Hopeful
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777 fixer said:
Here's the link:
http://www.buyitfixit.org/
Face-Off: UAL vs. proposed AMR ESOP Plans
The logical first reaction when one is confronted with the idea of an “ESOP†or Employee Buyout of AMR is, “What about United?†The purpose of this paper is to get you past this understandable knee-jerk reaction, to knowledge of real facts and real answers to that question.
United Airlines employees spent $4.9 Billion to purchase 55% of their company, which remained a publicly traded stock on the NYSE. They received some limited governance powers and 3 of 15 Board seats.
We propose to take AMR “private†by injecting new equity (stock) capital into the company during reorganization. There will be no publicly traded stock. There will, of course, still be public debt and a need to service that debt. We think the price will be “right,†and much lower than what UAL employees had to pay for their stake.
Here is a side-by-side comparison of UAL vs. New AMR:
UAL New AMR
Conventional ESOP/“C†Corp structure, initiated 1994.
ESOP/“S†Corp structure, made possible by 1996/97 law changes.
Leveraged ESOP, meaning money was borrowed secured by concessions, and loaned to the ESOP.
Un-leveraged ESOP funded by voluntary, elective employee allocations of existing 401k or defined contribution plans.
55% interest obtained, UAL remained a publicly traded company.
100% interest obtained, and AMR will become a private company, 100% employee owned.
ESOP had a limited funding life of 6 years. Would dissolve if not renewed in 2000.
Unlimited life ESOP.
Different and opposing agendas for Labor and Management: Labor was focused on “control†and Management on “accommodation†to corporate needs.
Agendas should be more congruent, as employees will be 100% owners. Wall Street is removed from the equation. Situation is different, with survival being the primary goal.
Conventional ESOP/“C†Corp structure had limited but sizable financial advantage … about $2 Billion in tax advantage from ESOP debt principal being tax-deductible.
New 100% ESOP/“S†Corp structure has powerful financial advantage … all future profits are free of federal income tax. All debts are paid with pretax dollars.
Under “C†corp. structure, UAL net profits did not accrue to ESOP accounts.
Under “S†Corp structure, New AMR net profits would accrue to employee ESOP accounts, in proportion to initial investment.
UAL Error: Employees not allowed to sell stock until retirement.
We plan more liberal diversification provisions.
UAL Error: Not all employees participated in ESOP … flight attendants opted out.
All employee groups would participate in the New AMR ESOP.
UAL Error: limited life ESOP.
No limit on life of the New AMR ESOP.
UAL Error: Some governance provisions objectionable to management.
We can learn from UAL errors and design more functional governance provisions.
UAL Error: Top management hired top officer “opposed†to employee ownership.
All of the New AMR management team will be amenable to employee ownership. This will be a prerequisite.
UAL Error: Planned financial training and education for all employee-owners never took place.
Financial training will be high priority.
Consider the following points, keeping in mind the above differences between UAL and a New AMR.
It is important to realize that the structure we propose for New AMR was not possible under federal law in 1994 for UAL. At that time, ESOP trusts were not allowed to be shareholders in “S†Corporations. “S†Corporations are companies that are not taxed at the corporate level, but taxation flows through to the shareholders. Shareholders are taxed on their prorated share of the profits, on an individual basis. Changes in federal law in 1996/1997 made it possible and economically feasible for ESOPs to be shareholders in “S†corporations.
There were several interlinked factors that helped destroy the cooperation needed for an ESOP to succeed at UAL. For example, the stock in the new ESOP was issued to the employees at around $23 per share in 1994. UAL remained a publicly traded company, and the stock traded on the NYSE at $100 per share only 3 years later. This out-performance of the stock during a bull market period resulted in the top 600 managers receiving large bonuses in 1996. In addition, management was exercising options and outside investors were selling, while the employees asked, “How about us? We’ve given 20% pay cuts and cannot sell until retirement!†This combination of a bull market, a publicly traded stock, restrictive employee cash-out provisions and selling by other parties to the transaction, “poisoned the well†for the ESOP early on in its history.
These factors should not exist for a 100% employee owned, private New AMR.
The corporation retained cash profits from UAL. In the case of New AMR, net profits will accrue to individual ESOP accounts, allowing for “automatic†diversification, over time, of employee retirement funds.
Given the way in which the New AMR ESOP would be funded by elective employee contributions, a securities offering would be made to all employees who would decide on an individual basis how much of their 401k balances or other defined contribution (pilot B Fund) plans to invest in New AMR Stock, all employee groups would participate. At UAL, the flight attendants never participated, which posed big problems.
The profit motive should be a more powerful incentive to New AMR employees under the 100% ownership, “S†corp. structure.
In the years leading up to 1994, UAL was reeling from takeover attempts by Marvin Davis and accumulation of stock by corporate raiders like Coniston Partners. This created a series of concerns about successorship and “control†that drove the subsequent ESOP design. Under the current scenario at AMR, where corporate survival is at issue, it is anticipated that plan design and management execution will be a more cooperative arrangement. Employees will be highly motivated, driven by the profit motive.
There is no question that an ESOP + Sub S arrangement at New AMR will require new ways of dealing with each other, new ways of working, and a new role of unionized labor. Our traditional relationships will not apply or work in many cases and in many ways. It will be up to us to meet the challenges, but we believe that the unique and more amenable structure under 100% ownership and S Corp will greatly enhance the chances of success at the New AMR.
