Lucky Me

Very interesting read.

Lucky Me

From The Wall Street Journal 12 Apr 07

The following is an unsent email from 2007 found on the laptop of the late Sam Zell, beloved real-estate mogul, who decades ago flirted with a career in media by proposing a leveraged buyout of the Tribune Co. financed by an employee stock option plan.

Dear Fellow Investors:

Please join me in disregarding the guff you've been reading about your new ESOP (some of which, I admit to uttering myself!). The government wouldn't have to dangle giant tax inducements to encourage companies to adopt this ownership structure if employee ownership produced the benefits that its fans claim for it.

Yes. I've seen the studies claiming employee-owned companies are happy and have higher growth. Is that because employee ownership creates happiness and growth, or because employee ownership only thrives under circumstances where the underlying business can produce happiness and growth?

You don't work in a business that's happy and let's not imagine that happiness and growth will be conjured out of shifting ownership to an ESOP. Our business is not growing and we had better get unhappy about it. We need to rid of people we can't afford. We need to stop paying people to do what they've always done just because they like doing it. You seem to believe you have a sacred right to carry on despite the customer's lack of interest in what you do.

By "you", I mean the Los Angeles Times. Dude - to quote my acquaintance Donald, you're fired!

I'm joking. You're not fired. You're laid off. Perhaps you're offered a generous exit package. I''ll get back to you. (Actually, my secret hope is to get somebody to take the L.A. Times off our hands.)

Between you, me and the lamppost, we're structuring this deal as an ESOP for the tax benefit. As employees, your role in the ESOP is to serve as - what's the word? - a patsy? No, a cut-out. Your participation is what makes us eligible for the giant tax handout, so don't worry, we're going to cut you in. You betcha.

Believe me, I'm not saying the ESOP can't pay off for you. It could. But I'm honor-bound to point out that it's not good financial sense to double down on your own employer by recycling your income back into your company's stock. Sure, the stock could take off. So could any stock. If you want to swing for the fences, at least give yourself some stocks to choose from. And don't forget ESOPs typically deny their employee "owners" the basic prerogatives of ownership. In our case, I will have control, you won't.

You aren't dumb (I'm told). You understand that the newspaper industry faces a problematic future. Our Tribune predecessors did a great job of preserving our fat profit margins by cutting, cutting, cutting. We'll be cutting too - to pay down the $8 billion loan to put the company (nominally) in your hands. But don't worry. There will still be plenty of work around here. You can do valve checks on my Ducatis. They need one every 3,000 miles. Talk about high maintenance! (I'm joking. Don't touch my bikes.)

On a serious note, the world's appetite for news and information is hardly shrinking. There's a future for us distributing local news and information that readers can't get elsewhere and wouldn't exist if we didn't produce it. We got sidetracked by the Times Mirror merger that brought the L.A. Times aboard. We will concentrate again on becoming a local Chicago e-commerce giant.

Between there and here, we'll be struggling to pay down our huge debt. Being realistic, you wonder why I have put up a tiny sum of my own money to become the engineer of this train wreck (and mix metaphors, which is a boss's prerogative!).

At some point, we might hit on a new business model that really pays off, in which case your stock would actually be worth something. For me, I only have to wait for the transaction to close a few months from now. Then I've got a 15-year option to buy 40% of the company (current market value $8 billion) for the bargain price of $590 million. Talk about backdating!

I know. I can hardly believe it myself. I'm a great guy and my lack of media experience is probably a plus at this point, and the value of my stake would have to be discounted for my share of the massive debt taken on partly to buy it and hand it to me. But it still adds up to a giant signing bonus for agreeing to serve as chairman. What's more, the agreement basically gives me control whether or not I spend the money to exercise the option.

Boy oh boy, this is a deal for the M&A record books. I've heard of acquirers paying a "control premium" but a "control discount"? I just hope Burkle, Geffen and Broad (the West Coast billionaires whom I outfoxed in bidding for Tribune) don't steal my ESOP idea and offer to pay a more realistic price for my controlling stake, with the extra cash reducing the ESOP's debt. What's the estimated value of my option? Good question. It's not in the documents and Trib's chief spokesman claims not to have seen a figure. Even I don't really understand what the ESOP is getting in return for basically letting me buy control of the company for 15 years with $90 million. (I'm also lending the firm $225 million, but that will be paid back.)

Lordy, I just thought of something: What if the ESOP trustee asks for a "fairness opinion"? Can you imagine the lawsuits? You media types will say the flaw in the negotiation was the absence of anybody with a motive to protect the ESOP's interests. The Chandler Trusts might be sued too. You'll say we got together and concocted the ESOP to buy out Chandler at top dollar, turn around and sell me a controlling stake at a knockdown price.

Geez, what was Tribune CEO Dennis FitzSimons thinking when he let me brainstorm up this convoluted deal? And I have such a good reputation too. I'd better rethink, pronto. What a drag - because I really might have been the guy to save the newspaper business from itself!

Your pal, Sam.