A Research Summary of Employee Owned Company Acquisitions Shows High Success Rate
by: Suzanne Cromlish, Ph.D. from Case Western Reserve University, INCEO Blog Contributor
As has been widely publicized, wealth inequality in America is currently greater than at any previous time in United States history. In 2005, a CEO’s typical compensation package equated to their making $262 for every dollar earned by the lay workers in the United States.
ESOPs, or Employee Stock Ownership Plans, have certain characteristics that could enrich and empower the 99% of the population because the workers actually become owners of the company. These worker owners generally receive higher wages than conventional companies in their industry and, as a whole, the employees have larger retirement accounts.
These companies also generally tend to implement progressive management strategies of open-book management and open door communication with high employee involvement practices in work-level decisions more often than conventional firms and they have been proven to be more successful in equality and productivity because the employees are both personally and financially empowered to improve the performance of the company.
Despite their many advantages, there are only approximately 7,000 ESOPs and ESOP like plans in the United States and the purpose of my research topic is to examine the ESOP acquisition process, hopefully to increase the numbers of ESOP participants. Despite there being widespread academic research on ESOPs in general, surprisingly there is very little on ESOP acquisitions. When ESOP companies acquire Non-ESOP organizations, the acquired employees from the target companies generally join the ESOP plan and thus become employee-owner participants. This research topic will continue to examine factors contributing to both successful and unsuccessful acquisitions especially as to how organizational and behavioral characteristics of ESOPs affect the implementation of post-acquisition cultural integration.
The Phase One qualitative study involved interviewing 20 ESOP executives of acquiring companies, who have completed both successful and unsuccessful acquisitions as well as 10 executives from the target companies that were purchased. The 20 executives interviewed completed a total of 442 acquisitions with only 12 being reported as unsuccessful, which is a phenomenal success rate.
The Phase Two quantitative research study was marketed to the three largest ESOP Associations in the US as The National Center for Employee Ownership (nceo.org), The ESOP Association (esopassociation.org), and The Ohio Employee Ownership Center (oeoc.org), which is located at Kent State University, all granted access to their confidential membership lists for this survey. These findings resulted in 86 participants completing 467 acquisitions with 465 meeting expectations and 442 being considered successful, which, again, demonstrates a huge success rate. In addition, all paths were significant in the proposed model, which indicates that certain organizational behaviors were significant for completing productive and successful acquisitions.
The Phase Three qualitative study involved interviewing 25 executives of consulting firms, who strategize with both Non-ESOP and ESOP executives during the acquisition process. Since the previous two studies were self-reported, a third party viewpoint of this acquisition process was obtained, which ended up validating the previous two studies. This third study brought insights into the organizational behaviors of both ESOP and Non-ESOP firms during the acquisition process for a compare and contrast study. Sixteen consultants were experienced with ESOP acquisitions and 9 consultants had experience with non-ESOP acquisitions. The Non-ESOP consultants completed a total of 525 acquisitions with 74% meeting the buyer’s expectations and 23% exceeding their expectations. The ESOP consultants completed a total of 268 acquisitions with 91% meeting the buyer’s expectations and 43% exceeding their expectations.
Findings: ESOP executives are risk averse by meticulously selecting and attempting to match cultures with their target companies even prior to the acquisition. Certain organizational behavioral management strategy practices of Shared Vision, Strategic Planning, Ethical Values, Long Term Orientation, Altruistic Behavior, and Organizational Empowerment by ESOP Executives were discovered to cause these successful and productive acquisitions to occur. These ESOP acquiring companies viewed the target company employees as assets by providing employment for 90-95% of these newly acquired employees and approximately 90-100% of the target company employees eventually joined the ESOP. ESOPs are clearly different from the Non-ESOP conventional corporations as a great majority of them implement open book management and open door communication practices, which personally and financially empowers their employees.
In 2016, the Dealogic Research Institute reported the value of withdrawn and rejected mergers and acquisitions offers were at the highest level since 2007 & that the US was at the top of the list for withdrawn deals. In addition, failed deals set new records as 47% of mergers & acquisitions failed or appeared to not be worth the deal. This is definitely a contrast of the findings from these three studies as acquisitions completed by ESOP type organizations are highly successful.
This research gap is continuing to provide many opportunities to assist the ESOP practitioner world as four practitioner articles have been published regarding this topic and the findings from this dissertation study have been presented at fourteen academic and practitioner conferences including The Academy of Management Annual Conference twice, once in 2015 at Vancouver and this year in Chicago. In addition, after a national competition, The Employee Ownership Foundation awarded a Louis O. Kelso Research Fellowship from Rutgers University School of Management and Labor Relations in New Brunswick, NJ. for this research study. Moreover, the three largest US ESOP Associations previously mentioned are collaborating with this topic and are opening their doors to have this research study presented at their conferences. Two of these associations have also approached me with additional research topics to benefit their practitioner membership.
A recent article appearing in Harvard Business Review discusses the concept that Baby Boomers may be more willing to sell their companies to their employees. Capitalism requires for our country’s currency to be distributed throughout the system, and since ESOPs are employee-owned, and many operate with progressive management strategies of open book management and open door communication practices; as they continue to obtain successful acquisitions, the 99% could truly be personally and financially empowered, thereby offering more wealth equality as well as an enhanced sustainable solution for our country’s economic system.