Having Former Politicians on Board Helps Complete Mergers
Study finds appointing former politicians and regulators to boards of directors or management teams influences corporate mergers and acquisitions and improves the financial performance of acquiring companies.
The study found that corporations with political connections are more likely to acquire the companies they bid on and avoid regulatory delay or denial.
By james-hellegaard | 11/30/2016
While AT&T’s recently announced plans to acquire media giant Time Warner is drawing the attention of federal antitrust authorities, the company’s political connections greatly enhance its chances of completing the deal, says a Florida Atlantic University professor who has studied decades of mergers and acquisitions.
“I would say that the probability that the merger will get past regulators is relatively high,” said David Javakhadze, assistant professor of finance in FAU’s College of Business. “We found that having these political connections greatly improves the firm’s chances of closing the deal.”
Javakhadze co-authored a new study with colleagues Stephen P. Ferris, Ph.D., director of the Financial Research Institute at the University of Missouri, and Reza Houston, Ph.D., assistant professor at Indiana State University, that found appointing former politicians and regulators to boards of directors or management teams influences corporate mergers and acquisitions and improves the financial performance of the acquiring companies.
AT&T is certainly politically connected, counting among its executives and board of directors a former deputy U.S. Trade representative with the rank of ambassador; a former special advisor in the White House; a former chairman of the U.S. Federal Communications Commission; and a former chair of the White House Council of Economic Advisers.
The study found that corporations with political connections like AT&T are more likely to acquire the companies they bid on and avoid regulatory delay or denial. The more politically connected the company, the higher the merger premium paid in the deal. Returns during the announcement period show that investors recognize that bids by politically connected acquirers are more likely to create firm value. Connected corporations also enjoy superior post-merger financial and operating performance, the study found.
Examining the effect that the addition of a politically connected individual to a firm’s management team/board of directors has on the merger behavior of a sample of publicly traded companies, they manually went over proxy statements from every firm, going back decades.
They also found that connected firms make more bids and acquisitions than non-connected firms and there is an increase in bid and acquisition activity after former politicians or regulators are appointed to a firm’s board or management team.
“This might be due to the unique insights regarding issues such as regulatory process and delay, government contracting needs and procedures, or pending legislation that these political connections can provide to the acquiring firm,” they wrote in their paper, “Friends in the Right Places: The Effect of Political Connections on Corporate Merger Activity,” recently published in the Journal of Corporate Finance.