Although the link between M&A integration cost and deal size might seem obvious, most research suggests this correlation is not so clear. Instead, the degree of change integration demands is a much better predictor of total deal price. Change is the main driver of M&A costs, so dealmakers must be mindful of exactly how much change their mergers really require.
Regulatory and compliance adjustments may shift legal entities, reporting requirements, risk mitigation tactics, or quality standards. Although it might seem intuitive to estimate M&A integration costs based solely on deal size, 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 M&A integration costs, as exemplified in three areas:
- Cost savings targets (and, to a lesser degree, revenue or growth synergy targets)
- Regulatory or compliance-related adjustments resulting in changes to legal entities, reporting requirements, risk mitigation or redefined quality standards.
- Cultural differences, too, can cost significant funds.
Here’s what we’ve observed regarding the relationship between mergers and expenses:
- Harnessing synergies often requires significant expense. The more change the synergistic target will require and the larger this target is, the higher the expenses will be. Reducing staff, closing a building, building a new building, rebranding, and supply chain consolidation can all present significant expenses.
- Severance and other employee-related costs, office, plant, and real estate closures, and IT system changes are the most significant drivers of one-time integration costs. To reduce costs and realize desired synergies, find ways to keep the talent you have and recruit new talent who can grow the business and bring in revenues.
- Deal size correlates only very loosely with integration costs. Most studies suggest M&A integration costs range from 1 to 7 percent of deal value, but that’s a significant range, and to realize significant synergies companies may spend much more.
- Different sectors have different integration costs. Consumer, health, and life science sectors tend to produce higher costs compared to energy, technology, communications, and utilities. Consumer sector costs are often driven by product innovations, while health and science integration requires adherence to regulatory and safety standards, driving up costs. Manufacturing has significant deal activity, and while its costs are lower than sectors with the highest integration prices, costs remain higher than average.
Ultimately, the most important predictor of integration costs is the size and nature of the synergy target. Dealmakers must be mindful of this, and should be prepared to spend what it takes to make the merger work.
About Madison Street Capital
Madison Street Capital is an international investment banking firm committed to integrity, excellence, leadership and service in delivering corporate financial advisory services to publicly and privately held businesses. Over the years we have helped clients in hundreds of industry verticals reach their goal in a timely manner.
Our experience and understanding in areas of corporate finance and corporate governance is the reason we are a leading provider of financial advisory services, M&A, and valuations. With offices in North America, Asia and Africa, we have adopted a global view that gives equal emphasis to local business relationships and networks.