[The Burden of Employee Stock Ownership] ① Stock Price Surges Right After Listing... Slumps Around the Time Lock-up Period Ends

IPO Market Boom Drives IPO Prices Soaring... Many Cases of Stock Prices Falling Below IPO Price After One Year
Expansion of Stock Price Gains on First Day of July IPO Listings Also Disadvantageous for Employee Stock Ownership Plans

Editor's NoteThe Employee Stock Ownership Plan (ESOP) is a system designed to promote workers' welfare and improve their economic and social status. It is a system where employees acquire company stocks through corporate or government policy support, but in reality, it does little to help employees build wealth. Since employees bear the burden of holding a large proportion of ESOP shares, it can even lead to financial losses. Although the initial public offering (IPO) price is high, it is common for the stock price to fall below the IPO price after the lock-up period ends. While funds flood the public offering market and company executives benefit, employees who received ESOP shares are left disappointed. There is a growing call to devise measures that increase employee benefits in line with the original purpose of the ESOP system, which is to enhance worker welfare and corporate productivity.

According to Korea Securities Finance on the 8th, as of May, the deposit size of ESOP shares was 10.8288 trillion KRW, down 18.6% from 13.2918 trillion KRW in May last year. The deposit size decreased as there were no major blockbuster IPOs in the market. By market, the deposit size for KOSPI-listed companies fell from 12.0848 trillion KRW to 9.49858 trillion KRW, a decrease of 2.589 trillion KRW. Meanwhile, the deposit size for KOSDAQ-listed companies increased from 5.3364 trillion KRW to 6.7059 trillion KRW, an increase of 1.3695 trillion KRW. This suggests that there were more disposals after the lock-up period of past blockbuster IPOs than acquisitions of ESOP shares. Moreover, although the IPO market has been favorable this year, only mid- and small-cap stocks have entered the domestic stock market.

High IPO Prices Amid IPO Boom... Burden on ESOP Associations

In Korea, ESOP associations are preferentially allocated shares during IPOs and rights offerings, with the proportion of ESOP acquisitions exceeding half of the total. During IPOs, up to 20% of the total public offering size is preferentially allocated to ESOP associations.

Because the acquisition proportion through preferential allocation to ESOP associations during IPOs is large, the original intent of wealth formation for employees is not significant. It is common for newly listed companies' stock prices to spike initially but fall below the IPO price after the one-year lock-up period. According to the Korea Exchange and Daishin Securities, the first-quarter IPO stocks recorded an opening price return of 78.1% compared to the IPO price, up 34.2 percentage points from the same period last year. The closing price return on the listing day compared to the IPO price was 104.1%.

Thanks to the rise in newly listed companies' stock prices in the first quarter, the demand forecast and subscription markets for IPO stocks also experienced a favorable trend. The demand forecast competition rate in the first quarter was 1,077 to 1, a significant increase from the previous quarter's 462 to 1. With higher demand forecast competition rates, three out of four companies set their IPO prices above the upper limit of the expected price range.

Newly listed companies with high demand forecast competition rates tend to see their stock prices rise sharply at the beginning of the listing. Daishin Securities analyzed the opening day market price returns compared to IPO prices by demand forecast competition rate segments for companies listed from 2018 to 2022. The analysis showed that the higher the competition rate, the higher the opening day return compared to the IPO price. Companies with competition rates above 1,200 to 1 saw an average increase of 81.8%. In contrast, companies with competition rates below 200 to 1 had returns of only 11.9%. Daishin Securities researcher Park Sera explained, "In the first quarter of this year, among 16 newly listed companies, many recorded high market price returns. This contrasts with the second half of last year, as the closing price return at the end of March was higher than the opening price return compared to the IPO price."

Lock-up Period Ends, but Stock Prices Fall Below IPO Price

It is rare for stock prices that surged initially after listing to maintain their levels until the ESOP lock-up period ends one year later. Kakao Pay is a representative case. When the ESOP lock-up ended in November last year, the stock price fell below 40,000 KRW. The stock price soared to 248,500 KRW, a 176% increase compared to the IPO price of 90,000 KRW just one month after listing, but then continuously declined. ESOP association members recorded an average unrealized loss exceeding 100 million KRW.

The Kakao Pay ESOP association was allocated 3.4 million shares at the time of listing. Based on the IPO price, this amounted to over 300 billion KRW and was fully subscribed. However, the shares held by the ESOP association decreased to 1.6 million shares as of the end of last year. Some employees sold shares after the lock-up period ended, and others who resigned before the lock-up period ended also disposed of their ESOP shares.

The situation is similar for Kakao Bank employees, who entered the KOSPI market three months earlier than Kakao Pay. Although the stock price rose sharply compared to the IPO price initially, it fell below the IPO price around the one-year mark. The ESOP association was allocated 13.09 million shares (497 billion KRW) at the time of listing. As of the end of last year, the ESOP association held 4.02 million shares, down from 10.61 million shares at the end of the first half of last year. This suggests that a considerable number of employees realized losses and sold their ESOP shares.

Among companies listed in the domestic stock market last year whose ESOP lock-up periods ended, companies such as Narae Nanotech, VC, and Easytronics saw their stock prices halved compared to the IPO price. Narae Nanotech was listed on February 8 last year at an IPO price of 17,500 KRW, but its stock price dropped to around 8,000 KRW after one year. Easytronics, listed on the same day, is trading around 10,000 KRW, with an IPO price of 22,000 KRW.

Of course, not all ESOP associations suffer losses. LG Energy Solution's ESOP association, which entered the KOSPI market in January last year, recorded a return of over 70%. They received ESOP shares at an IPO price of 300,000 KRW, and the stock price has not fallen below 500,000 KRW since the lock-up period ended.

Unlike LG Energy Solution, there have been more ESOP failures, and with the IPO market booming and more companies setting IPO prices at the upper limit of the expected range, employees of companies preparing for listing face dilemmas about subscribing to ESOP shares. A financial investment industry official said, "If the IPO price is high, ESOP association members who can only sell their shares after one year have no choice but to hesitate about subscribing."

At the time of SoCar's IPO in August last year, the ESOP allocation was 728,000 shares, but only 286,300 shares were subscribed. The current stock price is below 18,000 KRW. Except for the early listing period, the stock price has never exceeded the IPO price of 28,000 KRW. Employees who received ESOP shares are hoping the stock price will recover to the IPO price within the next three months.

According to the Labor Welfare Act, up to 20% of public offering shares can be preferentially allocated to ESOP associations, but many companies do not allocate shares to ESOP associations. If the stock price rises too much after listing, companies worry about employee turnover, and if the stock price is below the IPO price when the lock-up period ends, employee morale can suffer.

Is Discounted Allocation During Rights Offering Better?

The regulatory authority's plan to expand the maximum stock price increase on the first day of listing from 2.6 times to 4 times the IPO price starting in July to promote a healthier IPO market may increase feelings of relative deprivation among ESOP associations. By widening the price fluctuation range to help the stock price find equilibrium quickly, the possibility of volatile price swings on the listing day has increased. While public offering investors may earn high profits on the first day, ESOP associations, which can only sell shares after one year, must watch passively. The process of the stock price peaking on the first day and then gradually settling can negatively affect employee morale.

Management teams preparing for listing sometimes consider it better to allocate shares to ESOP associations during capital increases after listing rather than preferentially allocating shares at the time of listing. An official from a listed company said, "When a listed company conducts a rights offering, a discount rate is applied to the base price, so the burden is less. After listing, as stock price data accumulates, employees can judge whether the new share issuance price is undervalued."

Recently, the Samsung Biologics ESOP association, whose lock-up period ended, recorded a 22% evaluation return in one year. Samsung Biologics conducted a rights offering in April last year to raise funds for expansion and to acquire shares of its subsidiary Bioepis. The ESOP association was allocated shares and invested nearly 400 billion KRW. Samsung Biologics set the new share issuance price at 639,000 KRW, a 15% discount from the base price. Although Samsung Biologics' stock price fell 4.55% over the past year, the ESOP association did not incur losses.