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How Well Do ESOP Acquisitions of Non-ESOP Companies Work?

Suzanne Cromlish

February 5, 2016

(Suzanne Cromlish)According to the National Center for Employee Ownership, in recent years ESOP companies have been acquiring other companies at a rapid rate. There are probably as many or more companies acquired by ESOP companies as there are new ESOPs in any year. Until now, there has been no data on how well these acquisitions work. Wharton professor Robert Holthausen notes that 50% to 80% of all mergers fail to deliver positive results.

This research project looks at what happens in ESOP acquisitions. Most successful ESOP companies implement various types of progressive organizational strategies, including open-book management and high-involvement decision making, that may help overcome a principal challenge to mergers and acquisitions, namely difficulties with cultural integration. They also almost always make the target employees part of the ESOP. These practices of active employee engagement and participation enhance productivity and profitability because employees are personally empowered to improve company performance. This study focused on how other companies were acquired by an existing ESOP and how these target companies become employee-owned, with two key questions in mind:

I interviewed 20 ESOP company executives at acquiring companies and 10 at acquired target companies. The findings of this project revealed that certain organizational behaviors, including ethical values, shared visions, long-term orientations, altruistic behaviors, strategic planning, and organizational empowerment processes contribute to successful ESOP acquisitions.

In all cases, the acquiring ESOP company executives reported actively seeking target companies with the same vision and behaviors of placing the needs of the employees as well as the sustainability of the company over the self-interest of the executives.

Extensive strategic planning and preparation were a major part of the acquisition process, and some executives even installed hotlines for the target company employees to call with any questions. Other executives placed acquiring workers side-by-side with the target company employees to foster relationships so they would have a "buddy" as opposed to calling the corporate office with issues and/or concerns.

All 30 executives interviewed implemented open-book management and high-involvement decision-making strategies with all employees and maintained an outlook for continual inquiry. In addition, all executives carefully evaluated their decision-making strategies to implement ethical values as well as visions for long-term sustainability. These attributes appear to contribute by increasing organizational empowerment as employees become more engaged with the organizational goals and objectives.

While there were some unsuccessful acquisitions resulting from an emotional purchase, a lack of research within the diversified area of the target company, and unethical behavior by the target company executives during the planning process, of the 442 acquisitions completed by the 20 acquiring companies, only 12 failed in these ways.

A quantitative study is now currently being completed, and the preliminary analysis reveals that out of 86 responses, 467 acquisitions were completed with 465 meeting expectations and 442 being considered successful. Compared to non-ESOP companies, these are exceptional results. Another interesting emerging fact is that from 1989 to 2010 there were only 1 to 3 acquisitions completed each year, but from 2011 to 2015 there were 9 to 21 acquisitions completed each year. Moreover, 74 out of 86 respondents reported that 90%-100% of the eligible target company employees joined the ESOP.
About the Author

Suzanne Cromlish is currently a Ph.D. student of Management, Designing Sustainable Systems, at Case Western Reserve University in Cleveland, OH. Her email address is

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