Tuesday, April 03, 2007

The Lessons of Enron Didn't Stick

The management of the Tribune Company picked a buyer. Why did they choose a buyer that will put virtually none of his own money on the table when there were other bidders with deep pockets willing to pour money into the papers?

Could it be his professed lack of interest in the news business? Could it be because the winning bidder promised to leave the management team that oversaw the decline of the company in place? Could it be the big fat golden parachutes aka "change of control payments" ($200-269 Million) he offered the top executives?

That would be too cynical. I can't see into the hearts and minds of others. However, I do have to wonder about the structure of the deal.

"In the first step, Zell would invest $250 million in Tribune. Of this, $50 million would purchase 1.5 million shares of newly issued stock at $34 a share, and $200 million would essentially be a loan convertible into shares at the same price.

Simultaneously, the newly minted ESOP would invest $250 million lent by the company to buy stock at $28 a share."

The guy will put up $250 million of his own money, only he won't really do that. He will receive shares or convertible bonds that he can sell or trade.

The employees of the Tribune Company won't get off so easy. All future contributions of their pension plan will be invested into paying off the debt of this hugely leveraged buyout. The company will also "borrow" $250-Million from their pension fund right away. So, that means the employees will be compelled to put more money into the business than the new owner. Yet they won't have any say into how the paper is run. They won't even have a say about whether they want to be part of the deal.

When Enron went bust, we shook our heads at how the employees could have been so stupid as to put their retirement money into their employer. That's just too risky. Every financial planner warns against this. You could lose your job AND your retirement money in one fell swoop.

Yet, this is exactly what is happening. How can this be legal?

No one asked the employees whether they want to gamble their retirement money. Shouldn't the pension fund be their money? Actually, no and that is precisely the problem with American pension funds.

The Tribune Deal: Key Facts and Figures
More facts about the deal
Steve Lopez' Advice from one co-owner to another
Big checks for execs who lose jobs Gee the payout to the execs is suspiciously close to the amount being looted borrowed from the pension fund.

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