In 2019 the total value of merger and acquisition (M&A) deals globally was some $3.7 trillion. Despite the vast sums of money directed towards M&A deals there is still considerable debate about the extent of the value created by them.

Indeed, there is a large body of research suggesting that on average M&A destroys shareholder value. What is certain is that the M&A approval process is, itself, often extremely costly.

Yet, as my recent research conducted with Peter Roosenboom (Rotterdam School of Management) and Eden Quxian Zhang (Monash Business School) shows, when acquiring firms, there are ways to influence the outcome of any anti-trust review in a favourable way.

It is well established that firms can incur considerable costs due to the M&A process. Take the proposed acquisition of T-Mobile USA by AT&T in 2011. The deal was caught up in the approvals process in the US because of anti-trust concerns and eventually blocked by the Antitrust Division in the Department of Justice (DOJ).

AT&T's stock price fell by four per cent when the outcome was announced and the company also had to pay a reverse break-up fee to the target firm of around $4.2 billion, representing some 10 per cent of AT&T's market value.

We decided to look at the approvals process in some detail to see if we could assess the financial impact on the acquiring company depending on how a proposed deal was dealt with. We also wanted to gauge whether specific action taken (in particular lobbying) by the acquiring firm might influence the review process outcome, possibly mitigating any potential negative economic impact.

Our study examined 370 mergers of publicly-traded US companies from 2008 to 2014, with a deal value of at least $100 million.

The way mergers are treated can be broadly divided into three groups (with a number of subdivisions). The first group has the deal processed during the 30-day statutory period after public announcement of the deal and filing of pre-merger documents to the anti-trust authorities (Natural Expiration). Some deals may even have the deal processed by the anti-trust agencies before the end of the 30-day waiting period (Early Termination).  

A second group of firms withdraw but then refile (Pull and Refile) pre-merger documentation, allowing anti-trust authorities more time to review the deal.

In a third group, mergers attract a full scale anti-trust investigation by the authorities, accompanied by a request for additional information (Second Request). Of the second request firms, some are considered anti-competitive and have a complaint filed against them (Challenged). Others receive clearance to proceed without a complaint (Unchallenged).

Of the 370 transactions we investigated: 139 were classified as natural expiration; 138 were early termination; 31 were pull and refile; and 62 deals were second request, with 24 challenged and 38 unchallenged.

The prospects of a successful deal outcome and the deal completion time (and therefore the associated regulatory costs involved) vary substantially depending on the anti-trust review outcome.

For deals classified as early termination, natural expiration, and pull and refile, there was a very low risk of the deal failing, with only six per cent subsequently withdrawn and abandoned. Whereas 19 per cent of deals categorised as second requests failed to complete.

In terms of time to completion, second requests take on average 237 days from announcement to completion, compared with 98 days for favourable outcomes. Even unchallenged deals, for example, take some three times as long to complete as natural expiration or early termination deals.

Perhaps unsurprisingly, deals that became mired in the anti-trust approvals process were punished by the markets. For example, on average acquiring companies receiving a second request were penalised with a negative stock price reaction of 2.8 per cent at the announcement of the review outcome. This is a sizeable effect.

Furthermore, the negative impact is significantly worse (4.2 per cent) for deals that the market assumed had a good chance of being completed when the original announcement was made (as determined by the size of the gap between the offer price and target price immediately after public announcement).

Similarly, the negative impact is worse for mergers within the same sector or those expected to increase product market concentration, that is, mergers that can potentially deliver synergies. An adverse review outcome may lead to compliance concessions that reduce synergies. Consequently a second request also has a significantly negative impact on value with these types of merger of about three per cent.

The good news for firms (at least for acquiring firms in the US) caught up in the anti-trust process is that there is a way of both increasing the prospect of a successful deal outcome and to some extent attenuating the negative impact on value of anti-trust concerns - and that is through lobbying.

We looked at the potential benefits of leveraging political connections, ie using lobbying as part of a management strategy for the M&A process, particularly in terms of deal approval. As US firms are required to report expenditure on lobbying, we were able to evaluate a potential connection between the amount spent on lobbying and M&A outcomes.

On average the acquiring firms in the study spent around $3 million on lobbying both in the four quarters before and after a deal announcement. Our findings showed that this was money well spent.

Greater lobbying spend by the acquirer correlates with better M&A review outcomes and also with greater post-deal announcement market returns. For example, more money spent on pre-announcement lobbying was linked to a greater chance of natural expiration, pull and refile and unchallenged second requests and with a lower chance of a challenged second request.

It is also associated with a better value outcome in terms of market reaction on announcement of the deal - the greater the spend, the greater the effect. While post-announcement lobbying is particularly useful in avoiding second requests when associated with pull and refile, as well as increasing the prospect of an unchallenged second request.

There are some caveats. The significant increases in value only relate to deals where there are higher anti-trust concerns, or higher synergy expectations, such as mergers within the same sector or leading to greater market concentration.

And also only for firms that have stronger corporate governance - as determined by how entrenched the acquiring management team are (based on the presence of a number of anti-takeover provisions) and therefore can be assumed to be pursuing a deal for the benefit of shareholders, rather than engaging in M&A activity for empire building purposes.

Overall, our findings demonstrate the variety of regulatory risks involved in the anti-trust approval process for mergers. The cost impact on acquiring firms varies considerably depending on both outcome expectations and the treatment of that firm during the review process.

At the same time, it is clear that the strength of political connections demonstrated by a firm's ongoing commitment to lobbying for a reasonable period prior to any deal announcement (rather than merely post-deal) can considerably improve the prospects of a completed deal and enhance market value post-announcement.

Indeed, given that the value of lobbying in an M&A context is reasonably quantifiable, our findings might even be used by acquiring firms to undertake a cost-benefit analysis when making decisions about lobbying expenditure and assessing lobbying performance.

Further reading:

Fidrmuc, J. P., Roosenboom, P. and Zhang, E. Q. (2018) "Antitrust merger review costs and acquirer lobbying", Journal of Corporate Finance, 51, 72-97.

Fidrmuc, J. P. and Xia, C. (2017) "M&A deal initiation and managerial motivation ", Journal of Corporate Finance.

Jana Fidrmuc is Associate Professor of Finance and teaches Corporate Finance on the Executive MBA, Executive MBA (London) and the Distance Learning MBA. She also lectures on Mergers and Acquisitions and Corporate Control on  MSc Finance and Corporate Financial Management on MSc Accounting & Finance.

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