Perfect exchange

1
Getting by with a Little Help from My Friends
Does Political Affinity Lead to Lower MA
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
2
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 MA process
• Effect on the initial bid premium offered by
  acquirers
• Strategic parameter in deal-making (Eckbo, 2009)

3
Main Contribution
Introducing international relations into MA
research
Focus on the Acquisition process

• 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)

• 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 MA negotiations

4
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

5
Why should it matter? (1)Bid premium and
bargaining power

• 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

5
6
Why should it matter? (2)Governments and MA

• 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)

6
7
Why should it matter? (3)Cross-border MA 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 MAs.
8
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

9
Should it matter for all firms to the same
degree? (2) Firm size and political affinity
Acquirer firms
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.

• 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.

10
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.
11
Empirical Set-up Sample Model

• Sample
• Final sample 925 cross-border deals for the
  period 1990-2008 with an average four-week bid
  premium of 43 (source Thomson ONE database)

Model

• 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

12
Example Political affinity with the US
0.15 Canada 1991
0.24 Canada 1994
0.08 Canada 1995
0.29 Canada 1996
0.17 Canada 1997
0.13 Canada 1998
0.16 Canada 1999
0.15 Canada 2000
0.07 Canada 2001
-0.01 Canada 2002
0.03 Canada 2003
0.03 Canada 2004
-0.03 Canada 2005
-0.03 Canada 2006
0.09 Canada 2007
0.12 Canada 2008
0.77 Israel 1996
0.72 Israel 2000
0.72 Israel 2002
0.68 Israel 2003
0.79 Israel 2004
0.65 Israel 2005
0.56 Israel 2008
-0.39 S. Africa 2001
-0.69 S. Africa 2008

-0.37 Mexico 1999
-0.36 Mexico 2000
-0.52 Mexico 2002
13
Political affinity matters!
14
Moderating Effect Firm Size
15
Moderating Effect Host government
16
To summarize Main findings

• Our hypotheses are supported
• Hypothesis 1
• Political Affinity is negative (plt0.01)
• Hypothesis 2
• Interaction affinity and target size is positive
  (plt 0.01)
• Hypothesis 3 (b)
• Interaction affinity and acquirer size is
  positive (plt0.1)
• Hypothesis 4
• Interaction affinity and domestic political
  constraint is negative (plt0.05)

17
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

18
Conclusion

• Contribution to the literature
• Linking international relations and finance
  strategy
• MA 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

19

• Thank you for you attention!

20

• Back-up

21
Why should it matter? Examples of
Politicians-Business Networking
Shortly after his election, French President
François Hollande met German top-executives 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
MA 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 deal-making
(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)
22
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 Swedens Volvo the government played an
important role in placating union concerns
regarding a Chinese owner (Leung, 2010)
23
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 German-Chinese 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 UKs Cable and Wireless (CW) of
Japans 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 Russias economy (Frynas et al.,
2006 335).
24
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
  MA process
• Political intervention abroad (e.g., ToysRs Us
  in Japan, Baron (1995) Volkswagen in China,
  Frynas, Mellahi and Pigman, (2006))
• Simple or more complex form of intervention

25
Empirical set-up (2)

• 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

26
Empirical set-up (3)

• 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

27
Empirical set-up (4)

• 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

28
Empirical set-up (5)

• Control variables
• Deal-level variables
• Stake sought
• Completed deal
• Multiple bidders
• Tender offer
• Cash payment
• Year and industries dummies

29
Descriptive Statistics