Political polarization is hitting the U.S. economy in new and unexpected ways. It’s even affecting how assets are allocated. In a study by SMU Cox Finance Professor Tarun Patel and co-authors, political polarization was shown to impact the economy through a study of mergers. When firms and their employees had more similar political views, they were more likely to announce a merger, complete it faster and perform better on profitability measures. In more recent years, the impact of polarization has become more evident and costly. The antidote: get along and find common ground.
According to Patel, mergers and acquisitions between firms are expected to occur when there are synergies—the idea of the sum being greater than its parts. “We believe that if you have differences in the workplace that can cause conflict with strategies or approaches, this is a factor to consider when shopping for a merger candidate,” he notes. A firm’s corporate culture can include differing political views, influencing mergers and acquisitions, negotiations and the workforce integration that follows. Prior research shows that nearly half of chief executives would walk away from a culturally-misaligned target firm.
“Political differences have been escalating in the recent past, with more apparent conflict,” Patel observes. In the ‘90s, more laws were being passed in a bipartisan way, the research shows. Since 2010, bipartisanship has hardly existed. He says, “This speaks to more conflict in the last 10-15 years and we expect this to present higher costs for politically-distant firms. The result seems to shine through.”
Political Divide Costs
The authors found that greater political distance between firms reduces the likelihood of a future merger announcement. It follows then that political similarity across firms becomes a strong predictor of future mergers. When political distance is greater, mergers take longer to complete as well. One of the mergers that revealed the highest political distance in their sample was between Disney and 21st Century Fox. “That merger took a long time to negotiate, with a struggle to reach terms about how things were to be done,” Patel says. “These firms are very far away politically. After the merger occurred, Disney divested considerable assets into a separate firm which operated independently.”
Being on different sides of the political spectrum negatively affects market returns as well. When firms announce a merger, the returns are lower when the political distance is greater. In real terms, for example, political distance reduces returns by 22.5 basis points, the study showed. “In a $100-million merger, that’s $225,000 worth of wealth that gets destroyed because of differences in political views for mergers that went through,” says Patel. “What we don’t get to see is all of the mergers that would have worked or been profitable were it not for different politics. That’s where the real economic loss is.”
The study looked at publicly-traded U.S. domestic mergers announced between 1980 and 2018, with a transaction value of at least $10 million. The authors also collected detailed data on the personal contributions of corporate employees to political campaigns from 1980-2018. These data include a total of 965,379 contributions, from 316,757 employees of 9,136 firms.
The research has implications for how assets are allocated across the economy. “There is a cost to being politically divided and consequences in doing business with each other, such as less employment and production when we could have added more value to the economy,” Patel offers.
Political divergence is an obstacle to post-merger integration, with negative consequences for merger negotiations, performance, and value. Importantly, the cost estimates likely underestimate the true effect of political partisanship on integration because politically misaligned firms are less likely to merge in the first place. However, some mergers don’t require integration per se. For example, consider the case of a merger between grocery store chains in the Pacific Northwest and the South, these two chains will likely continue operating independently given their different geographies, thus politics will matter less. Patel adds: “If the firm mentions integration in their 10K filing as an assessment of the risks of the merger, that’s when politics matters. It’s more about the ability of people to work together that seems to be important in achieving synergies.”
According to Patel, the merger cases observed are the ones in which the costs are low enough for merger synergies to overcome. “We don’t see the costs of what should have happened that never did,” Patel says. Those are the cases where political differences are particularly costly. “That’s why we say we are likely underestimating [costs] because we don’t get to see how much partisanship is eating into our potential benefits of merging or consolidating firms,” he explains.
Patel and his coauthors also note that political “fit” predicts the success of a merger. If two companies fit reasonably well, they were seen to perform better on some key accounting terms, both returns on equity and assets. Patel notes, “Markets tend to react more positively to this as well as the actual performance of the company. It could be that teams are working better together; they are less distracted and thus focusing on the work at hand.”
Our attitudes towards each other are part of economics, says Patel. In economics, there are gains in trading with one another, and less so in being in conflict. “It’s not all dollars and cents— though it reflects in the dollars and cents and how we do business with each other,” he concludes.
The paper “Political Attitudes, Partisanship, and Merger Activity” by Tarun Patel of Southern Methodist University, Cox School of Business, with Ran Duchin, Abed El Karim Farroukh, and Jarrad Harford of University of Washington, is a working paper available on SSRN.
Written by Jennifer Warren.