Using ESOPs as a Financing Technique
The Deal's Innovative Deal Financing Conference had a session called ESOP Acquisitions: Doing it the Sam Zell Way, with a panel to discuss the following:
The buzz about Employee Stock Ownership Plan (ESOP)-structured deals is growing after Sam Zell's buyout move of the Tribune Co. Tax-exempt ESOP deals are winning favor as middle markets aggressively hunt for new financing techniques. Many ESOPs are now using plans to structure acquisitions of other companies, a very new development. In this panel, we discuss the risks and upsides of ESOP deals and the terms savvy dealmakers angle for.
Innovative Financing: ESOPs comments on the discussion:
- ""Word is getting out on the power of an ESOP, and how it differentiates itself from an LBO."
- They're starting to see a lot of ESOP activity in the middle market, not just the low end.
- In general companies that go the ESOP route have in the range of $100 million to $500 million in enterprise value.
- ESOPs transactions can borrow more money since all of the money normally paid in taxes can be used to service the debt.
- ESOPs have an advantage vis-a-vie private equity in the current credit market turmoil. Interest in ESOP deals has always grown in tough markets.
ESOP companies grow 6% to 8% faster on average, but it's vital to create a culture of employee ownership. Some structures take money away from the employees to give them ownership, but it usually creates so much resentment among them that the company underperforms."
The blog post also notes the panel's perspective of the Tribune transaction:
Ash commented that although it hasn't gotten much press, in the Tribune Co. deal the employees through the employee stock ownership plan won the auction; if Sam Zell makes $1.00, the employees make $1.30. Additionally all of the money normally paid in taxes will stay in the company.