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Corporates underestimating costs of post-merger integration, yet 14% of total deal value being spent on the integration process

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  • €36m (US$50m) on average spent on cost of integration per deal
  • More than a fifth say that they under-budgeted for integration
  • Skills and talent are seen as “added bonus” of a deal rather than strategic driver

London, 9 April 2014 – M&A is back on the corporate agenda to help deliver growth and expansion, however, corporates around the world are finding that they have underestimated 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 new 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 – 24 months, companies on average spent 14% of total deal value on integration. The average deal size for disclosed transactions in 2013 was €256m (US$342m)1, which suggests that the integration costs per deal averaged at €36m (US$50m).

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% of deal value, 38% said they would have increased their budget by up to 5% in hindsight.

Meanwhile, companies may also be underestimating staffing requirements, with only 4% using 16 or more staff on their integration team, and 46% using fewer than 10 people.

Max Habeck, EY’s Global Operational Transaction Services Leader, 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.”

Talent: the phony war
Just 21% 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.

Habeck comments: “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.”

Back office on the backburner
Sales and marketing integration was the function identified by most executives as the key consideration for their last major deal, with 29% saying it was their integration priority, followed by operations (27%) and R&D (24%). However, back office functions such as finance (9%), human resources (7%) and information technology (6%) were ranked in the bottom three positions.

Habeck says: “Executives are more interested in growth and less interested in cutting costs and synergies. It is important, however, to recognize that organizations 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-prioritized in the integration process, and because of this, executives end up spending more on it than anticipated.”

Lessons learned: speed up, speak up and start a second wave
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%) said they conducted integration audits. Codifying past integration lessons and best practices was listed by 41% 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% would have introduced a second wave of integration, while 58% of acquirers would have communicated integration progress to their stakeholders.

Habeck concludes: “Despite companies becoming better at acknowledging the importance of a coherent integration strategy and learning from prior experiences, improvements still need to be made. Corporates need to assess their integration budget and staff requirements more carefully as well as putting greater value on the importance of IT in the process.

“M&A activity is coming to life again and companies are ready to take advantage of opportunities to increase scale and expand their businesses in new markets. Corporates that have a clear plan for integration, budget appropriately, communicate clearly and have strong leaders in charge of the process will be best placed to take advantage.”

About the survey
In H2 2013, Remark, the market research division of the Mergermarket Group, interviewed 200 senior corporate executives involved in the deal integration process. During the interviews, these executives offered insight into how the strategic rationale of their company’s last significant transaction shaped their integration strategy.

Using the Mergermarket database, Remark identified all those companies involved in an M&A transaction over the past two years that had an enterprise value in excess of US$450m. The company list was then filtered to include only firms with annual revenues of US$800m or above.

Executive respondents were drawn from the Americas, Asia-Pacific and EMEIA regions, representing a range of industries. All interviews were conducted by telephone. The results are reported anonymously and presented in aggregate.

About EY
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1 Source: Mergermarket