Posted by:
Steve Dubb
Tribune employee purchase has Wall Street talking
Corey Rosen, founder and executive director since 1981 of the National Center for Employee Ownership, takes a closer look at recent speculation that a new ESOP (Employee Stock Ownership Plan) boom may be at hand: http://www.nceo.org/main/column.php/id/285/printable/y/.
As Rosen notes, for some Wall Street types, particularly in the wake of the purchase of the Tribune Company (owner of the Chicago Tribune among other holdings), an ESOP may seem like a financing device too good to be true. First, because the ESOP is a pension plan, contributions to an ESOP to repay a loan used to acquire shares are tax deductible, both for principal and interest. Second, if the company is an S-corporation and the ESOP owns 100% of the company, the company pays no federal income tax. Investors can use warrants or other means to earn a return on their investments, as Sam Zell did when buying the Tribune Company.
But as Rosen’s article makes clear, while ESOPs have many benefits, they (fortunately) do not provide a free ride outside investors. In particular, creating an ESOP means the outside investors are legally compelled to share equity with the company’s employees! To protect employees, independent appraisals are required of warrants or any other equity investment deals.
Two other key reasons why ESOPs may not become a device of choice for outside investors to buy out companies:
• Concessions required of employees—such as reductions in payments to present 401(k) plans—may hurt employee morale and hence corporate performance.
• Further, worker commitment is key to ESOP success and to the productivity benefit that ESOP companies enjoy over comparable non-ESOP companies. Obtaining this benefit requires management investment in facilitating employee involvement and participation.