As an investment banker who works with Employee Stock Ownership Plans (ESOPs), I was surprised when The New York Times recently published an article quite critical of ESOPs. The Times seems to suggest that US Sugar workers were “cheated out of money that was rightfully theirs” because of an ESOP.
In so doing, the article misses the foundational premise of ESOPs (hundreds of billions of dollars in wealth transfer from entrepreneurs and family businesses to worker employees) by making at least three fundamental errors of logic:
- Statistical Validity – making sweeping conclusions based upon one example.
a. I purchase a Lexus;
b. It’s air conditioning breaks;
c. I proclaim Lexus unreliable
- Causality – linking an outcome to an event without providing evidence as to their causal connection.
a. I go to the Miami Dolphins opener against the NY Jets;
b. Miami wins;
c. I declare that the Dolphins won because I attended the game.
- Rush to Judgment – closing the book before the final chapter is written.
a. President-elect Truman holding up the Chicago Daily Tribune 1948 headlines reading “Dewey beats Truman.”
Statistical Validity. More than 9,700 companies in America have an ESOP, covering 10 million workers and controlling $978 billion in assets. By every statistical measurement it has been one of the most successful bipartisan efforts ever undertaken by Congress. The Times considered only one data point (US Sugar) or 0.01% of all ESOP companies and a lawsuit initiated by only 3 US Sugar employees or 0.17% of the company’s workforce and 0.00003% of all ESOP participants.
There’s an obvious counter point in nearby Lakeland. Publix, the largest ESOP in the country, is headquartered a 100 miles north on US 27. The 100,000+ Publix employees have earned returns that rival or exceed the best of any public company in the country over the past 25 years.
Causality. The article goes on to assert that “what happened at U.S. Sugar could happen at many other companies because of [emphasis added] a type of retirement plan that proliferated in the 1980s.” The “what happened” bit refers to the fact that the Lawrence Group had offered to purchase US Sugar for $293 a share while the Company was buying shares from retiring employees for $194 a share.
Boards of directors reject offers to purchase their companies on a regular basis. Consider the board of Yahoo’s recent rejection of Microsoft’s offer to purchase at $33 a share. Yahoo traded at $18 a share before Microsoft’s January offer of $31 a share, and returned to the low $20s a share after Steve Ballmer broke off talks when Jerry Yang conveyed Yahoo’s $37 a share hurdle to ink the deal.
In both the US Sugar and the Yahoo examples, the critical factor is corporate governance and process. Did the board of directors act prudently in considering and responding to the offer? Both might have made good decisions; both might have made poor ones. The simple fact that both offers were significantly in excess of current trading levels does not settle the matter in either case, and certainly doesn’t explain the link with the ESOP.
Rush to Judgment. Just this week, US Sugar agreed to sell its 187,000 acres of land to the State of Florida for $1.7 billion. This translates into $865 a share. Had US Sugar’s board accepted the $294 offer from Lawrence, they would have left $1.2 billion on the table.
The deal hasn’t closed, and another chapter could yet be written, but suffice it to say, the persistence of US Sugar’s board of directors in pursuing the best transaction for its shareholders appears to be paying off in a huge way for the ESOP plan beneficiaries.
Conclusion. ESOPs are complex transactions and not an appropriate exit strategy for every company. However, the essential points are these:
- ESOPs are flexible vehicles for transferring wealth from owners to workers, while preserving the company’s culture and community presence.
- ESOPs at thousands of companies have generated hundreds of billions of dollars of wealth for workers they wouldn’t have otherwise have had.