ESOP Debt and Post-Transaction Value

Leveraged Employee Stock Ownership Plan ("ESOP") transactions originated in the 1950s, yet there are still unresolved valuation issues that arise from a complex set of operating expenses, financing structures and contingent claims that are unique to leveraged ESOPs. Although complex, these transactions provide no exceptions to general financial economic principles and can be evaluated using existing standards and methodologies. Existing valuation practices have supported transactions executed at stock prices that are expected to decline, sometimes dramatically, immediately after the transaction is closed. Such a situation, in which the current stock price exceeds an expected future price, is illogical and contrary to financial economic valuation models and theories. When this occurs, either the pre-transaction price or the expected post-transaction price (or both) are wrong.