02 Sep Typical M&A integration costs: From 1% to 7% of deal value, regardless of deal size
This finding from EY in October 2019 generally reflects our own experience here at BTD, and has remained largely consistent over the 20 years in which we’ve been supporting client integrations. Costs are similarly not inherently different by sector, nor even by the type of deal completed (vertical vs horizontal, bolt-on vs ‘merger of equals’). While deals (or more accurately) integrations that aim to deliver significant cost reductions tend to need the most up-front investment (eg in back-office systems/data migration, organisational restructuring and relocation), revenue-accelerating benefits also can require significant spend in areas such as product harmonisation and rebranding, sales force refitting, and customer-facing/CRM platforms.
One important point here is the confirmation that – contrary to conventional wisdom – smaller deals do not equate to simpler integrations. Your ability to extract value from your acquisition will still depend on the same kinds of actions mentioned above, regardless of whether you have bought a £10m family-owned business or a £10bn global enterprise. The absolute cost of achieving your post-close goals will of course be lower, while relative figures remain unchanged.
Which leads to my second point: In the end, the amount you spend on integration is in itself irrelevant; in fact, the above percentages often get dwarfed by the costs incurred getting the deal done in the first place. What matters is whether any amount you spend post-close – when compared to the value it creates – delivers an acceptable return on your investment. If (by way of a typical integration business case) you are looking for your integration to achieve a 10% increase in acquired EBITDA from, say, 12 months post-close, a (relatively high) integration spend of 5% of enterprise value (at typical deal multiples and WACC rates) results in a simple ROI of 27%. Yes, that’s 27% return on the investment you made in integrating (or improving) the business you bought 12 months earlier. How many other investments will give you that kind of return? Remember, acquisitions rarely create or add any value to your business – you typically get exactly what you pay for. It’s integration that delivers any added value. How much is that investment worth to your business?