ESOP Terminations
May 8, 2007

We provided a link to the first part of a research project on ESOP terminations in the following post: Reasons for ESOP Termination/ESOPs and Economic Development/Next Step in Tribune Transaction Here are some of the highlights of the report:

• There are between 8% and 10% new ESOPs each year. The average net growth rate of ESOPs is approximately 3.3% per year. The difference is a result of ESOP terminations.
• The results from the first phase of the study were obtained from interviews. Due to the small sample size (30 interviews), the results of the first phase may not be representative of the total ESOP population.
• The study split ESOP terminations into companies that were acquired (“acquired companies”) and companies that continued to exist after the termination (“termination companies”).
• Acquisition was the most common reason cited for ESOP termination. Most acquired companies reported strong or very strong performance.
• The second most common reason cited was the future repurchase obligation. This reason was more important to terminated companies.
• The next step of the study is to collect data from ESOP administration firms to test some hypotheses about ESOP termination. Here are some of the common ESOP termination hypotheses that were consistent with the interview data:
  • “Small companies are more likely to terminate ESOPs.” (termination companies)
  • “Highly profitable companies are more likely to terminate ESOPs.” (acquired companies)
  • “Highly profitable companies are less likely to terminate ESOPs.” (termination companies)
  • “Companies facing sever downturns are more likely to terminate ESOPs.” (termination companies)
  • “Companies with strong ownership cultures are less likely to terminate their ESOPs.” (acquired and termination companies)
  • “Companies where the ESOP owns a substantial percentage of shares are more likely to terminate their ESOPs.” (acquired companies)
  • “Future repurchase obligation would force companies to underinvest in their own growth; to avoid this situation, companies terminate their ESOPS.” (termination companies)
  • “Management supports an outside offer to purchase the company.” (acquired and termination companies)
  • “ESOP participants support an outside offer to purchase the company.” (acquired and termination companies)