Understanding Political Risk in M&A Transactions
Political risk can impact deal value in unforeseen ways
We are living in very interesting times today, the M&A activity over the past two years has been on record high and a very high number of them have been international transactions. In parallel to this unprecedented deal activity runs an era of protectionism, trade wars, currency battles, tariffs and political uncertainty across the world. Many companies have been exposed to political risk and have diluted the value of their M&A transactions. Inadequate understanding of the discipline of M&A due diligence covering political risk has attributed to sub-optimal deal values through M&A or joint ventures.
Challenges with M&A Political Risk:
The aspect of political risk in M&A and the associated due diligence is harder to understand because of a few reasons (non-exhaustive list):
(1) It is a lot more subjective than economic risk; while economic risk is country’s ability to pay back its debt, political risk is the willingness to do so
(2) It is influenced by law, government leaders, movements, even personalities and their actions
(3) While political risk needs a framework to understand (focus of this article), it needs deep country level expertise (not the focus of this article) to…
