What drives one-time M&A integration costs and how to estimate them

Focusing on one-time M&A integration costs is key for deal success.

In brief

• EY teams analyzed M&A transaction costs of 229 deals between 2010 and 2022 and found the degree of change in an integration strategy can be 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 an increasingly important factor in dealmaker decisions today as companies seek to radically transform operations in a volatile market for investing.

2. 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.

Reported buyer-paid severance costs account for more than 50% of integration costs in certain deals, according to the EY analysis. 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.

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 has some bearing on M&A integration costs.

M&A transaction costs can range from 1% to 4% of the deal value, though deals valued more than US$10b incur lower average integration costs as a percentage of the deal value than deals valued less than that threshold, according to the EY analysis.

The tendency for M&A transaction costs to increase marginally when the deal size goes down could be because larger deals, often the purchase of a direct competitor to achieve scale, may result in integration of similar products, services or facilities. In some smaller deals — for example, the purchase of a smaller company that makes an innovative product — the costs to integrate a dissimilar business can increase as a percentage of the deal value.

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

4. M&A integration costs vary by sector.

M&A transaction costs in relation to target revenue vary widely when looking through a sector lens.

The consumer, health care and life sciences sectors show higher median integration costs compared with energy and utilities; manufacturing; and technology, media and telecommunications (TMT).

• 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.
• TMT 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.