was clear: Tribune is going to end up with a new employee stock ownership
plan.
The question of whose plan would prevail was also coming into sharper
focus.
On Saturday, Tribune’s independent directors were still reviewing proposals
submitted by dueling billionaires from Chicago and Los Angeles to take the
company private by borrowing through an ESOP.
But even those close to Los Angeles’ Eli Broad and Ron Burkle were
conceding that Chicago real estate magnate Sam Zell’s $33-a-share offer
appeared to be favored over their $34-a-share proposal.
Tribune had asked Burkle and Broad on Friday for technical information
about their bid, said a source close to the duo. But since their proposal was
not a final merger agreement and would require a significant amount of time to
negotiate and complete, they appeared reconciled that Zell would prevail when
Tribune’s full board meets Sunday to make a decision.
“If you were naive you might think you were still in this,” the source
said. But “they’re just keeping [Broad and Burkle] warm to keep Sam honest on
his terms.”
Many skittish about ESOPs
The emergence of an ESOP in the Tribune takeover battle couldn’t be more
surprising, experts say, given that the splashy collapse of several such plans
in recent years has made other large companies skittish about going the
employee-ownership route.
When employee stock ownership plans became popular in the 1970s, they were
seen as a way to reduce workplace tensions and boost corporate performance.
But many ESOPs have failed to live up to that ideal, and some high-profile
companies have failed altogether.
The company that did the most to undermine the ESOP movement–at least at
major public companies–experts say, happens to be another Chicago company:
United Airlines.
United filed for bankruptcy protection in 2002, wiping out billions of
dollars in equity that airline pilots, mechanics and salaried workers had paid
for with wage and benefit cuts after an employee buyout in 1994.
“The UAL bankruptcy did have a ripple effect, and very unfairly too,” said
Steven Freeman, an ESOP expert and faculty member at the University of
Pennsylvania. “It was a terribly structured contract.”
Freeman is referring to the fact that although United employees owned more
than 50 percent of the airline’s equity after the ESOP, they had only three
out of 12 seats on United’s board. Also, because employees paid for their
stock out of their wages instead of receiving it as an additional benefit,
they took a double financial hit when United filed bankruptcy.
Retired United pilot Wright B. George seconds that.
“We paid a 100 percent control premium and had no control. I lost over
$300,000 in stock and the captains lost $500,000. My pension is about $2,200 a
month rather than $6,000,” said George.
United isn’t the only example of an ESOP gone bad.
At Polaroid, workers gave up 8 percent of their salaries in the late 1980s
to fund an employee ownership plan designed to thwart a hostile takeover. The
buyout did that, but the instant-camera company was slow to respond to the
digital photography revolution and continued to lose money in the 1990s.
As its balance sheet deteriorated, Polaroid filed for bankruptcy protection
in 2001 and a company-appointed trustee sold the employees’ stake for 9 cents
a share, down from $60 in 1997. Some 6,000 workers lost their retirement
health-care packages and a $300 million ESOP investment.
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The collapse of Enron Corp. further damaged the image of employee
ownership.
Many employees of the Houston- based energy giant saw their retirement nest
eggs vanish when the firm collapsed because the funds were locked into a
401(k) plan that was heavily invested in Enron’s stock and originally had been
structured as an ESOP.
The Enron plan shared another feature in common with ESOPs: Participating
employees couldn’t sell shares unless they retired or left the company. Like
employees at United and Polaroid, many Enron workers saw their life savings
vanish when the company wound up in bankruptcy.
“There’s no question that in terms of the public consciousness, United and
Enron gave a very negative image of employees being shareholders in the
companies where they work,” said Michael Keeling, president of the ESOP
Association, a Washington, D.C.-based trade group representing 1,500
employee-owned companies.
Such disastrous outcomes were not what Louis Kelso, a San Francisco
attorney and investment banker, intended when he put together a plan to
transfer ownership of a San Francisco newspaper to employees back in 1956.
A few years later, Kelso and philosopher Mortimer Adler wrote “The
Capitalist Manifesto,” which laid out their ideas about the economic and
social benefits that would derive from widespread employee ownership.
The nascent ESOP movement gained a big advocate in the 1970s in Sen.
Russell Long (DLa.), the chairman of the powerful Senate Finance Committee.
Congress passed legislation supporting employee ownership plans in 1974, and
since then more than 20 pieces of legislation have been passed encouraging
private companies to share equity with employees, according to Freeman.
ESOPs get tax breaks
By the 1980s, ESOPs had taken on another function. They gained prominence
as a leveraged- buyout tool because of their favorable tax treatment.
Corporate buyers could take on greater amounts of leverage if a takeover bid
contained employee ownership provisions because the new company paid much less
in federal and state income taxes and could use that additional cash to pay
down debt.
Twice during the 1980s, United’s pilots union tried to put together deals
to buy the company, but both attempts failed to get financed. A third effort
succeeded in 1994 but was unconventional in several regards. Not all employees
participated in the $5 billion deal–the airline’s flight attendants opted
out, and other employees paid for their stock in the new United with real wage
and benefit cuts.
The pilots and machinists unions were glad to be rid of Stephen Wolf,
United’s unpopular chief executive, and they recruited a new CEO, Gerald
Greenwald, an auto industry veteran willing to head an employee- owned
company.
Early on, things seemed to be going as planned. The company formed employee
task forces to find ways to save money on everything from jet fuel to cash
management. Greenwald made friends with cabin crews by dropping the much-hated
bodyweight limits for flight attendants.
Two years later, the number of union complaints had fallen dramatically as
operating margins fattened and revenue per employee outpaced those at rivals
American Airlines and Delta Air Lines. United’s stock price had more than
doubled, to around $190 a share.
But the good times didn’t last.
As the company prospered, pilots and machinists began to agitate for wage
hikes that would put them back on a par with their peers at other major
airlines. In 1997, pilots rejected a proposed pay hike of 10 percent over four
years and union leaders ordered members off company task forces.
In 2000, the standoff escalated and pilots staged a work slowdown during
the busy summer travel season. Thousands of angry passengers were delayed and
United’s reputation suffered.
That left United in a weakened position when the Sept. 11 attacks
devastated the airline industry. Losing billions of dollars over the following
year, United filed for Chapter 11 protection in December 2002.
It was a last resort because the move torpedoed the value of United stock
held by its employee retirement plans, which were forced to sell their shares
at cents on the dollar. When United emerged from bankruptcy in early 2006, its
old stock became worthless and the company was no longer employee owned.
“For employees, you’re really exposed more than you should be,” said
George, the retired United pilot. “When investment bankers and management come
to you and say, `Have we got a deal for you,’ they are not looking out for
your interest. I’d grab my wallet.”
ESOP expert Freeman believes United stands as a cautionary tale for “what
not to do for employee ownership.” The long-standing mistrust between unions
and management made working together especially difficult, he says, and
employees never really developed camaraderie because union groups were pitted
against each other.
ESOPs remain popular
Companies with employee ownership continue to grow. In fact, about 1 in 10
American workers toils in a company where employees have an ownership stake,
according to the ESOP Association.
Most of the plans–about 80 percent of the total–are set up at smaller,
privately owned companies, and are often used as a means to buy out founders
who want to retire, said Keeling. However, some large publicly traded
companies have successfully employed this ownership model, most notably
consumerproducts giant Procter & Gamble Co.
At Tribune, both Zell and the Burkle/Broad team are using what’s called a
“leveraged ESOP” to sweeten offers to take the media conglomerate private.
They plan to take advantage of rules that allow the ESOP to borrow a large
amount of money and pay it back using tax-deductible funds.
Zell’s plan, for instance, would work this way: He would invest $300
million of his own money and have the company set up an ESOP to borrow the
rest of the more than $7 billion it would take to buy out all of Tribune’s
outstanding public shares.
Tribune would then funnel its cash flow into the ESOP to pay down the debt
over a fixed period. But because an ESOP is a qualified retirement plan, those
contributions would be tax-deductible, meaning the company could pay down both
its principal and interest payments tax-free.
Those tax benefits allow both Zell and the Burkle/Broad team to structure
deals that enable the company to fund more debt and pay existing shareholders
more for their shares.
Employees, meanwhile, would get stocklike units tied to the company’s
performance instead of cash contributions to their retirement accounts. As the
ESOP repays the debt over time, employees collect more and more of the
company’s equity. Tribune employees would be able to cash out their stake only
if they leave the company or retire.
If Tribune flourishes and eventually goes public again, employees stand to
gain. If it falters and winds up in bankruptcy, their equity likely would be
wiped out in the restructuring.
Research has shown that employee- owned companies generally outperform
other corporate models, said Freeman.
In fact, an ESOP at the Peoria Journal Star proved too successful. The
newspaper was forced to sell itself in 1996 to Copley Press Inc. to avoid
bankruptcy forced from paying out its employees, who sought to cash in on
their status as newly minted millionaires.
Tribune has had its own success with an ESOP in the 1980s. When Tribune
went public in 1983, the stock price soared and many rank-and-file employees
eventually retired with seven-figure retirement accounts.
But it’s harder to instill the sense of ownership at large companies, and
that’s what drives employees to make their companies a success, Keeling added.
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“When you’re one out of 30 workers, your individual effort and payoff is
significant,” Freeman said. “When you’re one out of 100,000, that’s another
story.”
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