Companies shouldn’t scrimp on M&A integration budgets

By:
Carol Dean
Published on:

Companies are not only underestimating the cost of post-merger integration, with as much as 14% of total deal value on average being spent on the process, but in many cases using only ‘gifted amateurs’ to try to ensure its success.

A recent survey of more than 200 corporate executives by accountancy firm EY found a fifth of respondents had under-budgeted for integration, which on average costs a company €36 million.

The findings come at a time when a flurry of multi-billion dollar deals in the pharmaceutical sector has delivered a revitalizing injection to the mergers and acquisitions (M&A) market, potentially signalling a sustainable upturn in deal activity.

Valeant Pharmaceuticals and activist investor Bill Ackman’s unsolicited $48.1 billion bid for Allergan, the maker of Botox, and a complex multibillion-dollar asset swap between Novartis and GlaxoSmithKline came first before shares in AstraZeneca jumped on news Pfizer had made a tentative $100 billion approach.

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,” says Michel Driessen, UK and Ireland head of operational transaction services at EY.

However, he adds: “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.”

John Kelly, integration partner at accountancy firm KPMG, says effectively managing the integration process is critical, not least because, under the firm’s own analysis of this, roughly half of all merger failures happen post-deal.

“Generally, companies underestimate both the cost and the skills required to integrate two businesses,” says Kelly. “While they are happy to spend significant fees on deal advisers, they often then take the post-deal work back in-house, asking gifted amateurs to ‘have a go’ at integrating the two companies. This is often a costly mistake.

“Underestimating costs is not just about cash, but also about management time, effort and energy. Whilst people can do a bottom-up exercise to estimate spend, they often underestimate the toll on management capacity.”

EY surveyed more than 200 corporate executives from companies with an enterprise value in excess of $450 million and only included firms with annual revenues of $800 million or above.

Given the chance to do their last deal again, 80% of respondents said they would have quickened the pace of integration, 62% said they would have introduced a second wave of integration, while 58% of respondents said they would have communicated the integration progress to their stakeholders.