ESOP acquisitions are highly successful, according to new research
by Karen Kahn
At Fifty by Fifty, our goal is to help catalyze the growth of employee ownership to 50 million employee owners by 2050. One path to growth is through the sale of privately held businesses to employees, particularly among companies where owners find themselves on the cusp of retirement. Transferring the company to employee ownership can offer multiple benefits, including providing a way for the seller to secure his or her retirement while also leaving behind a legacy—a firm that will continue to provide jobs and generate wealth in the local community.
Suzanne Cromlish, Assistant Professor of Management at Saint Xavier University Graham School of Management in Chicago, has been researching another path to growth: growing existing employee-owned businesses through acquisitions. As a Ph.D. student at Case Western University, Cromlish chose ESOP acquisitions as her dissertation topic, seeking to determine whether these acquisitions could be an effective strategy to increase the number of employee owners in the U.S. Her research bears this out: over 90 percent of ESOP acquisitions succeed, an astounding figure considering that among non-employee-owned firms about half of these deals fail (i.e., the deals aren’t completed or they don’t result in productivity gains). But why?
Over 90 percent of ESOP acquisitions succeed, an astounding figure considering that among non-employee-owned firms about half of these deals fail.
In a recent interview, Cromlish noted that ESOP acquisitions have increased about five times since 2011, growing the number of employee owners even though there are fewer employee-owned companies. According to data from the National Center for Employee Ownership, in 2011, 6,941 ESOPS had 13,462,955 participants; in 2016, the number of ESOPs was 6,624, but participation had grown to 14,206,950 individuals.
This growth in employee owners isn’t necessarily intuitive: often when traditional companies acquire other firms, most of the target firm’s employees are let go. But what struck Cromlish in the first phase of her research — interviews with 20 executives at ESOP companies who had completed a total of 442 acquisitions — was the finding that, in ESOP acquisitions, the acquiring company almost always makes every effort to keep the employees of the target company and, then, to quickly turn these new employees into employee-owners. Of the 20 executives Cromlish interviewed, 17 had kept all of the employees from the target company; 3 had kept 90 percent of those employees.
Says Cromlish, “Cultural integration is what makes the difference. Every acquiring company executive I spoke with would personally go in and meet with every target company employee, explain that the employees would be able to become owners, and provide them with a hotline for any questions they might have.” She noted, “This isn’t the way traditionally owned companies do this.” Cromlish explained, most firms use acquisitions for short-term financial gains; the CEO of the acquiring company gets his bonus regardless of whether the deal works out well, so there is little concern regarding cultural compatibility or long-term strategic needs.
Cultural integration is what makes the difference,” says Cromlish.
In addition to her interviews with ESOP executives, Cromlish conducted a broader survey, which was sent to 3700 members of three U.S. ESOP associations. She analyzed data from 86 respondents, who had completed a total of 467 acquisitions. Of these, 442 — or 94 percent — were considered successful, confirming the high success rate of ESOP acquisitions.
Finally, looking for an outsider perspective, Cromlish interviewed 25 merger and acquisition consultants, 16 of whom facilitated ESOP deals and 9 who facilitated non-ESOP deals. Again, the ESOP consultants had a higher rate of success, completing 268 acquisitions, with 91 percent meeting the buyer’s expectations and 43 percent exceeding expectations. Among the non-ESOP deals, 74 percent met the buyer’s expectations, and 23 percent exceeded expectations.
This additional research helped Cromlish identify several other factors that influenced successful deals. In addition to the one-on-one interviews with the employees of the acquired firm, ESOP executives took time to find the right target company, she says. Risk adverse, these leaders sought to acquire firms that offered not only an attractive business opportunity but a firm with compatible culture and values.
Finally, Cromlish noted, ESOPs share organizational behaviors that result in organizational empowerment and happy, productive companies. These behaviors also yield successful acquisitions. She found ESOPs:
- Establish a shared vision across the firm;
- Manage with a long-term orientation;
- Engage in strategic planning;
- Practice ethical values and altruistic behavior: executives felt a sense of responsibility to the “shareholders”—the workers who made their enterprise succeed; and
- Empower employee-owners through practices such as open-book management and open-door communication.
Cromlish considers these practices, which are central to the operations of democratically run ESOPs, to be the drivers of greater productivity and higher growth rates characteristic of ESOP companies. In the long run, she says, if ESOPs can continue to successfully acquire new firms, it is possible to grow a more equitable economy, where shared wealth is the norm rather than the exception.
Karen Kahn provides communications consulting and editorial support for Fifty by Fifty.