When Sam Zell bought the Tribune Company last year, he finagled a way to make the employees themselves big owners—if the newspaper-and-TV outfit ever made a profit, that ownership structure would help with the tax bill. The news of Tribune filing for bankruptcy protection therefore made me a tad queasy. I had an Enron/WorldCom my-whole-401(k)-is-in-company-stock flashback, tried to discount those feelings considering my own ring-side seat to the implosion of print journalism, and then called up Corey Rosen. Rosen runs the National Center for Employee Ownership and has written at length about employee stock ownership plans (ESOPs), including the one they have at Tribune.
As it turns out, things aren’t that bad. I mean, aside from Tribune’s crushing debt load, lack of profit, and inability to sell the Chicago Cubs, which Zell was counting on as a way to raise $1 billion.
It’s true that as a holder of common shares, the ESOP won’t fare well in a bankruptcy proceeding—stockholders are pretty much last in line as creditors—but, luckily, employees didn’t give up an overwhelming amount to get into the ESOP in the first place. Pre-Zell, Tribune matched the first 4% of contributions workers made to their 401(k)s. Employees could get up to 5% of their pay on top of that, depending on corporate profits. In the new regime, workers only get a 3% match into a hybrid pension/401(k)-style plan, with 5% going into the ESOP. If shareholders get wiped out, the stock held in the ESOP won’t do anyone much good, but it’s not like that 5% bonus based on profitability was adding up to much over the past year, anyway. Importantly, employees didn’t convert their existing retirement funds to the ESOP when it started. And since the ESOP hasn’t been around all that long, I’m guessing employees hadn’t yet really come to count on it as a core piece of their savings.
Contrast that with the tale of United Airlines. Back in 1994, employees took double-digit pay cuts and cashed in retirement funds in order to buy 55% of their company. When United declared bankruptcy eight years later, employees lost $3.3 billion, or some two-thirds of what was invested in the ESOP.
That’s not to say that the debt-heavy design of Zell’s ESOP-managed buy-out didn’t drive Tribune into the ground. Heidi Moore has a nice take on that. As a journo myself, I’d never deny anyone the opportunity to rail against our corporate overlords. All I’m saying is, this could have been a lot worse.