Global Business and commerce have certainly faced a tumultuous 2022. Geopolitical risk management was tested with seismic geopolitical, inflation, currency, and operations risks. Which put business resilience testing right at the top of the agenda.
M&A constitutes one of the most important corporate investments that aid firms in creating value and achieving growth. However, during periods of high risk, especially geopolitical risk, many investments are frozen due to a perceived rise in uncertainty. And the most used method to manage periods of geopolitical risk is simply to avoid investments in such periods.
Times like this create a risk-off environment where pioneering or riskier investment strategy is put on hold and replaced with a conservative outlook on business strategy, development, and execution.
A geopolitical risk is a business risk arising from an interaction between one country and another or several countries. This includes risks arising from war, sanctions, etc.
Political risk is a business risk that arises from the actions of a government or a people within a country. This includes risks like civil war, labor problems, strikes, and expropriation, among others.
Secondly, when discussing the impact of geopolitics on M&A. It is very important to temper every general assumption and statement with an understanding that there are always exceptions and that everything depends on the specifics/nuance. Overarching claims about the impacts of geopolitics are unhelpful as firms do not exist in the “general” but rather operate in the often harsh specific.
It is known that geopolitical risk can heighten the perception of disastrous outcomes. Lower consumer confidence, and make investment less attractive. These tend to emerge especially if the geopolitical risk is new or relatively new to a country/region or if the region/country which is the source of geopolitical risk is systemically important to global supply chains.
Geopolitical risk is an essential component of a firm systematic risk and can influence equity volatility and valuation. Timing is important to consider, especially with this point. When an important geopolitical risk, like war, for example, becomes present. There will be an almost natural but temporary corresponding reaction to stock/bond markets and commodity markets. These tend to be temporary as markets regain losses or lose temporary gains. Which is dependent on the type of risk and the predicted longevity of the risk.
Business leaders need to properly assess the short-term liquidity/valuations risk of their business and not display short-term reactions that have the potential to do more harm than good.
Fundamentally, it is important to understand that the globe and everything in it experience what we call in geopolitics “the great convergence,” which sees phenomena connected with Globalization, Geopolitics, Transformative Technology, and Societal Change converge in its impacts on people and business. The great convergence and its effects are the least in world affairs today.
This article will be the beginning of many that will delve deep into these concepts. To help M&A practitioners in legal, business strategy, treasury, risk, or operations.
For successful M&A to exist, also all key functions of not only the transaction but post-transaction. Integration needs to be aligned and to have a better understanding of the non-financial risks. And opportunities that will inevitably arise when leveraging geopolitical factors in M&A, especially in cross-border M&A.
Companies are also walking a geopolitical tightrope. As political frictions inside and also among regions heat up. The likelihood increases that they will affect a global enterprise’s operations, performance, or people.
The challenges that geopolitical risks create will get worse. In the next two decades, competition for global influence is likely to reach its highest level since the Cold War. That’s one finding from the US National Intelligence Council’s report Global Trends 2040: A more contested world. According to the report, no single locale is likely to dominate all regions or domains, and “a broader range of actors will compete to advance their ideologies, goals, and interests.”
Nowhere is the fallout from current geopolitical tensions more apparent than the unfolding competition between China and the United States. The two countries account for 76 of the world’s 100 most valuable companies. Channeling the policy debates underway in the European Union. Many global companies are seeking their own form of “strategic autonomy” to navigate China–US relations. Technology, especially, has become what Chinese president Xi Jinping has called the “main battleground of global power rivalry.” Companies must consider how to harness capabilities. Such as 5G and AI without falling victim to geopolitically based regulatory or reputational crossfire.
Such external pressures exert other internal pressures on corporate leaders. Depending on the circumstance, a company’s leaders may have to weigh the effect that political or media scrutiny on the company’s operations in one area has on its holdings in other locales. They may have to balance, given the risks, and near- and long-term market priorities. And they may have to grapple with a global workforce. With divergent views on issues such as data privacy and human rights.
Any discussion of such potentially existential issues also must start at the top. After consulting with top business leaders and legal, public policy, and risk professionals at Fortune 500 companies in multiple industries. We suggest that company leaders can use a five-pronged approach to managing geopolitical risk.