| The news of another ESOP (Employee Stock | | | | whopping $1.1 billion for the company, but $745 |
| Ownership Plan) being offered to the employees | | | | million of that was in bonds and loans from |
| of a mattress retailer recalls for me Aesop's | | | | investors. In 2004 the manufacturing giant issued |
| "Dancing Monkeys" and the valuable lesson that | | | | debt at a 10% annual interest to help pay their |
| the fable teaches. | | | | sixth "benefactor" a "dividend of $137 million." |
| In case you don't remember the Aesop fable, it is | | | | 2007 saw the company's owner setting up a |
| the story about some monkeys that were | | | | holding company that issued $300 million more in |
| trained to dance. They were dressed up in fancy | | | | debt which paid another $238 million dividend back |
| clothes and taught to imitate famous attendants | | | | to its owners recovering their initial $327 million |
| to the king's court. Their act became very | | | | cash investment. The debt load left to the |
| famous and they received great applause | | | | company was too heavy to bear. |
| wherever they went. One day a mischievous | | | | As the economy soured in 2007, the cutbacks |
| attendant to the king decided to throw a handful | | | | started. The company cut costs wherever it |
| of nuts onto the stage. The monkeys | | | | could. 2008 saw huge job losses. In September |
| immediately forgot their dancing and became the | | | | 2008 the company closed the an entire plant in |
| monkeys that they really were. They pulled off | | | | Atlanta. The dedicated employees who had |
| their masks and their fancy robes and fought | | | | invested the bulk of their retirement savings into |
| with each other over the nuts. The dancing | | | | their company's ESOP found their stock practically |
| spectacle ended with much laughter and ridicule | | | | worthless. Many lost their homes, their cars, and |
| from the audience. The lesson, of course, is that | | | | their children's educational funds. Their retirement |
| "Not everything you see is what it appears to be." | | | | accounts had disappeared. A seventh equity firm |
| The vivid pictures of employee ownership painted | | | | joined hands with a pension plan to finance a |
| by an owner of an S-corporation or a privately | | | | seventh purchase, saving the company from its |
| held company offering an ESOP to its employees | | | | filed bankruptcy in 2009. The transaction was |
| brings to mind the sleepless nights and nightmares | | | | valued at $760 million by the New York Times. |
| suffered by the current and former employees | | | | The new investors hope to see similar returns to |
| of another major bedding manufacturer. It also | | | | those of the previous equity firms. |
| brings to mind the major failures of the ESOP's | | | | Those employees who had their retirement |
| offered to the employees of Enron and United Air | | | | packages tied to the company's ESOP are still |
| Lines and others. | | | | suffering. They have almost nothing to show for |
| The New York Times in October of 2009 traced | | | | their diligent savings in the company they trusted. |
| the sad history of a major bedding company | | | | The benefits for the employees touted by the |
| from its tremendous success (#2 in the industry) | | | | company in its sales pitch were not worth the |
| to its recent downfall into bankruptcy. The | | | | paper they were written on. The benefits to the |
| company has been sold seven times in the last | | | | owners of an ESOP are a much different story, |
| two years and each sale reaped huge rewards | | | | however. There are no fables to their benefits, |
| for the private equity firms that participated. | | | | and practically no risk. |
| Those private equity owners have reaped more | | | | Normally when a corporation sells to a buyer, the |
| than $750 million dollars in profits from the | | | | corporation pays a capital gains tax on the |
| company in those transactions. | | | | proceeds. The remaining proceeds would then be |
| In 1986 a private equity firm partnered with | | | | distributed to the shareholders who are also taxed |
| some of the top managers of the company and | | | | on their share of the proceeds. Shareholders who |
| acquired the company for $120 million and most | | | | sell to an ESOP and then reinvest in U.S. |
| of that money was borrowed. They decided to | | | | corporation stocks and bonds can avoid those |
| cash out just three years later in an ESOP | | | | taxes until they are sold at a much later date. If |
| transaction offered to its employees for $241 | | | | the owner dies and they are passed on to his |
| million, a tidy profit to the owners, and that says | | | | beneficiaries, the capital gains taxes are not paid. |
| nothing about the huge tax advantages they | | | | The tax advantages to the owners of the |
| reaped from the transaction. | | | | company and to the investment firms bankrolling |
| The selling equity firm helped the employee ESOP | | | | the trust account for the ESOP are huge. The |
| to obtain the financing to make the purchase. | | | | other advantage to the owner is that it grants |
| Within four months the ESOP owned company | | | | the owner additional liquidity in a market with |
| was in trouble with too much debt. Most of its | | | | limited buyers. Yes, the benefits to the owners |
| valuable assets had been previously sold off by its | | | | and investors are far more advantageous than |
| former owner to repay most of the debt they | | | | the "honor and pride" of owning a part of the |
| had incurred to buy the company in 1986. The | | | | company you work for. |
| employees' retirement accounts were now tied to | | | | The risks of an employee investing a majority of |
| almost worthless stock. | | | | his retirement savings in his employers stock |
| A second equity firm came to the rescue in 1991 | | | | have been documented everywhere. The Enron |
| and bought the company for a measly $32 million. | | | | story, the United Air Lines story, and the story |
| Lawsuits were filed by the employees against | | | | just related are sad proof of the huge risks |
| their original "benefactor" and the company's | | | | involved. |
| managers who had participated in the scheme, | | | | Aesop's "Dancing Monkeys" should be read again |
| but the lawsuit netted the ESOP with only $15 | | | | and again before taking the risk. "Not everything |
| million. A fourth sale was arranged in 1996 to a | | | | you see is what it appears to be," and certainly |
| Bahrain investment company for $265 million, | | | | not everything you hear is the truth it is |
| leaving the employee ESOP owning just 15% of | | | | professed to be. Don't let the dancing monkey |
| the company. Two years later a fifth sale was | | | | steal your dreams and leave you with nothing but |
| approved to another equity firm for $500 million. | | | | tired and sleepless nights. |
| In 2003 a sixth sale was transacted for a | | | | |