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Beyond the deal: accurately estimating M&A integration costs

Photographic portrait of Elizabeth Kaske
Elizabeth Kaske

EY Americas Strategy and Transactions Buy & Integrate Leader

5 minute read 09 Dec 2024
Related topics
Strategy and Transactions

Accurate estimation of one-time M&A integration costs is crucial for achieving deal success and long-term value.

In brief:

  • EY teams analyzed M&A transaction costs of 229 deals between 2010 and 2023, revealing that the degree of change in an integration strategy is a major cost driver.
  • One-time acquisition costs associated with employees, real estate and technology rank high as deal cost drivers.
  • Sector nuances can be a major driver of M&A integration costs.

Many buyers are not budgeting enough for M&A transaction costs, which are increasingly important in dealmaker decisions today as companies seek to radically transform operations in a volatile market for investing. M&A serves as a key instrument within the growth strategy, vital for establishing a competitive edge and spurring innovation. Strategic planning from the beginning provides organizations with the resilience and clarity to overcome market uncertainties and seize opportunities for value creation.

How EY can help

CEOs’ planned transactions are being driven by several factors, according to the EY-Parthenon CEO Survey, including investing in early stage or adjacent businesses, acquiring a business in an adjacent sector to create new growth avenues, and making a transformative deal to shift to a new business model and customer base.

 

As companies consider these acquisitions, it might seem intuitive to estimate the related M&A integration costs based solely on the deal size. But our extensive experience and research into reported one-time costs in 236 transactions1 reveal that expenditures are much more indicative of the degree of change required in the integration plan rather than the sheer transaction size. 

 

Put another way, change — to the current operating model, technology, workforce, infrastructure and other aspects of a business — is the key driver of M&A integration costs, as exemplified in four challenges, outlined below.

 

Key drivers of M&A integration costs

 

1. Synergies

 

The best measurement of the degree of required change in the integration plan is the size of the targeted synergy. Typically, the more an operating model redesign or change is desired, the more spending will be needed. For example, rebooting IT, reducing the number of employees, shutting down a central office, rebranding the company, or consolidating the supply chain all result in significant costs.

 

It is logical then that the larger the targeted synergy, the greater the change needed and the more it costs to get there.

 

2. Employee-related cost

 

Reported buyer-paid severance costs account for more than 50% of integration costs in certain deals. This one-time “hit” has an annuity-like payback from cost savings for the foreseeable future. But because higher costs often creep back in over the near term, it is critical to track these cost synergies for at least three to five years post-close.

When companies report one-time M&A transaction costs, the most frequent drivers are severance and retention costs, followed by real estate activities and IT costs.

In addition, businesses seek to build scale and break into new markets with acquisitions. They may need new talent with the skills and local knowledge that the acquiring company lacks. Businesses may need to place more emphasis on the cost of acquiring talent and put the resources in place to secure the commitment of software engineers, technologists, founders and others who may be essential to the organization’s future success.

3. Deal size

M&A transaction costs can range from 1% to 4% of the deal value. According to EY analysis, larger deals valued at more than US$10 billion often incur lower average integration costs as a percentage of the deal value compared with smaller deals. This is due to the fixed integration costs and the complexity of integrating dissimilar businesses.

The tendency for M&A transaction costs to increase marginally as the deal size decreases could be because larger deals, often involving the purchase of a direct competitor to achieve scale, may result in the integration of similar products, services or facilities. In contrast, smaller deals — for example, the acquisition of a company that makes an innovative product — can lead to higher integration costs as a percentage of the deal value due to the need to integrate dissimilar businesses.

Additionally, small deals can be more expensive than larger deals due to fixed integration costs, including regulatory filing requirements, IT-related fees, and management consulting fees.

4. Sector variations

M&A transaction costs vary widely by sector. For instance, the health care and life sciences sectors show higher median integration costs compared with energy and utilities. Cross-sector deals also tend to incur higher average integration costs due to varying degrees of integration and differences in operating models.

  • In health care and life sciences, the median M&A integration cost is 10.1% of the target revenue, driven by regulatory, safety and quality standards compliance, as well as consolidation in the health care research and development function.
  • In the consumer sector, M&A integration costs, at a median 7.5% of the target revenue, tend to be driven by deals in the consumer products subsector that focus on product innovations, as opposed to deals in the retail space, which hover around operational efficiencies.
  • Technology, media and entertainment, and telecommunications companies reported a median integration cost of more than 5.6% of the target revenue, with higher costs for hardware and asset-heavy media companies, and lower costs for software and tech-talent deals.
  • In advanced manufacturing and mobility, most reported transactions involve M&A integration costs of more than 5% of the target revenue. This level of integration costs can be linked to several subsector dynamics, such as the amalgamation of manufacturing facilities by chemical companies and the streamlining of administrative functions and infrastructure by automotive and transportation companies.
  • The energy and utility sectors have shown relatively lower M&A integration costs, with a median of 3.5% of the target revenue. This could be because many acquisitions happen within the sector, rather than as cross-sector investments. For example, oil and gas acquisitions of oilfields and rigs — strategic fixed assets — may be easily added to a buyer’s portfolio.

EY research indicates cross-sector deals incur a higher average integration cost, as a percentage of the target revenue, compared with same-sector transactions. This may be due to varying degrees of integration, differences in operating models, and a tendency to have a longer duration of integration.


Summary

When considering M&A transaction costs, companies are best served by realistically calculating acquisition costs to achieve synergy targets. Buyers should not underestimate the fundamental cost of the work required to integrate two companies and realize a deal strategy.

How EY can help

  • M&A Advisory Services

    Discover M&A advisory services from EY when you buy and integrate. We help enable strategic growth through integrated mergers and acquisitions, joint ventures and alliances.

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About this article

Photographic portrait of Elizabeth Kaske
Elizabeth Kaske
EY Americas Strategy and Transactions Buy & Integrate Leader
Focused on mergers, acquisitions, divestitures and large-scale transformations. Mother, golfer, runner. Enjoys yoga, wakesurfing and global travel.
Related topics
Strategy and Transactions

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