The news that Chicago real estate mogul Same Zell was close to a deal to acquire media conglomerate The Tribune Company brought back some old memories. The proposed deal would take the company private, giving ownership to a partnership between Zell and an ESOP used as a financing arrangement reminiscent of the high-flying days of the 1980s. A time in which new and larger ESOPs were encouraged by increased tax benefits, a rising stock market, hostile takeover activity, and the availability of high-yield debt to purchase companies.
But more that anything else, it was the new tax benefits that Congress added in the 1980s:
- 1984: an exclusion from gross income for 50% of the interest a qualified lender receives on a securities acquisition loan.
- 1986: dividends paid on ESOP shares deductible when they were used to repay exempt loans in 1986.
Combined with the ability to deduct principal repayment on ESOP debt, large public companies used ESOPs to finance leveraged buyouts (LBOs) and as an anti-takeover device by putting stock in friendly hands, i.e., the employees.
This would be ESOP number 2 for The Tribune Company. It’s first ESOP, started small in 1988, was later expanded to successfully thwart a hostile takeover by the billionaire Bass brothers of Texas. Newday (itself a Tribune company) reported that if that ESOP existed today, its holdings – 18.6 million shares of common stock, according to a securities filing – would make it Tribune’s third-largest shareholder, behind the Chandler family of Los Angeles, which owns 20 percent, and the McCormick Tribune Foundation with 13 percent.
Or in Shakespeare’s words, what’s past is prologue.