Friends in the Right Places: The Effect of Political Connections on Mergers

AT&T’s recent announcement to acquire media giant Time Warner draw the attention of federal authorities. In the US, the two primary agencies overseeing merger activity are the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice. Under the Hart-Scott-Rodino Act, merging parties are required to provide pre-merger notification to these agencies and the Assistant Attorney General. The primary concern of these regulatory agencies is to make sure that the merge deal does not limit market competition or creates significant barriers to entry. If a regulatory agency has concerns about the effect of a proposed merger deal it could force merger parties abandon the transaction, restructure the transaction, or agree to a consent order to change their conduct. Since 1996, the FTC has filed more than 319 cases against proposed acquisitions. The Department of Justice has filed several hundred cases over the same period. Challenges by the FTC frequently result in accepted consent orders which prevent merger parties from undertaking certain actions. Approximately half of the Department of Justice challenges against transactions have been filed in a U.S. district court, the majority of these complaints are resolved through settlements.

To navigate the merger review process and achieve more favorable results, firms like AT&T hire former politicians or regulators to serve on their boards or senior management team. For example, AT&T is counting among its top 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 former regulators or politicians might benefit a firm during the merger review process: First, they might have insider information concerning the merger process or the practices of the overseeing agencies that can help firms construct a merger proposal that will pass regulatory scrutiny. Both, FTC as well as the Department of Justice negotiate with representatives of the merger parties to narrow the demand for documents during the second request and firms that employ former regulators or politicians possess a negotiating advantage during this process. Second, former government officials might offer a firm the ability to network with current regulators or politicians. Merging firms can provide future industry employment, campaign contributions, and other benefits to regulators or politicians. The potential of future industry employment could alter regulators’ behavior when enforcing regulations. Further, networking with current politician is important because the House and Senate Judiciary Committees can hold hearings on proposed mergers. These public hearings can influence public support for a proposed merger, which can be conveyed to the regulatory agencies during the review process.

The goal of our study is to examine whether the corporations with political connections like AT&T are more likely to acquire the companies they bid on and enjoy regulatory advantage by avoiding delay or denial. More specifically, we argue that for merger deals which involve firms operating in different industries antitrust issues are unlikely. However, mergers in the same industry could be the subject of regulatory scrutiny because it could potentially limit market competition. Therefore there is a greater need for the ability of political connectedness to pursue a deal which avoids adverse regulatory decisions. Consequently, we propose that non-diversifying bids by politically connected acquirers are more likely to close than those of non-politically connected acquirers. Further, non-diversifying bids by politically connected acquirers are less likely to face regulatory delay or denial than those of non-politically connected acquirers.

Next, because political connectedness helps acquirers to close the deal with increased potential for synergy gains due to increased market power, acquirer political connectedness will be positively associated with the takeover premium for non-diversifying deals. Further, we postulate that if a politically connected acquirer is better able to pursue value enhancing targets due to relaxed regulatory oversight, then the market response to their merger announcement should be more positive, thus, cumulative abnormal returns around bid announcements will be higher for politically connected bidders. In addition, because overall merger activity of connected acquirers is less likely to be scrutinized, these firms will make more bids and acquisitions and pursue larger targets. Finally, as politically connected acquirers have a greater ability to pursue value-enhancing targets, the long-term post-merger financial (accounting) performance of politically connected acquirers engaged in non-diversifying merger deals will be superior to the long-term post-merger financial performance of non-politically connected acquirers.

To empirically examine the effects of political connections on the merger behavior of a sample of publicly traded companies, we use data from individual firm proxy statements and construct our measures of political connections as indicator variables that show whether the bidder has a former politician or industry regulator, former general or admiral, or non-counsel lawyer on its board or management team.

Our empirical findings demonstrate that political connections matter. Firms like AT&T are more likely to close the merger deal and avoid regulatory delay or denial. The more politically connected the company, the higher the merger premium paid. Returns during the announcement period show that investors recognize that bids by politically connected acquirers are more likely to create firm value. Connected bidders make more bids and bid on larger targets. In addition, connected corporations also enjoy superior post-merger financial and operating performance.

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