Experts weighed in on employee stock option plans during a panel moderated by Corey Rosen, the executive director of the National Center for Employee Ownership at The Deal's Innovative Deal Financing Conference Tuesday.
The panelists included David Ackerman, a partner at Morgan, Lewis & Brockius LLP; Merri Ash, a vice president at First Bankers Trust Services Inc.; Elyse Bluth, a managing director at Duff & Phelps; and Mary Sullivan Josephs, a managing director at LaSalle Corporate Finance.
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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.
Listing the prime benefits of ESOPs, Ackerman said that in an ESOP:
- The owner of a stock can sell that stock on a tax-fee basis under certain conditions.
- ESOPs can be used as as form of corporate finance where the interest and the principle can be deducted.
- If the ESOP is combined with an "S" corp; the 100% owned ESOP corporation pays no taxes (as was done in the Tribune deal).
Josephs commented that:
- "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. —George White
See The Deal’s Aug. 31 analysis of Tribune’s buyout
