The news of other Esop (Employee Stock ownership Plan) being offered to the employees of a mattress retailer recalls for me Aesop's "Dancing Monkeys" and the important lesson that the fable teaches.
In case you don't remember the Aesop fable, it is the story about some monkeys that were trained to dance. They were dressed up in fancy clothes and taught to imitate preeminent attendants to the king's court. Their act became very preeminent and they received great applause wherever they went. One day a mischievous attendant to the king decided to throw a handful of nuts onto the stage. The monkeys immediately forgot their dancing and became the monkeys that they certainly were. They pulled off their masks and their fancy robes and fought with each other over the nuts. The dancing spectacle ended with much laughter and ridicule from the audience. The lesson, of course, is that "Not everything you see is what it appears to be."
News From Bahrain
The vivid pictures of laborer ownership painted by an owner of an S-corporation or a privately held firm contribution an Esop to its employees brings to mind the sleepless nights and nightmares suffered by the current and previous employees of other major bedding manufacturer. It also brings to mind the major failures of the Esop's offered to the employees of Enron and United Air Lines and others.
The New York Times in October of 2009 traced the sad history of a major bedding firm from its grand success (#2 in the industry) to its up-to-date downfall into bankruptcy. The firm has been sold seven times in the last two years and each sale reaped huge rewards for the secret equity firms that participated. Those secret equity owners have reaped more than 0 million dollars in profits from the firm in those transactions.
In 1986 a secret equity firm partnered with some of the top managers of the firm and acquired the firm for 0 million and most of that money was borrowed. They decided to cash out just three years later in an Esop transaction offered to its employees for 1 million, a tidy profit to the owners, and that says nothing about the huge tax advantages they reaped from the transaction.
The selling equity firm helped the laborer Esop to regain the financing to make the purchase. Within four months the Esop owned firm was in trouble with too much debt. Most of its important assets had been previously sold off by its previous owner to repay most of the debt they had incurred to buy the firm in 1986. The employees' relinquishment accounts were now tied to practically worthless stock.
A second equity firm came to the saving in 1991 and bought the firm for a measly million. Lawsuits were filed by the employees against their primary "benefactor" and the company's managers who had participated in the scheme, but the lawsuit netted the Esop with only million. A fourth sale was arranged in 1996 to a Bahrain venture firm for 5 million, leaving the laborer Esop owning just 15% of the company. Two years later a fifth sale was approved to other equity firm for 0 million.
In 2003 a sixth sale was transacted for a whopping .1 billion for the company, but 5 million of that was in bonds and loans from investors. In 2004 the manufacturing giant issued debt at a 10% yearly interest to help pay their sixth "benefactor" a "dividend of 7 million." 2007 saw the company's owner setting up a holding firm that issued 0 million more in debt which paid other 8 million dividend back to its owners recovering their preliminary 7 million cash investment. The debt load left to the firm was too heavy to bear.
As the cheaper soured in 2007, the cutbacks started. The firm cut costs wherever it could. 2008 saw huge job losses. In September 2008 the firm fulfilled, the an whole plant in Atlanta. The dedicated employees who had invested the bulk of their relinquishment savings into their company's Esop found their stock practically worthless. Many lost their homes, their cars, and their children's educational funds. Their relinquishment accounts had disappeared. A seventh equity firm joined hands with a pension plan to finance a seventh purchase, saving the firm from its filed bankruptcy in 2009. The transaction was valued at 0 million by the New York Times. The new investors hope to see similar returns to those of the previous equity firms.
Those employees who had their relinquishment packages tied to the company's Esop are still suffering. They have practically nothing to show for their diligent savings in the firm they trusted. The benefits for the employees touted by the firm in its sales pitch were not worth the paper they were written on. The benefits to the owners of an Esop are a much dissimilar story, however. There are no fables to their benefits, and practically no risk.
Normally when a corporation sells to a buyer, the corporation pays a capital gains tax on the proceeds. The remaining proceeds would then be distributed to the shareholders who are also taxed on their share of the proceeds. Shareholders who sell to an Esop and then reinvest in U.S. Corporation stocks and bonds can avoid those taxes until they are sold at a much later date. If the owner dies and they are passed on to his beneficiaries, the capital gains taxes are not paid. The tax advantages to the owners of the firm and to the venture firms bankrolling the trust account for the Esop are huge. The other benefit to the owner is that it grants the owner additional liquidity in a store with little buyers. Yes, the benefits to the owners and investors are far more advantageous than the "honor and pride" of owning a part of the firm you work for.
The risks of an laborer investing a majority of his relinquishment savings in his employers stock have been documented everywhere. The Enron story, the United Air Lines story, and the story just related are sad proof of the huge risks involved.
Aesop's "Dancing Monkeys" should be read again and again before taking the risk. "Not everything you see is what it appears to be," and certainly not everything you hear is the truth it is professed to be. Don't let the dancing monkey steal your dreams and leave you with nothing but tired and sleepless nights.
Esop's Mattress Fable - Remember the Dancing Monkeys and the Sleepless NightsRelated : todays world news headlines
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