I find that foreign acquirers capture a larger portion of acquisition gains than do targets when political uncertainty is high in the host country.
Assistant Professor Kyeong Hun Lee
Political uncertainty causes concern about foreign investments
Foreign acquirers capture a larger share of the acquisition gains relative to local targets in acquisitions amid electoral uncertainty, according to Assistant Professor Kyeong Hun Lee.
Trump administration's use of uncertainty as a weapon in trade war, as told in Bloomberg December 6, has led to a drop in foreign direct investment into the US.
`This uncertainty may have further negative effects for US economy`, Kyeong H. Lee says.
Lee is a researcher at the Department of Finance, Norwegian School of Economics.
Damage the value of US businesses
`Not only does foreign direct investment into the US drop, the terms of completed investment deals could be less favorable to US businesses. In particular, such uncertainty could damage the value of US businesses in cross-border investments`.
A recent study by Lee («Cross‐border mergers and acquisitions amid political uncertainty: A bargaining perspective») highlights that when political uncertainty is escalated in the host country, foreign investors tend to acquire domestic businesses at more favorable terms, such as lower purchase price and contingent (non-cash) payment options.
Paper on political uncertainty
Assistant Professor Kyeong Hun Lee´s study («Cross‐border mergers and acquisitions amid political uncertainty: A bargaining perspective» is forthcoming in Strategic Management Journal, a journal on the NHH and Financial Times´ publication list. Bonus per publication is set at NOK 100 000, - for publications in journals on both lists.
`When faced with political uncertainty, multinational enterprises can make use of their knowledge and all available negotiation tools to create value, rather than to avoid it, and should take the opportunity to acquire business at favorable terms`, Kyeong Hun Lee says.
Weaker negotiation position
`Foreign investors are reluctant to political uncertainty and therefore demand compensation for their exposure to it. This gives domestic counterparts a weaker negotiation position, if they want to make a deal. The study notes that the US market is not an exception`, Lee says.
In his study Lee exploits a natural experiment to estimate the causal effect of political uncertainty on bargaining outcomes in cross‐border acquisitions.
Lee´s study is forthcoming in Strategic Management Journal.
Elections as a natural experiment
Using elections as a natural experiment, Lee finds strong support for the hypothesis; foreign acquirers capture a larger share of the acquisition gains relative to local targets in acquisitions amid electoral uncertainty.
`Foreign acquirers can endeavor to negotiate merger terms and conditions to reduce their exposure to political uncertainty by, for instance, paying less and/or using a contingent payment. Our findings suggest that such an endeavor is responded to positively by their shareholders´, Lee says.
Concern over political uncertainty is not limited to developing economies, such as Turkey, which has experienced a stock market plunge and a credit rating downgrade following an attempted coup in July 2016.
Even in the US
`Even in the United States, a well‐developed economy, political uncertainty escalated during the approach of the 2016 presidential election`, Lee says.
The heightened political uncertainty that surrounds such events has caused concern about foreign investments.
Using a sample of 921 cross‐border M&A deals from 43 countries during the period of 1990 to 2011, Lee tests the link between political uncertainty and cross‐border M&A bargaining outcomes.
When faced with political uncertainty, MNEs can make use of their knowledge and all available negotiation tools to create value, rather than to avoid it, and should take the opportunity to acquire business at favorable terms.
Assistant Professor Kyeong Hun Lee
`I find that foreign acquirers capture a larger portion of acquisition gains than do targets when political uncertainty is high in the host country. The results are robust to potential sample selection bias and alternative measures of bargaining outcomes, such as M&A premiums`.
More unpredictable
Political uncertainty makes the returns on cross‐border M&As more unpredictable, and, thus, foreign acquirers want compensation for it.
`Foreign acquirers consider such compensation necessary, and this gives foreign investors greater bargaining power, resulting in more favorable outcomes for them`.
Although there is an extensive literature on international strategy that has examined how political uncertainty affects cross‐border investment, most studies have focused on the direction and magnitude of investment flows between countries rather than on the negotiation process and outcomes.
Fill this gap
But there are inherent challenges to empirically testing political uncertainty, Kyeong Hun Lee explains
`First, it is difficult to disentangle political uncertainty from other macro‐level factors, such as a country's economic conditions and financial development, which are correlated with cross‐border mergers and acquisitions activity`.
Second, although many studies have created their own indices to quantify political uncertainty, there is no consensus as to which one is the most appropriate.
To circumvent these issues, Lee uses national elections to measure political uncertainty.
`This study attempts to fill this gap in the context of cross‐border mergers and acquisitions, which currently represent the majority of foreign investment`.
See also