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The Employee Ownership Update

Corey Rosen

August 4, 2009

(Corey Rosen)

ESOP Valuations in the Downturn

It is far from a scientific sample, but ESOP valuation advisors are generally telling us that their clients are doing about as well as or somewhat better than non-ESOP clients in terms of their stock values. Paul Halverson of Chartwell Capital Solutions, for instance, reports that ESOP companies are doing about as well as non-ESOP companies, but that their values are not declining as much as the market as a whole. His explanation is interesting: "In the M&A markets, what we see is buyers have reduced their valuations so low that most sellers are choosing to not sell, but rather hold onto their company. If sales are occurring, it may be factors other than valuation that drive the transaction, i.e., poor health of the owner, lack of interest in the business, 'I just want something out of the company,' etc. So, the 'deals' that happen are more distressed sales at reduced values. The valuation challenge becomes, in that situation where a buyer's value is less than a seller's willing sale price, what is 'value'? We think it is somewhere above the buyer's 'bargain value' and the seller's idea of what value was a year ago. That is really where we see ESOP values holding up a bit relative to reported transactions and public market values."

A number of other valuation consultants said the key issue was leverage. Highly leveraged companies were facing a lot more difficulties this year no matter what their financial structure. None of the respondents, however, indicated that ESOP companies were doing worse than non-ESOP companies, and about half said they were doing somewhat better.

11 of 35 Winning Workplaces Awards Finalists Are NCEO Members

Eleven of the 35 finalists for the annual Winning Workplaces Awards are NCEO members. Ten of these have ESOPs. This continues a pattern in which NCEO members consistently account for about one-third of the finalists and winners of Winning Workplaces' Top Small Workplaces awards. Our congratulations to Analytical Graphics, Bailard Inc., Crop Quest Agronomic Services, Fleetwood Group, Heavy Constructions Systems Specialists (HCSS), NewAge Industries, Normandeau Associates, Pool Covers Inc., and Skyline Construction.

Winners will be announced at the Winning Workplaces annual conference Oct. 1-2 in Chicago. For details on the meeting, go to this link.

The Pope and Employee Ownership

In his new encyclical, Caritats in Veritate, Pope Benedict states that "alongside profit-oriented private enterprise and the various types of public enterprise, there must be room for commercial entities based on mutualist principles and pursuing social ends to take root and express themselves." The encyclical nowhere specifically endorses employee ownership, although it does often refer to Pope John Paul II's 1981 encyclical Laborem Exercens, in which he endorsed such employee-owned enterprises as worker-owned cooperatives as one means of satisfying this mutuality principle.

If Employees Monetize Options With Call Options, Is It Taxable?

Recently, the SEC issued a new rule allowing employees with vested, unexercised stock options to use them as collateral to purchase call options as a way to obtain some cash value for the shares they can exercise. Generally, employers are less than enthused about allowing employees to hedge options this way, but if they do allow employees to do so, an unresolved question is whether the strategy will be considered a sale and, if so, at what rate and when. The issue is complicated, and it may be some time before there is any clarity on this matter.

ESPP Survey Results Show Few Changes to Plans

The NCEO and CEP Institute at Santa Clara University jointly sponsored a survey of companies with employee stock purchase plans (ESPPs). The results have not yet been publicly released, but they indicate that the great majority of companies (82%) made no changes to their plans in the past 12 months and a similar number (85%) expect no changes in the upcoming year. Roughly two-thirds of respondents describe their plans as "an excellent use of corporate resources" or "net beneficial," while 3% believe their plans are not worth the cost.

Author biography and other columns in this series

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