Avis deal could trigger other large-scale employee buyouts. Ownership may prompt workers to `try harder'
Boston — Avis may ``try harder'' than any other car-rental company - but now that its 11,000 employees own the company, they have an even better reason to put their best foot forward. Avis is the largest company ever to be sold to an employee stock ownership plan (ESOP). This employee buyout is significant, analysts say, because of its sheer size. The $1.75 billion purchase could prompt investment bankers and other dealmakers to promote more large-scale employee buyouts. It may also somewhat reverse cooling management attitudes toward ESOP plans.
``There have been some jaded views about ESOPs recently, says Richard Belous, a labor economist with the Conference Board, a nonpartisan business research group. ``That's why the Avis deal really breathes a bit of fresh air into it.''
Today there are more than 8,000 ESOPs involving an estimated 8 million workers at mostly small and mediumsize companies with fewer than 1,000 employees.
The Avis ESOP is actually a trust fund in which the stock, purchased from Wesray Capital Corporation last week, is held until loans made against the stock are paid off. Thus, it will be about four years before Avis employees control a majority share of the stock and about 10 years before they own the company.
The advantage for employees ``in a deal of this magnitude is that it is not at all unrealistic to speak of accumulations of $100,000 upon retirement,'' says Corey Rosen, executive director of the National Center for Employee Ownership in Oakland, Calif.
The main advantage of an ESOP to company management has, so far, been mainly its usefulness as a financing tool due to its tax advantages. Federal tax laws allow an ESOP to deduct repayment of loan principal from its taxes. And lenders often lower their loan rates because they are allowed to deduct as much as 50 percent of the interest payments on loans to ESOPS.
``They don't automatically make you an economically successful company,'' Mr. Rosen says. But it can be a plus for management, he says, because ESOP companies with higher worker participation in management have been found to grow 11 to 17 percent faster than similar companies with little employee involvement.
Still, big companies with more than $1 billion in assets have been slower to adopt majority employee ownership positions than many smaller companies. When large companies have used ESOPs, it has generally been to take advantage of tax benefits by selling bits and chunks of corporate stock to an ESOP.
One of the big sticking points for management has been the issue of corporate control. If employees control a majority of shares, won't they want to override management at every step?
``In companies where employees do elect the board of directors, we have found that almost nothing changes,'' Rosen says. ``The critics are wrong on the one side who say control is the only thing that motivates employees. And they're wrong on the other side when they say employees electing the board will lead to disaster. It doesn't do either of those things.''
Despite some obvious advantages, ESOPs have also had their problems. One major hitch is management's motives. Some managers of companies on the brink of bankruptcy have turned at the last minute to the employees offering an ESOP.
``Is it lemon socialism?'' asks Dr. Belous. ``What I mean by lemon socialism is that when it's a dodo, or about ready to keel over, that's when the government or the workers are called in.
For that reason, some pension analysts say employees should be wary of ESOPS that leave their retirement funds at risk. They suggest pension funds or employee mutual funds to spread the nest eggs among many investments - reducing the risk if a company fails.
Still, there are notable successes that breed optimism. One frequently cited example of a successful ESOP is that of Weirton Steel Corporation, taken over in 1984 by its employees from National Steel Corporation. Last year the Weirton, W.Va., company recorded a $45 million profit, though it will need higher profits to avoid long-term insolvency.
Ownership is only one of two essential ingredients to a successful ESOP company. The other is the ``culture of participation'' which exists at Weirton.
``The day-to-day decisions are pushed down to the lowest level possible rather than having lots of management, lots of hierarchy, and lots of authority,'' Rosen says. ``That's the cutting point on what makes some ESOPs do extremely well and others remain lackluster.''
In the main, troubles that have befallen ESOP companies have come from mixed ownership and conflicting ideas of where the company should go, says Louis Kelso, the father of the leveraged buyout and the ESOP. He says the way some companies have used ESOPS is certainly not the way he envisioned it.
``If you are clever enough, you can design an ESOP to create a smoke screen and get tax deductions while defeating any employees acquiring control of the company,'' Mr. Kelso says.
The bottom-line reason for an ESOP, he says, is to enable a company's employees not only to earn money by working, but also by owning assets (part of the company's capital) that earn income.
Waiting in the wings has been a possible purchase of United Airlines by its pilots which would easily rival the Avis ESOP in size. If it happened, this might further bolster the ESOP boosters.
But Kelso is buoyant, because, he says, the Avis deal ``was done the way it ought to be,'' that is, 100 percent owned by employees. This deal, he says, means that more and bigger ESOPs are ``as inevitable as tomorrow's sunrise.''