ESOP Testimonial/Tribune Repurchase
April 26, 2007

This blog post is from a company that has been in business for over 25 years and has been a 100% ESOP for about two years. The post contains a testimonial to the advantages of employee ownership:

• As owners, we're committed to the success of our clients.
  
• Employee ownership is a great incentive compensation program.
  
• We're focused on the long-term.
  
• Unlike many small businesses, our exit strategy is already established.
  
• FBS doesn't pay federal or state income taxes. (The secret.)
  

The post also talks about Jack Stack and "The Great Game of Business", and cites various examples of ESOP companies that have succeeded and failed.

……..

The Tribune Company announced

that it has commenced its tender offer to repurchase up to 126 million shares of its common stock for $34 per share:

"This tender offer will return significant capital to Tribune shareholders, including employees who currently own about 23 million shares of stock," said Dennis FitzSimons, Tribune chairman, president and chief executive officer. "With Sam Zell's initial investment completed, and the tender offer launched, the first stage of our transaction that will result in Tribune Company going private is underway."

Reasons for ESOP Termination/ESOPs and Economic Development/Next Step in Tribune Transaction
April 24, 2007

ESOP Termination Phase I – A Report on the Reasons Companies Terminate Employee Stock Ownership Plans is the first part of a research project funded by the Employee Ownership Foundation. The report, "describes the results of the first phase of a research project on the reasons companies terminate employee stock ownership plans (ESOPs). It summarizes interviews with company leaders at former ESOP companies and suggests directions for the quantitative research planned for phase 2 of this project." I will be reviewing the report and sharing my comments in a separate post.

……………….

This article talks about how employee-owned businesses are engines of economic development:

An ESOP ``can't make a poor company good, but it can make a good company great,'' he said, as long as leadership seeks ``to enrich everyone, not just a few at the top."

……………….

Federal antitrust regulators approved the first step of the Tribune transaction. The next step, the merger of the Tribune and the ESOP, needs to be approved by various regulatory agencies and the shareholders.

Hiring a Qualified, Independent Valuation Firm and Reviewing and Approving the Valuation Report
April 20, 2007

The responsibility of the ESOP trustee is to act in the sole interest of the ESOP participants and beneficiaries. ERISA requires all plan fiduciaries, including the ESOP trustee, to act prudently. Here is the prudent man rule as provided under ERISA Reg. § 2550.404a-1(a):

(a) In general. Section 404(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (the Act) provides, in part, that a fiduciary shall discharge his duties with respect to a plan with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Demonstrating prudence under ERISA includes proper investigation and documentation, and obtaining outside expertise when needed. One of the professionals that an ESOP trustee will need to hire is a qualified, independent valuator to perform the appraisal of the employer securities. ESOP trustees need to demonstrate prudence in selecting the valuation firm and in reviewing and approving their work. Many of the same concepts discussed in this post will also apply in the selection of the valuation firm. Once the valuation firm has been selected, a trustee is responsible for monitoring the performance of the valuation firm, including reviewing and approving the stock appraisal. This includes understanding the valuation process and methodology as well as the content of the final valuation report. This article contains a more thorough discussion of selecting a qualified financial adviser and reviewing the valuation report.

Chrysler ESOP Proposal/ESOPs in Mergers and Acquisitions
April 16, 2007

Now that the Tribune/ESOP transaction has been announced, media coverage has switched to the offer to purchase Chrysler:

"One source says Kerkorian is offering the unions a 10 percent equity stake in Chrysler, plus a seat on the board. In return, the UAW would have to accept concessions on workers' benefits."

The previous article and this article discuss the Tribune deal and the Chrysler offer and question whether the companies will succeed:

"ESOPs can only work if you have corporate leaders who are not afraid to give more management power to employers," said Kurland, an early lobbyist for ESOPs back in the 1970s. "The successful ones are those where workers have a direct stake in the bottom line." By those measures, he questions whether ESOPs will succeed at Tribune and Chrysler."

This article goes further by suggesting that the Tribune deal and the Chrysler offer are for financial purposes only and not to provide employee ownership:

"Neither deal foresees a big role for workers in corporate decision-making, as advocated in Kelso's book, "The Capitalist Manifesto", written with Mortimer Adler. Today's plan is to use ESOPs to achieve narrow financial goals, not to forge an enlightened bond with workers."

The true spirit of employee ownership is best illustrated in the story of Burns & McDonnell:

"We can measure success in a lot of ways, but one readily apparent measure is employment growth. In 1986, the first year of our ESOP, Burns & McDonnell had slightly more than 600 employees and our total sales that year were approximately $42 million. Today we have more than 2,300 employees, 1,800 in Kansas City and the rest in more than 20 offices nationwide. And we are on track for sales of $1 billion by the end of this year. That's a sixfold increase in revenue per employee, a rate of growth that has directly benefited our employee owners."

NCEO Executive Director Corey Rosen once again puts things in perspective in ESOPs in Mergers and Acquisitions: Wave of the Future?

"In short, there are a lot of reasons to believe that ESOPs will not be the next big thing in M&A. If the Tribune deal looks good a year from now, and if Chrysler ends up with an ESOP, no doubt at least a few other similar transactions will be tried, and maybe even a few that are in less risky situations. My guess, however, is that ESOPs will not be a major player in M&A in large public companies but will show continued and (to people outside the ESOP community) surprising strength in acquisition activity among existing ESOP companies and ESOP purchases from owners in increasingly large privately held companies."

Selecting an Employee Benefit Plan Auditor
April 14, 2007

Generally, a qualified retirement plan is required to be audited if there are 100 or more participants as of the first day of the plan year. In addition to the legal requirement, the audit also helps protect the assets of the plan and helps ensure that a complete and accurate IRS Form 5500 is filed. One of the most important responsibilities of the plan administrator is to hire an independent auditor. The DOL has an informative article, Selecting An Auditor For Your Employee Benefit Plan, which includes a section on selecting an auditor. This blog post also discusses factors to consider when hiring an auditor for your qualified retirement plan. Here are some things to consider:

• Don't automatically use your corporate auditor.
  
• Make sure that your auditor is truly independent, both in fact and appearance. They should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an opinion. Financial interests may include other work performed by the firm.
  
• Consider going through a competitive bidding selection process. Some factors to consider include: cost, employee benefit plan audit experience (both firm experience and the experience of the audit team assigned to your plan), training and continuing education, and audit team turnover.

PPA Amendment Deadline
April 13, 2007

This article discusses the fact that PPA amendments are not due until the last day of the 2009 plan year. It also mentions that the PPA does not distinguish between required and discretionary amendments.

ESOP Companies are More Productive
April 10, 2007

Yesterday we talked about the benefits of ESOPs and employee ownership to employees. It is important to note that one of the benefits, job satisfaction, is generally dependent on the employees' level of participation in the decision-making process. ESOP companies can increase the level of participation by embracing an open-book management style and actively involving the employees (both individually and in workgroups) in the decision-making process. Studies have demonstrated that ESOP companies with a high level of participation and a consistent ESOP communication and training program are more productive and grow faster than non-ESOP companies.

………

The author of one of the negative Tribune articles (discussed here) has admitted that the transaction was more complex than she thought, and provided a link to an NCEO article. The NCEO article reiterates that none of the existing qualified plan assets are being used in the transaction.

………

After reading all of the articles about the Tribune, it was refreshing to read the story of this ESOP company.

The Benefits of ESOPs and Employee Ownership to Employees
April 9, 2007

Last week I mentioned that we were going to discuss the benefits of ESOPs and employee ownership. Effects of ESOP Adoption and Employee Ownership: Thirty Years of Research and Experience, a study commissioned by the Employee Ownership Foundation, summarized the effects of ESOPs and employee ownership as follows:

"Research suggests almost entirely positive effects for individuals of ESOP adoption and, more generally, employee ownership"

Here are some of the benefits of ESOPs and employee ownership to employees:

• HIGHER PAY – The average pay of employees of ESOP companies is at least as high, if not higher, than the pay of employees of non-ESOP companies. This comparison does not include the value of the ESOP benefit.
  
• MORE BENEFITS - Employees of ESOP companies tend to receive more retirement benefits than employees of non-ESOP companies. This comparison does not include the value of the ESOP benefit, which further increases the total benefits of ESOP employees.
  
• GREATER JOB SECURITY - Employees of ESOP companies have greater job security than employees of non-ESOP companies.
  
• GREATER JOB SATISFACTION – Employees of ESOP companies are more motivated and satisfied than their non-ESOP counterparts.
  

In addition to the findings in the above-mentioned study and the studies that can be found on the NCEO website, the ESOP Association's ESOP Fact Sheet provides support for these benefits.

Final Section 415 Regulations
April 7, 2007

The Internal Revenue Service and the U.S. Treasury Department have released final Section 415 Regulations (Treasury Decision 9319 - Limitations on Benefits and Contributions Under Qualified Plans). For more information, please see the Rules and Regulations section of our website, which can be accessed from our main menu or by using the Rules and Regulations buttons located on the right-hand corner of our website. The regulations are effective April 5, 2007 and are generally effective for limitation years beginning on or after July 1, 2007.

Why Companies Form ESOPs
April 6, 2007

This blog discusses another negative Tribune ESOP article.

Instead of focusing on the negative articles, which are generally written without an understanding of what an ESOP is or how it works, we are going to take some time over the next few days and weeks to talk about the benefits of ESOPs and employee ownership. Today we are going to talk about why companies form ESOPs.

Companies generally form ESOPs (and enter into additional ESOP transactions) for many reasons. Here are some of the more common ones:

• To provide an additional employee benefit (as well as a motivational tool) and to share ownership with the employees of the company.
  
• To borrow money to buy the shares of an existing owner(s). If certain requirements are met, the selling shareholder(s) can defer (or even avoid) paying taxes on the gain.
  
• To borrow money to acquire additional capital, which could be used for many purposes, such as refinancing existing debt, reinvesting in the company, or acquiring another company.
  
• To utilize the tax advantages of ESOPs. The company can deduct the fair market value of the shares contributed to the ESOP and can make tax-deductible contributions and dividends to the ESOP to fund loan payments. For S Corporations, the portion of income attributable to the ESOP is not subject to federal income tax (and in many cases state income tax).

Tribune Sale Coverage - Unfair Representation of ESOPs
April 4, 2007

The following article from the Washington Post did not represent ESOPs in a favorable manner: Private Equity's Bottom Line for Workers

In response to the article, the ESOP Association sent the following advice to employee owners:

As many of you have seen, the recent articles in the media regarding the sale of the Tribune Company to an ESOP have left the general public with a rather negative impression of the ESOP community.

In the old days, we would put out a press release, or write a letter to the editor, but not anymore. Journalism has become democratized. Emails are sent directly to reporters and discussions are carried out on blogs.

The Washington Post Business Columnist, Steven Pearlstein, (Link to Mr. Pearlstein's article in today's Washington Post, "Private Equity's Bottom Line for Workers" - http://www.washingtonpost.com/wp-dyn/content/article/2007/04/03/AR2007040301863.html) was overall negative in tone in his references to the ESOP. His email is posted at the end of the article. Send him an email and let him know your feelings about employee ownership and how the ESOP works at your company. Maybe he'll change his tune after hearing the stories of a few employee owners who know first hand the type of success an ESOP can bring to a company.

Many articles that we've seen will include blogs and comments on their sites, for example The New York Times, "Is Tribune's Leverage ESOP Worth the Risk?" - http://dealbook.blogs.nytimes.com/2007/04/03/is-tribunes-leveraged-esop-worth-the-risk/#comment-61020 and USA Today's article, "$8 Billion Deal Takes Tribune Private" - http://www.usatoday.com/money/media/2007-04-02-trib-zell_N.htm.

In other words, if you have a moment, express your views. It's the most effective way to change opinions on ESOPs and employee ownership.

Not all coverage has been negative. This article was fair to ESOPs and stresses the importance of the ownership culture and a strong business strategy to the success of the ESOP.

The Tribune Goes Private in an ESOP Transaction
April 3, 2007

The Tribune Company (NYSE:TRB) released the following press release: Tribune to go private for $34 per share. In addition to providing the details of the transaction, the press release discusses the company's future retirement plans:

The press release Beginning Jan. 1, 2008, eligible Tribune employees will participate in three retirement plans:

• ESOP: The newly-created ESOP will be funded solely through company contributions. Those contributions will be invested in shares of Tribune stock (the private company), which will be allocated each year among eligible employees' accounts in the ESOP trust. The first allocation, for the year 2008, will be made in early 2009. The company initially anticipates an annual allocation of approximately 5 percent, based on employees' eligible compensation. GreatBanc Trust Company will serve as the ESOP trustee, and the ESOP will be administered by a board-appointed employee benefits committee.
  
• Cash Balance Plan: A cash balance plan will be funded entirely by the company and provide a 3 percent annual allocation to each eligible employee's cash balance plan account.
  
• Existing 401(k) Plans: Eligible employees will continue having the opportunity to contribute a portion of their pre-tax earnings to 401(k) accounts.
  

The transaction will be in two stages, and end up with the ESOP owning all of the company and Zell, acting as chairman, with a warrant to purchase 40% of the shares:

The company said yesterday morning that Mr. Zell will invest $315 million in the deal in a two-step process. In the first step, Tribune will stage a tender offer, at $34 a share, for a bit more than half of the company's shares. To fund the offer, the company will use $250 million of the $315 million pledged by Mr. Zell, plus additional borrowed money. It will return $4.2 billion to shareholders.

If the deal is approved by regulators, a second step will follow: the ESOP will buy the rest of the shares at $34 a share and Zell will put in $65 million, the rest of his pledge. The ESOP then will hold all of Tribune's remaining stock outstanding, and Mr. Zell will hold a subordinated note and a warrant entitling him to acquire 40% of the common stock for a price initially set at $500 million. The deal values the company at roughly $8.2 billion.

Mr. Zell will get a seat on the company's board and will be able to appoint one other member. If the deal is approved, he will become chairman. The board will have five independent directors, a majority. Dennis FitzSimons, the company's current chairman and chief executive, will remain on the board and continue as CEO. Although Mr. Zell will not control a majority of the stock, he is expected to exert considerable influence over decision-making.

Some financial analysts believe the warrant will not be exercised.

This blog post further discusses the details of the transaction, including the fact that if a better offer comes along, Zell would get a $25 million break-up fee, and if the merger is not closed by January 1, 2008, the shareholders will get additional cash.

WHAT IS AN ESOP

We previously discussed ways to answer the "what is an ESOP" question. This Wall Street Journal article answers that question as well as some other ones:

• What is an ESOP?
  
• How can an ESOP be used to take a company private?
  
• Will Tribune employees really own the company?
  
• What will Tribune employees pay for their shares?
  
• Why is an ESOP risky?
  
• What are the benefits for employees?
  

PERSPECTIVES FROM THE ESOP COMMUNITY

The ESOP Association published the following press release regarding the transaction:

April 2, 2007 (Washington, DC) – The following is a statement from J. Michael Keeling, President of The ESOP Association, in reaction to the sale of the Tribune Company to an ESOP (employee stock ownership plan).

The ESOP Association is pleased to see news today of the sale of the Tribune Company to an ESOP. There are very few companies in ESOP history the size of the Tribune Company using a leveraged ESOP. It is refreshing to see a private equity/LBO transaction take place that includes the employees.

The deal put together by Mr. Zell will permit employees to share in the wealth of the company. We urge the company's leadership to be aware of the challenges of being an ESOP company and to pay attention to the education of the employees so they are conscious of the needs of being an ESOP company and will be able to make the company succeed beyond anyone's expectations.

Dr. Steven Freeman, a scholar at the University of Pennsylvania, recently released a study covering over 30 years of research on ESOPs and employee ownership and the positive impact that can be brought to a company by an ESOP. It offers fresh opinions on employee ownership and ESOPs and is important research on the topic. The study can be found on The ESOP Association's website at www.esopassociation.org.

Founded in 1978, The ESOP Association represents over 1,400 ESOP companies and over 1 million employee owners who believe that employee ownership will improve American competitiveness, increase productivity through greater employee participation and strengthen our free enterprise economy.

Various ESOP experts provide commentary in this article. In addition, the latest NCEO Employee Ownership Update for April 2, 2007 provides more commentary on the transaction.

OTHER PERSPECTIVES

This blog addresses the tax advantages of an ESOP to an employee, while these two posts discuss the deal from a retirement plan perspective:

Send lawyers, pens, and money. ESOP to become major shareholder in Tribune sale
The Tribune deal is done and Thank Goodness

Finally, this blog provides an employee perspective of the transaction.