The number of ESOPs in the US hasn’t increased in recent years, but the number of ESOP participants has. How so?
One reason is that many ESOP companies have been on the acquisition trail. In fact, ESOP-related acquisitions have increased fivefold since 2011.
An example is H.B. McClure, a Pennsylvania-based contracting company that offers a wide variety of construction and home-maintenance services. McClure, which is 100% employee owned, has bought several companies over the last few years, most recently a Florida-based mechanical and plumbing contractor, and now has more than 500 employees. (A list of its acquisitions can be found here.)
In the conventional business world, growth by acquisition is a controversial strategy, because many deals fail to pay off. The acquiring company may not have done its homework. The target company—that’s the one being bought—may not fit well with the acquirer. Key people may leave once the deal is complete. According to some estimates, about half of acquisitions either fail outright or don’t live up to the acquirer’s expectations. Other estimates put the failure rate even higher.
But ESOP companies seem to be different. Suzanne Cromlish, an assistant professor of management at Illinois’s St. Xavier University, put together a comprehensive research project that looked at hundreds of acquisitions by ESOP companies. She found success rates in the neighborhood of 95%.
Why the big difference? One factor is that ESOP companies have a distinctive culture. They look for potential acquirees that will fit comfortably with that culture. Another factor is that they are unlikely to lay anybody off after the acquisition; in nearly all of the deals Cromlish studied, the target’s workforce was hired by the acquirer. That avoids the fear and mistrust that builds up when people are worried about keeping their jobs.
A third factor, says Cromlish, is that the acquirers paid close attention the integration of the two organizations. For instance, they typically retained the acquiree’s management and made a point of including its employees in teams and committees.
Most acquirers also integrate the acquired company’s employees into their ESOP. Presto: the number of ESOP participants rises while the number of ESOPs stays the same—or even declines, if the acquired company had its own ESOP.