The Role of Employee Stock Ownership Plans in the Restructuring and Privatization of StateOwned Fina

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The Role of Employee Stock Ownership Plans in the
Restructuring and Privatization of State-Owned
Financial Institutions

• David M. Binns
• www.beysterinstitute.com
• Ronald J. Gilbert
• www.esopservices.com

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Introduction

• Extensive international experience
• Over the past 15 years, over 20 different
  countries have implemented some form of employee
  ownership

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The Rationale for the Use of ESOPs in
Privatization and Financial Sector Reform

• Flexibility
• Macroeconomic policy and corporate reorganization
• Mixed Privatizations are likely to predominate
• Traditional boards of directors and management
• Financial institutions are in a unique position

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Practical Considerations in Implementing ESOPs in
Financial Institutions

• A technique for corporate finance
• Non-leveraged ESOP
• Leveraged ESOP
• Credit of the Corporation
• Access to capital credit

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A Standard Leveraged ESOP
   
 
 
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Key Issues to Consider When Valuing a Financial
Institution

• Quality of the financial institutions earning
  assets
• Asset/Liability management practices
• Management of non-interest or overhead expenses

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Creating New Capital for Financial Institutions
Growth of Annual 100,000 ESOP Contribution Over
10 Years   Plan Retained New Capital Total
Leveraged 1.25 Deposit Earnings from Profit
New Capital Assets After-Tax ROA Year
1 100,000 42,000 - 42,000 630,000 7,875
Year 2 100,000 42,000 7,875 91,875 1,378,125 17,22
6 Year 3 100,000 42,000 17,226 151,101 2,266,523 2
8,331 Year 4 100.000 42,000 28,331 221,433 3,321,4
96 41,518 Year 5 100,000 42,000 41,518 304,951 4,5
74,277 57,178 Year 6 100,000 42,000 57,178 404,130
6,061,954 75,774 Year 7 100,000 42,000 75,774 521
,904 7,828,570 97,857 Year 8 100,000 42.000 97,857
661,761 9,926,427 124,080 Year
9 100.000 42,000 124,080 827,842 2,417,632 155,220
Year10 100,000 42,000 155,220 1,025,062 15,375,93
8 192,199 TOTAL 1 million 420,000 605,062
- - 797,261
 
 
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Impediments to ESOP Implementation

• Distressed Situations
• Lack of Credit Availability
• Ideological Opposition

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Impediments to ESOP Implementation - continued

• Inexperienced Management
• Lack of Public Markets
• Lack of Outside Investors

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Impediments to ESOP Implementation - continued

• Cut Throat Competition
• Management as the Competition to the ESOP
• Lack of Legal and Regulatory Protections

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Case Study 1 Royal Bank of Trinidad and Tobago
Case Study 2 Phelps County Bank
Case Study 3Virginia Community Bankshares, Inc.
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Case Study 4National Commercial Bank of Jamaica
Case Study 5Allied Bank of Pakistan Limited
Case Study 6K-REP Bank of Kenya
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ESOPs in Financial Institutions in Korea
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Facilitating the Use of ESOPs in Bank
Restructuring and Privatization Transactions

• Contemplates an IPO in the relatively near future
• Expects to remain unlisted for a period of
  several years
• Contemplates selling shares to strategic investor

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Facilitating the Use of ESOPs in Bank
Restructuring and Privatization Transactions -
continued

• Employees will be the only shareholder in
  addition to the government
• Privatization will result in total divestiture or
  full privatization
• Management buyout is a feasible option

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Conclusion
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Recommended Operational Guidelines for ESOPs
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An Overview of ESOP Incentives