Are you giving

M&A integration
costs the attention
they deserve?
 Integration costs
Although it might seem intuitive to estimate integration costs based solely on
deal size, our extensive research and experience reveal that costs are much more
indicative of the degree of change required in the integration plan rather than the
sheer transaction size. Put another way, change is the key driver of integration
costs, as exemplified in three areas:

1. Cost savings targets (and, to a lesser degree, revenue or growth synergy

targets)

2. Regulatory or compliance-related adjustments resulting in changes to legal

entities, reporting requirements, risk mitigation or redefined quality standards

3. How much integration governance and third-party support are required to

make the integration a success

Clients frequently ask what

they should budget in terms
of one-time integration costs Supply chain and
Severance and
retention
for an acquisition or merger. procurement

Often, very little time is spent Emplo

ye
osts e- Pension and
thinking about these costs. At Sales and ional c r
benefits

el
best, they are underestimated, marketing

at
ct

ed
Fun
and in some cases, they

costs
Value creation
Compliance
are ignored or forgotten
Governance
altogether, leading to either Research and Legal and
budget overruns or, worse, development regulatory

underspending in critical areas.

Real estate and IT and systems
facilities

We reviewed more than 70 deals* (announced, closed or effective mergers and

acquisitions) from 2010 to 2016 valued at over US$1b each with publicly listed
buyer companies. The range of publicly reported integration costs was very wide —
from US$4m at the low end to US$3.8b at the high end.

While every deal is different, we observed four trends around integration costs.

Integration cost (US$m)

*Deals in the financial services and real estate industry, deals with multiple buyers, private equity firm
acquisitions and deals in which the buyer is headquartered outside the US were excluded

2 3
1
4.7%
4.3%
Average integration
costs as percentages of
3.4%
3.1%
deal value by drivers Overall average of integration costs as a percentage of deal value: 3% 2.5%

The best measurement of the degree of

required change is the size of the synergy Real estate Severance IT/systems Sales and Legal and

target — synergies represent the most direct

2
and employee- marketing regulatory
related costs

10 31 7 4 3
correlation with integration costs. Number of deals considered for calculation of average

Source: EY research.

More specifically, capturing Capital Confidence Barometer survey

synergies requires making changes
to the current operating model,
technology, workforce, infrastructure
published in October 2018, companies
that spent more on the integration
process outperformed their pre-deal The most frequently reported drivers of Integration costs as a
% of deal value
Integration costs as a
% of target revenue

one-time integration costs are severance

and other elements. Typically, the targets. In fact, those companies that Advanced 0.1% 0.3%
more that change is desired, the met or exceeded their original synergy 33 Manufacturing and 2.6% 5.0%
Mobility (AM&M) 19.8% 18.7%

and employee-related costs, plant, office or

more spending will be needed — at targets spent on average 8% more (as 0.8% 2.8%
least in the near term. Reducing a percentage of announced synergies) 14 Consumer 3.4% 8.2%
17.8% 24.8%
the number of employees, shutting than those that failed to meet their
real estate shutdown and IT system changes.
0.3% 0.9%
Energy and
down a headquarters, rebranding the ambitions. Being willing to spend 10 Utilities (E&U)
1.5% 3.5%
4.0% 7.2%
company or consolidating the supply money to save money seems to make
0.1% 0.5%
chain all result in significant costs. sense in this case. Health Science and
Wellness (HS&W)
1.3% 14 10.1%
So, it is logical that the higher the 21.0% 23.5%
Severance costs that the buyer Building scale and breaking into new Real
0.3%estate1.5%
activities (shutting
synergy target, the greater the change
pays account for more than 50% of markets are someTMTof the main reasons 19
down properties,
2.6% 6.0%moving offices,
needed and the more it costs to get 9.2% 17.3%
integration costs in certain deals, for an acquisition. These acquisition andNo.
reconfiguring locations) drive
there. According to the EY Global of deals
according to EY research. This one-time drivers often bringMin
new talent into a Max
Median integration
analyizedcosts but are not
“hit” has an annuity-like payback from business because operating in a new reported as frequently as other
Source: EY research. cost savings for the foreseeable future. market may require skills and local costs. IT costs, such as licensing,
Given that such costs often creep back knowledge that the acquiring company consultant and reconfiguration
Between $5b

in over the near term, it is critical to lacks. Companies may need to place fees, round out the top three
track these cost synergies for at least more emphasis on the talent that they integration cost drivers.
three to five years post-close. are acquiring and put the resources
Integration costs ($b)

in place to secure the commitment of

Correlation between individuals who are essential to the
announced cost synergy organization’s future success.
and integration costs
Below $0.5b

Below $1b Between $1b to $10b

Announced cost synergy ($b)

4 5
 4
Integration costs vary4.7%
by sector
4.3% .
3.4%
Certain sectors we studied illustrate • The energy and utilities sector has 3.1% with significant
• Lastly, a sector
variances in integration costs in the lowest integration
Average costs cost
for integration overall,
as a percentagedeal
of activity
deal value:is3% 2.5%
the advanced
relation to deal value as well as target with a median of 2.9% of target manufacturing and mobility sector,
revenue. For example, consumer, revenue. This could be because where most reported transactions
health care and life sciences sectors most acquisitions happen within the involve integration costs of more
show higher integration costs relative sector rather than as cross-sector than 6% of the target revenue.
to deal value and target revenue, investments. For example, oil and This higher level of integration
Real estate Severance
compared with the energy and gas acquisitions tend to be for oil
and employee-
costs can
IT/ Systems
be linked toregulatory
Sales and
marketing
several
Legal and

utilities, and technology, media and
telecommunications (TMT) sectors.
Hence, the integration costs for a deal
might vary if we look at them from the
fields and rigs — strategic fixed
related costs subsector dynamics, such as the
assets — which can easily be added amalgamation of manufacturing
to the buyer’s portfolio. facilities by chemical companies and
the streamlining of administrative

3
lens of the target sector. Here are some functions and infrastructure by
examples: automotive and transportation
companies.
• In the consumer sector, integration
costs tend to be driven by deals in
the consumer products subsector Integration costs as a Integration costs as a
% of deal value % of target revenue
that focus on product innovations, Advanced 0.1% 0.3%
as opposed to deals in the retail manufacturing and 2.6% 33 6.4%
mobility 19.8% 18.7%
space, which hover around

Deal size has some bearing on integration costs —

0.8% 2.8%
operational efficiencies. Consumer 3.4% 14 10.0%
17.8% 24.8%
• In health care and life sciences, the
but only loosely. Despite deal size, integration integration cost median was at 7.6% Energy and
utilities
0.3%
1.5% 10
0.9%
2.9%
of target revenue, possibly driven by
costs can range from 1% to 7% of deal value.
4.0% 7.2%
compliance with regulatory, safety Health care and
0.1% 0.5%
and quality standards, as well as life sciences
1.2% 14 7.6%
21.0% 23.5%
consolidation of the research and 0.3% 1.5%
According to EY research, deals valued The tendency for integration costs terms of percentage of deal value.
development function. TMT 2.6% 19 6.0%
9.2% 17.3%
above US$10b incur, on average, to increase marginally when the deal The real reason small deals are more
No. of deals
lower integration costs than deals size goes down could be because expensive than bigger deals is likely Min Median Max
analyzed
valued below US$10b, measured as a larger deals are oftentimes scale that there are many fixed integration Source: EY research.
percentage of deal value. In the deal deals in which a company is buying a costs not linked to deal size (e.g., costs
value range of US$5b to US$10b, direct competitor and can more easily of regulatory filings, IT-related fees and
the integration costs ranged from 1%
to 5% of the deal value. In the lower
integrate its similar products, services
or facilities. In some smaller deals — for
management consulting fees).
Conclusion When considering an integration, the best predictor of integration costs is the
size of the synergy target. Companies would be better served by realistically
deal value range of US$1b to US$5b, example, the purchase of a smaller calculating costs to achieve these targets, as well as including the cost of the
integration costs increased to 2% to company that makes an innovative expertise required to successfully execute the transaction.
7% of the deal value. In reality, this product — the costs to integrate a The EY organization has done extensive research on this topic. For a deeper dive
range is too large to be predictive. dissimilar business can increase in into these findings, please contact Brian Salsberg, EY Global Buy and Integrate
Leader, or your EY representative.

6 7
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Managing Director, Transaction Advisory Services
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Partner, Transaction Advisory Services
This material has been prepared for general informational purposes only and is not intended to
Ernst & Young LLP
be relied upon as accounting, tax or other professional advice. Please refer to your advisors for
jasper.knol.bruins@nl.ey.com specific advice.

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Contributors
Rahul Kumar Agrawal, Banipreet Kaur and
Deepanshi Jerry