Power Play: Buying Political Support for M&a in the Electricity Sector

Abstract: We examine how firms use nonmarket strategies to protect economic rents created by corporate mergers and acquisitions. Since the early 1990s over 35% of all investor owned electric utilities (IOUs), have been the target of an M&A offer with an aggregate deal value of nearly 300 billion dollars. Mergers are typically rationalized on the basis of creating economic rents by achieving scale or scope economies. State regulatory agencies, however, have the ability to capture rents by imposing conditions such as electricity rate reductions or freezes before approving a merger. Utilities thus have an incentive to use nonmarket strategy to limit the extent of regulatory conditions imposed on a proposed M&A transaction. In this paper we contribute to the nonmarket strategy literature by conducting one of the first empirical investigations of how firms design integrated market and nonmarket strategies. Specifically, we investigate the conditions under which electric utilities use electoral campaign contributions to state politicians to achieve more favorable merger approval conditions. In our preliminary empirical results we find that target utilities significantly increase the level of their contributions in the 12 month period before the announcement of a proposed merger transaction.