If all else fails, hand the workers some equity. That seems to be the new philosophy of America’s private-equity firms, at least, judging by the bidding war for Chrysler and the recent deal to buy the Tribune newspaper group. Each time, a large, and possibly controlling, slice of the firm’s equity is likely to end up in an employee share-ownership plan (ESOP).
Anyone seeking in this the spirit of Robert Owen, the father of the workers’ co-operative, or of Louis Kelso, an American lawyer who invented the ESOP in 1956, is likely to be disappointed. 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.
Financial engineering is central to the deal announced earlier this month to sell Tribune to Sam Zell, a real-estate tycoon. Although the purchase price was advertised as $8.2 billion, Mr Zell will have to cough up only $315 million (assuming that other potential buyers, such as billionaires Ron Burkle and Eli Broad, do not return with a higher offer). Ultimately, the rest of the money will be borrowed by a newly formed ESOP, which will eventually own most of Tribune’s equity.
One of the main attractions of this arrangement is that the ESOP structure will bestow huge tax breaks on Tribune. The benefits to employees are less clear. Mr Zell has not said anything about giving workers a bigger say in running things. And Tribune will stop making matching contributions to employees’ individual retirement schemes; instead, pension provision for employees will now consist entirely of shares held by the ESOP.
Some form of ESOP is reportedly also part of each of the various bids for Chrysler, the struggling American arm of DaimlerChrysler. When Daimler bought Chrysler in 1998, it paid $35 billion. Analysts now value it at no more than $8 billion, though Daimler may be fortunate to get anything close to that for a business that some experts think is destined, sooner or later, for bankruptcy, along with Detroit’s other giant car manufacturers, Ford and General Motors.
On April 5th Tracinda, the investment vehicle of Kirk Kerkorian, a buy-out veteran, offered to pay a paltry $4.5 billion for Chrysler. Mr Kerkorian’s offer assumes that Daimler will retain some of Chrysler’s crippling health-care and pension liabilities and that the firm’s employees will take a big chunk of equity in exchange for giving up some promised benefits.
Overall, ESOPs seem to improve the performance of firms that have them, which may explain why they are increasingly popular. Some 10 million American workers are members of ESOPs, which together control assets worth an estimated $600 billion. However, it is less clear that they help firms in upheaval or confronting possible failure–such as Tribune and Chrysler.
ESOPs “aren’t magic”, argues Corey Rosen, who runs the National Centre for Employee Ownership. In his view, they “only improve performance when they are part of creating a culture of employee involvement, with plenty of opportunities for workers to participate in the big decisions facing the firm.”
One success was Floturn, a troubled machine-tool maker that was bought through an ESOP from its parent, Belcan, in 1988. The management got the employees to help overhaul the firm’s business, which led to huge improvements in productivity and profits. That rare triumph must be contrasted with the more typical experience of United Airlines. In 1994 an ESOP bought 55 percent of its equity, not least because the unions saw that as the only way to stop the then chief executive from making big (and, with hindsight, essential) job cuts. After an initial success, the unions and management quickly reverted to confrontation. In 2002 United entered bankruptcy, and the ESOP became worthless. Tribune and Chrysler would do well to avoid a similar fate.