Calculating Operating Cost Synergies

Rob Owen, Tom Piotrowski, Eva Szczepanska

Operating cost synergies are a common deal driver. Yet the availability of information can often make them complex to calculate. In this piece, we set out some pointers on how to best approach establishing the overall cost reduction.

Target for Cost Reduction

It is important to carefully consider the potential savings achieved through a proposed deal. Participants in Class 1 transactions must provide a ‘Quantified Financial Benefits Statement’ to the FCA (a quantified statement of expected synergies) stating the key metrics.  This increased scrutiny often means a buffer is applied to management’s synergy target and that the actual outcomes expected by management are higher.

Alpha looked at several transactions within the Asset Management industry. On average, announced synergies were c.£144m p.a.  Typical reductions were:

  • 30% of the target cost base
  • 10% of the combined entity (target and acquirer) cost base
  • One-off integration costs of 1.5x the announced operating cost synergy

Operating Cost & FTE Baseline

For Class 1 transactions, declared synergies must only be possible due to the merger. This means that the impact of any planned change programme must be removed and each synergy should be sense checked to ensure it cannot be delivered independently.

Baselining operating and FTE costs is complex. Whether costs such as technology and premises are held centrally or charged to functions varies by company, and a like-for-like comparison is necessary to ensure forecast savings are accurate. It can sometimes be the case that the most accurate comparison can be gained by comparing different time periods. A recent transaction used actual prior-year operating costs for one business and forecast costs for the other.

Sources of Synergies

  • People: Easy to quantify the number of staff exits, however, the quantum of saving often relies on average salaries


  • Middle & Back Office Consolidation: Understanding existing relationships underpins the potential savings derived from a strategic supplier and a preferential rate card for the combined entity.


  • IT & Data: Requires a well-defined target operating model to identify which systems will be retained vs. decommissioned. Often complex to complete this within the timeframe of a transaction


  • Research: Significant area of cost and likely overlap, however typically limited information available. Suitable sensitivity analysis should be conducted to fully understand the impact to the cost base.


  • Premises:  Assumptions are typically made regarding the ability for an unwanted property to be sub-let. These assumptions should be tested.
Sources of Synergies

Culture and Delivery

Acquirers often overlook the most valuable assets they are acquiring: people. Whether cultures can be aligned and the focus that senior management place on this will have a direct impact on whether synergies are achieved. The rate of deal failure is alarming – over 50% of mergers fail to meet their targets and cultural issues have been reported as a primary factor.  Delivering change is a slow process and culture is built gradually from the top down.

How Alpha can help?

Pre-Deal Expertise: Alpha’s pre-deal expertise combined with our unparalleled knowledge of asset and wealth management industry allows us to help position your business and merger partner for integration success.

Planning and Delivering Integration Success: Alpha is experienced in planning and delivering large-scale integration programmes. From defining the target state, moving suppliers or creating best-in-class platform functionality, Alpha can not only help you plan for success but also deliver it.

If you are interested in finding out more about how Alpha can support, please get in touch.

About the Authors

Rob Owen
Executive Director

Rob works exclusively on transaction-related projects, specializing in identifying value creation opportunities. He often works on transactions which will result in a significant change to the ongoing business, either as a result of an integration and delivery of operational synergies or as part of a divestiture and carve out. Rob has worked in London and Hong Kong and advised on over 50 transactions.

Tom Piotrowski
Associate Director

Tom advises clients on their transaction strategy within the Asset Management, Wealth and Insurance sectors. Tom’s deal experience spans the transaction lifecycle from market scanning, cost synergy modelling, pre-deal due diligence through to integration / separation planning and execution. He has supported domestic and cross-border transactions spanning UK, Europe, the Americas and Asia-Pacific.

Eva Szczepanska
Senior Manager

Eva works in our M&A practice, supporting clients with their transaction requirements across pre and post-deal. She specialises in Asset Management, having previously worked at one of the major third party administrators supporting clients on their data strategy.