Blue Ridge ESOP Associates Industry News

New Study Shows Great Success with ESOP Acquisitions

Posted by Blue Ridge ESOP Associates

Feb 9, 2017 10:43:37 AM

The results of a 3 year study, recently presented at The Mid-Year Fellows Workshop in Honor of Louis O. Kelso hosted by Rutgers School of Management and Labor Relations in New Brunswick, NJ, was conducted by Suzanne Cromlish, a Ph.D. Candidate at Case Western Reserve University, discovered that ESOP acquisitions of Non-ESOP companies are extremely successful.

Cromlish conducted an acquisition study consisting of 2 phases as follows:

1. Interviews with 30 ESOP Executives – 20 were with ESOP acquiring firms & 10 were with non-ESOP target companies who were acquired by an ESOP company.

2. A larger internet survey was distributed to over 3700 ESOP executives.

The results of both phases are equally enlightening as over 95% of the ESOP acquisitions were successful 2-3 years after the acquisition! 

These findings are amazing since the Dealogic Research Institute in NYC in 2016 reported that the total value of withdrawn, rejected, or expired merger & acquisition offers were at the highest level since 2007 & that the US was at the top of the list for withdrawn deals.  They also report that failed deals set new records & that 47% of mergers & acquisitions failed or appeared to not be worth the deal.

Phase One

In the Phase One study, all 20 ESOP executives had completed a total of 442 acquisitions & only 12 were unsuccessful, which is a 97.5% success rate.  In addition, every ESOP acquirer hired 90-95% of all of the target company employees! In fact, prior to the acquisition, the ESOP acquirer worked diligently with the target company executives to ensure their employment as they actually viewed the target company employees as assets!

Within these 30 interviews during the acquisition process, certain organizational behaviors were imminent such as:  Ethical Values, Altruistic Behavior, Shared Vision, Strategic Planning, Long Term Orientation, & Organizational Empowerment.  These behaviors integrated together caused positive post-acquisition productivity & success to occur.

Phase Two

Cromlish marketed this research to the 3 largest ESOP associations in the US & they all graciously provided their membership lists for the Phase 2 study.  During this study, an anonymous internet survey was emailed to approximately 3700 ESOP executives.  The only criteria required was for the ESOP executive to have completed at least one acquisition.  Out of the 3700 surveys emailed, 234 respondents opened the survey & 86 of them completed it.  The 86 respondents had completed a total of 467 acquisitions out of which 465 were fulfilling expectations & 442 acquisitions were considered successful.  These findings dovetail with the Phase One findings with a 95% success rate, which, again is amazing!  Again, in this phase, very few employment positions were eliminated from both the acquiring & target companies.

What was discovered in this phase was that the same organizational behaviors, which emerged in Phase One, were extremely important.  In fact, after analyzing the data, the 5 behaviors listed above actually caused Organizational Empowerment to occur & the Organizational Empowerment actually caused positive post-acquisition productivity & success to occur.

The strongest effect was the relationship of a Shared Vision to Organizational Empowerment.  This indicates that for a successful acquisition to occur, both the acquiring & target companies need to have a common shared vision for their future together!

What does all of this mean to ESOPs today? 

All ESOP Acquiring Executives interviewed:

1. Extensively planned & strategized prior to the acquisition carefully selecting complementary target companies with the same goals, objectives, & concern for employee welfare.

2. Viewed the target company employees as assets & strategized as to how to retain & locate employment for them.

3. Provided extraordinary efforts during the cultural integration by having power point presentations, conducting one on one meetings with every target company employee, installing hot lines, providing dedicated contact people, working side by side, exchanging positions, etc.

For the Target Firms:

1. The ESOP was a huge factor as they were concerned about the welfare of their employees after selling their company.

2. Some target companies were maxed out prior to the acquisition & needed improved resources, capital investments, training, travel, & enhanced technology & benefit packages.

3. Open book management & open door communication was a better culture.

4. Employees were excited about participating in company ownership.

5. The increased level of bureaucracy did create some frustration & new policies & procedures were also a factor.

What is exciting about this study is that from 1989-2010, only approximately 1-3 acquisitions were completed each year by ESOPs; however, between 2011-2015, these numbers quadrupled, which clearly demonstrates a trend for increasing ESOP acquisitions.  In addition, a great majority of the respondents reported that over 90-100% of the eligible target company employees joined the ESOP! 

Since the numbers of employment positions eliminated are so small, & the number of acquisitions are increasing, ESOPs are a vehicle or catalyst for personally & financially empowering the 99% of the population, thereby increasing the number of ESOPs as well as having a positive impact upon our current US economic situation of wealth inequality! 

Suzanne Cromlish is an Assistant Professor of Management at Saint Xavier University in Chicago where she resides with her husband, Dave, of 36 years & they both are passionate about empowering the 99% & increasing the number of ESOPs!  She is a Ph.D. Candidate from Case Western Reserve University in Cleveland, OH with plans to graduate in August 2017.  Her email is: suzanne.cromlish@case.edu   

Topics: ESOP Acquisitions