ESOP Companies on Acquisition Binge

We don't have any hard data, but all the indicators point to a remarkable increase in the number of ESOP companies doing acquisitions. At recent meetings, we have asked how many companies have done an acquisition recently or plan one soon, and over more than half the people from ESOP companies raise their hands. Plan advisors note the same trend. Two factors seem at work here. One is that many ESOP companies have now long since paid off their own acquisition debt and have more cash. The second is that many ESOP companies are now 100% S corporations and pay no federal, and often no state, income taxes. These savings can then be used to fuel new growth. Of course, ESOP companies also tend to be more successful as a result of employee ownership, so this also better positions them for acquisitions. An important challenge will be whether these companies can export their successful cultures to the acquired companies.

When Louis Kelso, the creator of ESOPs, first promoted the idea of employee ownership, he envisioned the main use of ESOPs would be to acquire productive capital, not to buy out existing owners. For most of their history, however, the majority of ESOPs have been used to buy out an owner. Now that they have matured, ESOPs seem to be returning to Kelso's original goal.