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Corporates underestimating costs of post-merger integration

M&A is back on the corporate agenda to help deliver growth and expansion, however, corporates around the world are underestimating the costs and resources needed to complete a successful integration.

While the integration phase of a deal may never grab the headlines, it is in many ways the only way to properly evaluate the outcome of a deal, according to a survey by EY.
The right combination: Managing integration for deal success, a survey of over 200 senior corporate executives around the world involved in the deal integration process, found that, based on their most significant deals in the last 12 to 24 months, companies on average spent 14 per cent of total deal value on integration.
The average deal size for disclosed transactions in 2013 was EUR256m (USD342m), according to Mergermarket, which suggests that the integration costs per deal averaged at EUR36m (USD50m). 

However, while on the whole companies are doing a good job of allocating resources to integrate functions, there is evidence to suggest that they are not spending enough on their integration budget. Over a fifth of those surveyed stated that, in retrospect, they would have increased the size of their integration budget. Of the respondents who had a budget of 10 per cent of deal value, 38 per cent said they would have increased their budget by up to five per cent in hindsight. 

Meanwhile, companies may also be underestimating staffing requirements, with only four per cent using 16 or more staff on their integration team, and 46 per cent using fewer than 10 people. 

Michel Driessen, UK and Ireland head of operational transaction services at EY, says: “Whether the reasons for a deal were geographic growth, diversification or market share, companies need to strike the right balance between budget, time and team size. This is even more important, as the right sequence of a transaction process is a mystery to many companies. If the integration process is done well, it can help businesses grow and succeed. However, if it's done badly, it can result in significant loss of value.” 

Just 21 per cent of executives identified acquiring skills and talent as a factor for undertaking their last major transaction. None of the respondents ranked it as the most important reason for a deal. 

The low priority placed on bringing in key people through M&A stands in contrast to the notion that in order to remain competitive and successful businesses need to win the “war for talent”. Respondents see bringing in new, talented staff as an “added bonus” of a deal rather than an underlying strategic driver. 

Driessen says: “Operating in a new market may require skills and local knowledge that the acquiring company lacks. Companies may need to place more emphasis on the talent that they are acquiring, and in particular put in place the resources to secure the commitment of individuals that are essential to the organization’s future success. Without the right skills in place, a company could struggle to achieve its primary M&A goals, whether these are growth, geographic expansion or R&D.” 

Sales and marketing integration was the function identified by most executives as the key consideration for their last major deal, with 29 per cent saying it was their integration priority, followed by operations (27 per cent) and R&D (24 per cent). However, back office functions such as finance (nine per cent), human resources (seven per cent) and information technology (six per cent) were ranked in the bottom three positions. 

Driessen says: “Executives are more interested in growth and less interested in cutting costs and synergies. It is important, however, to recognise that organisations typically expect finance, HR and IT to be integrated as a matter of course. The successful integration of sales and marketing, which is linked to upside growth, is less certain and therefore more likely to be at the forefront of an executive’s mind. However, a failure to integrate back office functions can make it impossible to achieve other integration goals.

“Despite its operational importance, IT ranks as the top integration priority for just a handful of executives, however, more than a fifth end up allocating the top proportion of time and money resources to IT integration. This suggests that IT is under-prioritised in the integration process, and because of this, executives end up spending more on it than anticipated.” 

The best integration processes involve defining a clear rationale for the deal from the outset and ensuring that rationale set the agenda for the integration strategy accordingly.   

Following the integration, almost half of executives (45 per cent) said they conducted integration audits. Codifying past integration lessons and best practices was listed by 41 per cent of respondents. 

If given the chance to do their last deal again, executives would integrate deals faster, improve communications and introduce a second wave of integration. Eighty percent said they would have quickened the pace of integration, 62 per cent would have introduced a second wave of integration, while 58 per cent of acquirers would have communicated integration progress to their stakeholders. 

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