Many private and ESOP-owned companies are adopting private equity’s core strategy of growing through acquisitions in order to offer career opportunities for talent, increase revenue faster than inflationary costs, and de-risk operations to meet today’s challenges. However, this strategy also makes these companies vulnerable to unsolicited acquisition offers in today’s robust M&A market, leading to questions on how to stay private and respond to such offers.
While ESOP companies were previously rarely faced with unsolicited acquisition offers, there is now unprecedented interest in evaluating and potentially acquiring ESOPs, especially from private equity firms. Factors contributing to this interest include increased familiarity with ESOP structures and employee ownership, a significant amount of funds earmarked for acquisitions, and the success of established ESOPs competing with private equity firms’ portfolio companies.
When determining how to respond to an unsolicited offer, ESOP boards should consider two fundamental points. Firstly, an unsolicited offer does not require an automatic “yes” response, as it is likely to be deemed not bona fide. Critical factors to consider in evaluating the seriousness of an offer include specific consideration, reasonable deal terms, financial ability of the buyer, and a sound acquisition rationale.
The evaluation process for unsolicited offers should be logical and well-documented, with the help of legal and financial advisors who can guide the board through the decision-making process. While many offers may be dismissed immediately, attractive offers that address company gaps may warrant engagement with the suitor. Advisors will help the board navigate various factors, such as assessing the value of an offer through informal reads, market tests, formal valuations, or auction processes.
ESOP directors must balance multiple roles when considering unsolicited offers, including serving as a member of the management team, an employee concerned about job security, and an individual with ESOP shares. By understanding the requirements for responding to offers, conducting independent assessments of the company’s value, and evaluating alternatives carefully, ESOP directors can generate meaningful shareholder value while acting in good faith. This is an exciting time for ESOP directors as they may receive offers for their company beyond what they had imagined, and by following a strategic evaluation process, they can determine the best course of action for their company and its shareholders.
