Political risks in M&A: evaluation and mitigation

September 2026  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

September 2026 Issue

Risk is inevitable in the complex world of M&A. While financial and legal risks often sit at the forefront of any transaction, political risks increasingly play a decisive role.

Geopolitical tensions, trade disputes and protectionist policies are significantly affecting the global M&A landscape, influencing deal valuations, regulatory hurdles and cross-border transactions.

Further complicating the landscape is the growing array of political sanctions imposed by international coalitions, alongside national security concerns, trade tensions and shifting industrial policies. Key challenges include President Trump’s expanded use of tariffs as a policy tool, large fiscal deficits across many Western economies, conflict in the Middle East and the ongoing war in Ukraine.

Such disruption inevitably has a tangible impact on the forecasts, structures and strategies that underpin M&A activity. A study by the M&A Research Centre at Bayes Business School, part of City St George’s, University of London, found that bidders were most concerned about uncertainty surrounding economic policy, trade, taxation and environmental regulation.

The study also found that deal returns were typically 1 percent lower and deal synergies 3 percent lower for completed acquisitions where the target company had significant exposure to political uncertainty.

Recent developments have reinforced the importance of political risk assessment. Continued instability in the Middle East, ongoing tensions surrounding shipping routes through the Strait of Hormuz and greater scrutiny of foreign investment in strategic sectors across the US, UK and European Union have further increased regulatory complexity for cross-border transactions. Dealmakers are increasingly factoring geopolitical resilience into target selection, valuation assumptions and integration planning.

Further momentum is coming from the growing use of dedicated geopolitical intelligence during due diligence. Alongside legal, financial and operational reviews, acquirers are increasingly analysing election risks, sanctions exposure and potential policy shifts before committing capital. This broader approach helps management teams identify vulnerabilities earlier, refine transaction structures and develop contingency plans that can protect value after completion.

Additional evidence of the impact of political risk on M&A is provided by Datasite’s ‘Deal Drivers: EMEA Q1 2026’ report, which notes that geopolitical tension and energy disruption during the first quarter of 2026 accelerated a clear shift in investor priorities, directing capital toward strategic sectors and away from more discretionary areas of the market.

“Political risk has moved from a background consideration to a frontline dealmaking concern,” notes Jerome Pottier, EMEA chief revenue officer at Datasite. “This is evident in Europe, the Middle East and Africa first quarter transaction volumes, for example, which fell 16 percent year on year to 4310 deal announcements.

“Yet, at the same time, aggregate value rose 28 percent, suggesting that companies are not walking away from deals but concentrating capital on fewer, higher-conviction targets. The deals most vulnerable are cross-border deals with pending regulatory approval, where pricing assumptions were established in a more stable environment before political shocks hit in the middle of the process.”

Core drivers

Political risk can significantly affect M&A activity, particularly in jurisdictions with evolving regulations or sensitive geopolitical environments. Overlooking these factors can turn profitable opportunities into costly mistakes.

The Bayes Business School study identifies several key drivers of political risk in global M&A transactions.

Shifting regulatory and trade frameworks can disrupt deal economics through sudden changes to taxation, foreign investment restrictions and tariffs. New industrial policies may also trigger supply chain bottlenecks and reshoring initiatives.

Intensified geopolitical rivalries are increasingly shaping cross-border transactions involving critical infrastructure, technology and supply chain sovereignty. This often leads to politically influenced merger control and antitrust reviews.

“A stable political and economic backdrop is always the preferred environment for a healthy M&A market, and any actual or perceived future disruption will damage confidence,” says Simon Heath, a partner at the Heligan Group. “Ultimately, a strong M&A market is supported by stability and improving sentiment. As long as the goal posts do not move, then deals will happen.”

Currency controls can restrict cross-border capital flows and profit repatriation, limiting post-acquisition cash flow and financial returns.

Election cycles can bring rapid changes to labour laws, trade rules and environmental regulations. Uncertainty before and immediately after elections often increases the cost of capital and delays deal completion.

“At a government level, a change in leadership can directionally alter the economics of a country, as demonstrated by President Trump’s import tariffs that were introduced overnight,” says Mr Heath. “And with Andy Burnham now in office as prime minister, the UK may see a potential swing to the left, where nationalisation of assets and centralisation of decision making is more likely.”

Expropriation and nationalisation remain risks in resource-rich and strategically important sectors such as energy and telecommunications, where governments may pursue state intervention or forced divestment.

Civil unrest and sanctions can disrupt operations, delay integration and restrict market access.

Political risk also varies considerably by geography. In Africa, resource nationalism frequently affects mining, oil and infrastructure sectors. In Eastern Europe, geopolitical tensions complicate technology and defence-related acquisitions.

Meanwhile, shifting regulatory priorities in Latin America continue to influence the energy, agriculture and consumer goods sectors. In South Asia, electoral volatility can disrupt manufacturing and pharmaceutical approvals, while in the Middle East, sanctions and political transitions affect infrastructure, logistics and energy investments.

“The Iran conflict and near-total closure of the Strait of Hormuz have reshaped energy security, affecting Middle East deal activity,” adds Mr Pottier. “M&A volume fell close to 15 percent in Q1 and Gulf sovereign wealth funds are investing in domestic infrastructure rather than European acquisitions.

“Tariff uncertainty is also changing cross-border values,” he continues. “US, European Union and UK national security reviews are expanding, adding regulatory scenario preparation that did not exist two years ago.”

While these regions may present attractive growth opportunities, they also require heightened vigilance, strong local partnerships and specialised due diligence. In many respects, they demand a rethinking of the traditional M&A playbook.

Evaluate and mitigate

Given the potential impact of political risk, buyers must assess exposure carefully and implement appropriate mitigation strategies, including tools that provide actionable insight during due diligence.

This is particularly important from a competitive perspective. Research including NL Analytics’ ‘Firm-Level Political Risk: Measurement and Effects’ found that 91.7 percent of political risk impacts reported by companies were firm-specific, compared with 7.5 percent at sector level and just 0.8 percent at market level.

Riddle Insights’ ‘Political Risk in M&A: What Buyers Need to Watch Out For’ highlights several techniques for assessing political risk effectively.

Political risk indices, such as those produced by the Economist Intelligence Unit and the PRS Group, rank countries according to governance quality, policy stability and investor risk.

Geospatial data modelling can help identify areas affected by unrest or conflict and inform post-acquisition operational decisions.

Scenario stress testing allows buyers to model potential outcomes such as sanctions, trade restrictions or regulatory intervention, supporting contingency planning.

“Companies that are handling political risk well are incorporating regulatory scenario modelling into original deal structuring,” says Mr Pottier. “For example, buyers responding to trade policy uncertainties became sharper in their focus on strategic reasons and more disciplined in their structuring, modelling multiple regulatory outcomes before committing.”

Artificial intelligence-powered sentiment analysis can also provide early warning of policy changes by monitoring political discourse across media platforms.

Bayes found that successful acquirers navigating political uncertainty typically use stock rather than cash financing, redesign deal structures to redistribute risk, develop contractual protections against policy shocks and identify potential post-merger disruptions before integration begins.

The study also argues that politically uncertain periods can create opportunities for superior returns when transactions are strategically sound and dealmakers adapt their approach. Such flexibility can allow firms to acquire attractive assets while competitors remain cautious about interest rates, supply chain uncertainty, market access and large-scale investment commitments.

“Acquisitions can actually be a strategic hedge against political risk by reducing reliance on a single country or policy regime,” attests Valeriya Vitkova, senior lecturer in corporate finance at Bayes Business School, and lead author of the study. “They can also improve supply chains or market access to protect against future political disruption.”

Political risk insurance is another important tool. According to the World Bank’s Multilateral Investment Guarantee Agency, demand for such protection increased by 12 percent in 2024. These policies help protect investors against expropriation, transfer restrictions, contract breaches and political violence.

Another emerging consideration is the growing role of national economic security agendas in shaping M&A activity. Governments are increasingly reviewing transactions involving advanced technologies, data assets, semiconductors and critical infrastructure through a strategic rather than purely economic lens. As a result, buyers must account for longer approval timelines, heightened disclosure requirements and the possibility of behavioural remedies or deal restructuring as conditions of regulatory clearance.

AI impacts

One of the key challenges in M&A is bridging the gap between due diligence findings and integration planning. AI-powered analysis is increasingly helping dealmakers provide faster, more comprehensive and cost-effective support throughout the transaction lifecycle, from target identification and due diligence through to negotiation and post-merger integration.

“AI is compressing deal timelines,” observes Mr Pottier. “Document analysis, regulatory mapping and cross-border compliance checks that used to take weeks are now faster and can cover larger data sets. The more significant recent development is that AI tools can now operate inside secure deal environments without sensitive documents leaving the platform.”

Mr Heath is more cautious. “Tools are still relatively basic and political risk diligence is largely human capital and risk-intelligence based,” he contends. “AI can be used to drive more efficient market scanning and open source data manipulation but to get under the skin of potential legislative change, a direct dialogue with politicians and civil servants remains a key intelligence source.”

Essential, not optional

As the world navigates an era of structural volatility, geopolitical fragmentation and rapid technological change, buyers face a range of challenges that continue to reshape M&A markets.

“Geopolitical risks remain elevated,” says Mr Pottier. “The conflict in the Middle East has become a global event with implications for energy, defence and capital allocation, highlighting the vulnerability of the global economy to energy flows via the Strait of Hormuz.

“Dealmakers should expect fragmentation, not stabilisation,” he continues. “The real shift in M&A has been toward scale, selectivity on deals aligned with policy, and with strategic conviction trumping more traditional cyclical timing.”

Politics is becoming increasingly polarised, according to Mr Heath, with growing support at both ends of the ideological spectrum. “As politics lurches further left or right, it will inherently create change,” he says. “The pace of change is also accelerating, but ensuring that companies recognise these trends and seek to mitigate them is at the heart of many multijurisdictional M&A transactions.”

Political risk assessment is no longer optional. Dealmakers are increasingly required to incorporate it into M&A due diligence processes, carefully evaluating the risks they face and implementing mitigation measures wherever appropriate.

Success will increasingly depend on treating political intelligence as a strategic capability – embedding foresight, agility and scenario planning into every stage of the deal process.

© Financier Worldwide

BY

Fraser Tennant