
in the business arena?
◦ Political affinity, defined as
the similarity of national
preferences in global affairs
(Gartzke, 1998)
Focus on the
Acquisition process
◦ Still little on the
acquisition process
◦ A few papers on the effect
of host country
environment on the level
of bid premium (Rossi &
Volpin, 2004; Bris &
Cabolis, 2008)
◦ Governments as key
stakeholder in M&A
negotiations
3
Main Findings
Based on a sample of 925 large cross-border deals
 Lower initial bid offer with a higher level of political affinity
(as measured by UN voting patterns)
 Effect moderated by
◦ The size of acquirers and target firms
◦ The level of domestic political constraint faced by the host
government
4
Why should it matter? (1)
Bid premium and bargaining power
5

Bid premium
◦ Objective of the acquirer to pay as little as possible

Initial bid premium as a direct function of the anticipated
bargaining power of acquiring and target firms (Aktas, de
Bodt, and Roll, 2010; Schwert, 2000)
◦ Target firm is advantaged due to information asymmetries
◦ But, acquirer heterogeneity in terms of
 Access to relevant information
 Ability to influence the decision made by the target firm
Why should it matter? (2)
Governments and M&A
6

Several facets of government involvement
◦ Regulator (Clougherty, 2005; Wan and Wong, 2009)
◦ Owner (Johnson and Mitton, 2003; Shleifer and Vishny, 1994)
◦ Customer/ supplier (Agrawal and Knoeber, 2001; Dinc, 2005).
◦ Government executives are usually part of vast networks that
include political and business elites (Kadushin, 1995;
Colignon and Usui, 2001)
Government can also affect the negotiation outcome through:
◦ Information access (e.g., elite circles, investment bank links)
◦ Access to dependency relationships (e.g., regulation, major
customer, public opinion)
Why should it matter? (3)
Cross-border M&A and political affinity


In cross-border transactions: Larger influence of (no) help &
two governments involved
Political affinity
◦ Similarity of national preferences in global affairs
 In case of positive and high political affinity ‘global
objectives coincide’(Gartzke, 1998)
◦ High political affinity provides a door for economic
cooperation while disaffinity makes international deals
more costly and difficult
Hypothesis 1: The level of political affinity between
acquirer and target countries is negatively related to the
initial acquisition premium for cross-border M&As.
Should it matter for all firms to the same degree? (1)
Firm size and political affinity


Firm size – proxy for resources (Moeller et al., 2004)
◦ More resources can be deployed to influence governments
◦ Higher ability to bear the fixed costs of establishing an
infrastructure in the host market (Helpman, Melitz, and
Yeaple, 2004; Salamon and Siegfried, 1977)
More attention of government to bigger firms
◦ More visible and legitimate
◦ Larger popular support
Should it matter for all firms to the same degree? (2)
Firm size and political affinity
Target firms
Hypothesis 2: The
relationship between the
initial acquisition premium
and political affinity is
moderated positively by the
size of the domestic target
firm.
Acquirer firms
Hypothesis 3a(b): The
relationship between the
initial acquisition premium
and political affinity is
moderated positively
(negatively) by the size of
the foreign acquiring firm.
Should it matter in all target countries to the same degree?
Host government constraints and political affinity



Trade-off between foreign policy and domestic interests
(Putnam, 1988)
Implementation of foreign policy objectives constrained
by domestic political decision-making procedures
(Besley and Case, 2003, Milner and Tingley, 2011)
◦ Formal approval
◦ Negative response from political partners or opponents
Political accountability varies across political regimes
Hypothesis 4: The relationship between the initial
acquisition premium and political affinity is moderated
positively by the level of domestic political constraints
on the host government in the target country.
Sample

Final sample: 925 cross-border deals for the period 19902008 with an average four-week bid premium of 43% (source:
Thomson ONE database)
Model
Pijt  f Cijt , X ijt , Dijt , I j , Tt 
Political Affinity:
 Patterns of national interests revealed in
United Nations (UN) voting behavior (see e.g., Gartzke, 1998).
 Spearman rank-order correlations of roll-call voting
patterns in the UN General Assembly.
Method
◦ Pooled least squares regressions – robust errors
◦ Fixed country/dyad effects in robustness check
0.15
Canada
1991
0.24
Canada
1994
0.77
Israel
1996
0.08
Canada
1995
0.72
Israel
2000
0.29
Canada
1996
0.72
Israel
2002
0.17
Canada
1997
0.68
Israel
2003
0.13
Canada
1998
0.79
Israel
2004
0.16
Canada
1999
0.65
Israel
2005
0.15
Canada
2000
0.56
Israel
2008
0.07
Canada
2001
-0.01
Canada
2002
-0.39
S. Africa
2001
0.03
Canada
2003
-0.69
S. Africa
2008
0.03
Canada
2004
-0.03
Canada
2005
-0.37
Mexico
1999
-0.03
Canada
2006
-0.36
Mexico
2000
0.09
Canada
2007
-0.52
Mexico
2002
0.12
Canada
2008
VARIABLES
Model 1
Model 2
Political Affinity
-10.02***
(3.509)
-21.05***
(7.708)
Political Affinity (Lagged one year)
Difference in Political Systems between Countries
Cultural Distance
Difference in Shareholder Protection between Countries
Difference in GDP per Capita between Countries
Difference in Size between Acquiror and Target
Acquiror ROA
Target ROA
Acquiror Debt Ratio
Target Debt Ratio
Acquisition Experience
State-Owned Acquiror
Stake Sought
Completed Deal
Multiple Bidders
Tender Offer
Cash Payment
Financial Acquiror
Hostile Acquisition
Horizontal Acquisition
0.560
(0.714)
0.0381
(1.094)
-0.0929
(1.291)
3.090*
(1.691)
2.164**
(0.887)
-0.876
(15.83)
21.16
(26.83)
-16.60**
(7.600)
1.718
(5.620)
-0.403*
(0.228)
1.153
(14.79)
0.399***
(0.0849)
10.55**
(4.552)
15.70***
(4.161)
7.093***
(2.672)
1.620
(2.720)
1.213
(6.700)
0.00406
(4.420)
1.137
(2.630)
0.166
(1.150)
0.644
(1.761)
-1.721
(1.838)
1.050
(7.229)
4.884***
(1.724)
7.748
(22.62)
23.52
(31.03)
-43.81**
(18.87)
40.43*
(23.25)
-0.655*
(0.336)
-2.680
(21.04)
0.318
(0.245)
13.14**
(6.057)
25.53***
(6.110)
9.936**
(4.406)
2.829
(4.326)
Model 3
Model 4
Model 5
Model 6
-9.156**
(3.697)
-6.902***
(2.187)
-7.567**
(3.657)
-9.093**
(3.533)
0.639
(0.719)
-0.124
(1.104)
-0.0447
(1.282)
2.921*
(1.688)
2.093**
(0.878)
-0.0779
(15.80)
20.83
(26.90)
-15.83**
(7.670)
1.618
(5.619)
-0.387*
(0.229)
-1.500
(16.81)
0.403***
(0.0858)
10.57**
(4.260)
15.77***
(4.162)
6.875***
(2.628)
1.729
(2.699)
0.611
(0.728)
0.243
(1.257)
0.185
(1.372)
2.963*
(1.720)
2.208**
(0.895)
0.174
(16.02)
23.77
(27.34)
-16.62**
(7.699)
1.463
(5.732)
-0.479**
(0.232)
-1.200
(16.79)
0.404***
(0.0864)
10.11**
(4.326)
14.88***
(4.223)
7.017***
(2.710)
1.787
(2.772)
1.004
(0.669)
0.0698
(0.787)
-0.193
(1.205)
3.299**
(1.602)
2.525***
(0.370)
-0.398
(5.657)
-2.814
(6.553)
-4.678
(2.973)
-2.814
(2.415)
-0.244***
(0.0933)
-13.89**
(6.566)
0.512***
(0.0412)
4.429**
(1.941)
10.70***
(2.053)
3.850***
(1.168)
4.102***
(1.175)
0.903
(0.758)
0.175
(1.270)
-3.002**
(1.333)
2.401
(1.904)
-1.315*
(0.716)
-23.02*
(12.81)
-0.104
(0.306)
16.90*
(10.20)
0.385***
(0.104)
10.41**
(5.096)
14.33***
(4.767)
6.214**
(2.834)
4.521
(2.800)
3.050
(10.30)
-31.98**
(15.37)
5592
0.108
930
0.069
Acquisition Prediction
Constant
Observations
R-squared
3.060
(20.45)
6.452
(28.04)
1.022
(20.57)
0.109
(0.191)
-15.22
(18.58)
925
0.121
941
0.119
915
0.116
895
0.117
0.794
(6.257)
Political
affinity
matters!
Moderating Effect: Firm Size
Moderating Effect: Host government
To summarize: Main findings
Our hypotheses are supported
◦ Hypothesis 1
 Political Affinity is negative (p<0.01)
◦ Hypothesis 2
 Interaction affinity and target size is positive (p< 0.01)
◦ Hypothesis 3 (b)
 Interaction affinity and acquirer size is positive (p<0.1)
◦ Hypothesis 4
 Interaction affinity and domestic political constraint is
negative (p<0.05)
16
Robustness checks






Additional control variables (financial acquirer, hostile
acquisition, horizontal acquisition)
Different dependent variables
◦ Log-transformed value of initial bid premium
◦ Final bid premium
Reverse Causality
◦ Lagged value of political affinity measure
Selection:
◦ Predicted number of deals between country dyads as a
regressor
◦ Inclusion of domestic deals in the sample
◦ Matching with domestic deals
Fixed effects – target country, acquirer country, dyad
US dummy – does not change the results
Conclusion

Contribution to the literature:
◦ Linking international relations and finance & strategy
◦ M&A process

“Practical” Takeaways
◦ Close examination of bilateral country relationship
during the due diligence process
◦ Value of political connections at home when going
abroad

Limitations to the paper
◦ “Large firm” bias
◦ Almost no state-owned firms and privatization cases
◦ Firm size as a proxy of (political) resources
Thank you for you attention!

Back-up
Why should it matter?
Examples of Politicians-Business Networking
Shortly after his election, French President François Hollande met German topexecutives to discuss economic issues during a dinner in Paris (Gallois and
Lemaître, 2012)
As an example of economic-political
network, Alexander Dibelius, a top-banker
in particular on M&A issues at Goldman
Sachs Germany, had contacts with
Angela Merkel long before she was
nominated as a chancellor for Germany.
For instance, Dibelius organized dinner
meetings for Merkel with businessmen
(Reischauer and Zdral, 2006).
For instance, the former head of Morgan
Stanley Germany, Dirk Notheis, was a
member of the Christian Democratic
Union – the party of the current German
chancellor Angela Merkel. Recently
revealed e-mails point at his active use of
party connections for business dealmaking (WirtschaftsWoche, 2012)
In a French newspaper a French entrepreneur describes his participation in a
government led business delegation and explains how the French government
has introduced him to top businesses in India (Flamand, 2010)
Why should it matter?
Examples of Goverment Interference in Deals
in the acquisition battle over Aventis in 2004, the Swiss firm Novartis lost out
against the French firm Sanofi-Synthelabo despite a higher offer price; the
French government put pressure on the target management to accept the deal
(Gelman, 2007).
When Novartis started bidding for Aventis the French Prime Minister Jean-Pierre
Raffarin publically announced that the target products were essential for the
defense of the country against bio-terrorism, increasing public hostility towards the
Swiss offer (Gelman, 2007)
the Spanish government enacted new rules and imposed more
restrictions in the electricity and gas market to stop the German firm
E.On to acquire the Spanish firm Endesa (Clifton and Diaz-Fuentes,
2011
After the end of the Cold War the US Department of Defense encouraged
consolidation of the defense industry as the procurement of new weapons
systems seemed ready to decline (Hensel, 2010)
When Zhejiang Geely Holding Group of China took over Sweden’s Volvo the
government played an important role in placating union concerns regarding a
Chinese owner (Leung, 2010)
Why should it matter?
Host-home Government Interference in Business
Baron (1995) depicts the U.S. government involvement in the entry of Toys ‘R’ Us
in Japan, while Frynas, Mellahi and Pigman (2006) explain the role of GermanChinese interstate relations when Volkswagen came to China
Henisz and Zelner (2005) exemplify that the intervention may be as simple as a
phone call such as a phone call that a former regulatory official in Argentina
received from George W. Bush (the son of then President-elect George H.W. Bush)
about investments of Enron.
Acquisition by UK’s Cable and Wireless (C&W) of Japan’s International Digital
Communications corporation. According to Saner et al. (2000: 82), the deal
succeeded due to the firm ‘coordinating its moves with the UK government, the
U.K. Embassy in Japan and other equally supportive foreign country governments
[...].’
Examining the entry of Lockheed Martin into Russia in 1993, Frynas et al. (2006)
highlight the importance of the good relationship between the Clinton and Yeltsin
governments and how this entailed, for instance, the signature of a bilateral treaty
removing technology transfer barriers. ‘All of this was made possible by a favorable
political business environment. U.S.-Russian public cooperation in the space sector
gave a privileged position to U.S. companies in Russia’s economy’ (Frynas et al.,
2006: 335).
Why should it matter? (3)
Governments and cross-border deals


International transactions are even more challenging
◦ Higher information asymmetry
◦ Lower embeddedness in the host market
Role of host but also home government during the M&A process
◦ Political intervention abroad (e.g., Toys’R’s Us in Japan, Baron
(1995); Volkswagen in China, Frynas, Mellahi and Pigman,
(2006))
◦ Simple or more complex form of intervention

Independent variables
◦ Political affinity
 UN voting patterns (see e.g., Gartzke, 1998, 2000).
◦ Size of the firm
 Log (total assets)
◦ Domestic political constraints
 Executive constraints
 Government fractionalization
 Polity score

Control variables
◦ Country-level variable
 Difference in political system between countries
 Cultural distance
 Difference in shareholder protection between
countries
 Difference in GDP per capita between countries

Control variables
◦ Firm-level variables
 Difference in size between target and acquirer
 Acquirer ROA
 Target ROA
 Acquirer debt ratio
 Target debt ratio
 Acquisition experience
 State-owned acquirer

Control variables
◦ Deal-level variables
 Stake sought
 Completed deal
 Multiple bidders
 Tender offer
 Cash payment
◦ Year and industries dummies
Descriptive Statistics
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
VARIABLES
Political Affinity
Difference in Political Systems between Countries
Cultural Distance
Difference in Shareholder Protection between Countries
Difference in GDP per Capita between Countries
Difference in Size between Acquiror and Target
Acquiror ROA
Target ROA
Acquiror Debt Ratio
Target Debt Ratio
Acquisition Experience
State-Owned Acquiror
Cash Payment
Multiple Bidders
Tender Offer
Stake Sought
Completed Deal
Mean
0.332
0.497
1.741
-0.108
-0.106
2.431
0.113
0.024
0.55
0.513
3.091
0.008
0.583
0.111
0.59
94.197
0.923
S.D.
0.378
1.758
1.158
1
0.725
1.884
0.109
0.075
0.217
0.277
5.196
0.087
0.493
0.315
0.492
13.106
0.266
1
1
-0.0401
0.0987
-0.0707
0.1285
-0.0808
-0.0725
0.043
0.1021
0.116
-0.0625
0.0834
-0.1312
0.0406
0.2099
-0.186
-0.0858
2
3
4
5
6
7
8
9
10
11
12
1
0.373
0.0443
0.0578
0.0138
0.0095
-0.035
-0.0477
0.0248
-0.0014
0.0037
-0.03
-0.018
-0.0307
-0.2357
0.0007
1
-0.0333
-0.1012
-0.0315
0.0021
0.0065
0.0593
0.0206
-0.0084
0.02
0.0407
-0.0728
0.0804
-0.1961
0.0171
1
0.1291
-0.0482
-0.0093
0.0467
0.0244
0.0135
-0.0188
0.0366
0.0148
-0.1425
-0.1373
-0.0837
0.0649
1
0.0856
-0.044
0.0012
0.0527
0.0213
0.0827
0.0034
-0.1364
0.0064
0.0416
-0.1707
-0.0365
1
0.0878
-0.3465
0.1441
-0.0543
0.3869
-0.0072
0.2022
-0.019
0.0462
-0.0914
0.053
1
0.231
-0.0727
-0.0428
0.0253
-0.008
0.1541
0.0626
0.0888
0.0054
-0.0189
1
0.014
0.0375
-0.0758
-0.0128
-0.0108
0.0924
-0.0148
0.049
-0.0513
1
0.4032
0.1569
0.0487
0.0633
-0.0076
0.0645
-0.0734
0.0216
1
0.0034
0.057
-0.0161
0.0036
0.042
-0.0848
0.0039
1
0.0033
0.0722
0.0243
-0.0439
-0.0698
-0.0474
1
-0.0526
0.0881
-0.0033
-0.0756
-0.0685
13
14
15
16
17
1
0.0138
1
0.2222 0.0503
1
-0.0351 0.0502 0.0053
1
0.0278 -0.4014 0.0488 -0.0196 1