Scribd Logo
Upload

Welcome to Scribd!

  • 326 views

    Esop MLP

    Uploaded by

    Yohanes Widi Sono
    This document defines and compares different types of employee stock ownership plans (ESOPs) and master limited partnerships (MLPs). It outlines the key characteristics of leveraged, nonleveraged, and tax credit ESOPs, and discusses their performance and impact on company productivity. It also defines roll-up, roll-out, and start-up MLPs, comparing their structures and how they are formed to provide liquidity and avoid double taxation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Esop MLP

    Uploaded by

    Yohanes Widi Sono
    326 views26 pages
    This document defines and compares different types of employee stock ownership plans (ESOPs) and master limited partnerships (MLPs). It outlines the key characteristics of leveraged, nonleveraged, and tax credit ESOPs, and discusses their performance and impact on company productivity. It also defines roll-up, roll-out, and start-up MLPs, comparing their structures and how they are formed to provide liquidity and avoid double taxation.

    Original Description:

    ESOP MLP

    Original Title

    ESOP MLP

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document defines and compares different types of employee stock ownership plans (ESOPs) and master limited partnerships (MLPs). It outlines the key characteristics of leveraged, nonleveraged, and tax credit ESOPs, and discusses their performance and impact on company productivity. It also defines roll-up, roll-out, and start-up MLPs, comparing their structures and how they are formed to provide liquidity and avoid double taxation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    326 views26 pages

    Esop MLP

    Uploaded by

    Yohanes Widi Sono
    This document defines and compares different types of employee stock ownership plans (ESOPs) and master limited partnerships (MLPs). It outlines the key characteristics of leveraged, nonleveraged, and tax credit ESOPs, and discusses their performance and impact on company productivity. It also defines roll-up, roll-out, and start-up MLPs, comparing their structures and how they are formed to provide liquidity and avoid double taxation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 26

    Yohanes Widi

    Sono
    (1006794495)
    M&A Course
    2012

    Employee Stock Ownership Plans


    (ESOPs)
    Definition:

    Defined contribution employee benefit pension plans


    designed to invest at least 50% of its assets in
    qualifying employer securities
    ESOPs may be
    Stock

    bonus plans
    Combined stock bonus plans and money purchase plans
    May also provide for employee contributions
    May represent portion of profit-sharing plan

    ESOPs different from:


    Employee

    Enable employees to buy company stock at discount


    Participation of all or most employees
    Shares sold at 85% or more of prevailing market price of
    shares

    Executive

    stock purchase plans

    incentive programs

    Provided mainly to top management and other key


    employees
    Part of executive compensation packages
    Two types

    Incentive stock options


    Stock appreciation rights

    Types

    of ESOPs

    Leveraged
    Recognized

    under ERISA in 1974


    Leveraged ESOP operation

    http://www.esopassociation.org/about/about_leveraged.asp

    Leveragable
    Recognized

    under ERISA
    Plan authorized but not required to borrow funds

    Nonleveraged
    Recognized

    under ERISA
    Plan does not provide for borrowing of funds
    Essentially stock bonus plan

    Tax credits ESOPs


    Provided

    by Tax Reduction Act of 1975; known as Tax


    Reduction Act ESOPs or TRASOPs
    In addition to regular investment credit in existence at
    that time, additional investment credit of 1% of
    qualified investment in plant and equipment could be
    earned by contribution of that amount to ESOP
    In 1976, additional 0.5% credit added for companies
    that matched contributions of employees of same
    amount to TRASOP
    In 1983, basis for credit was changed from plant and
    equipment investments to 0.5% of covered payroll
    plans called payroll-based ESOPs or PAYSOPs

    Performance of ESOPs
    ESOPs

    as a takeover defense

    Polaroid vs. Shamrock Holdings


    Delaware

    "freeze-out" law prevents hostile acquirer


    from merging with target unless 85% of target's voting
    shares are tendered
    Polaroid created ESOP which purchased 14% of its
    common stock
    Shamrock unable to obtain necessary 85% in 1988
    tender offer
    After Polaroid, ESOPs became widely used as
    antitakeover strategy

    ESOPs

    versus alternative methods of raising

    funds

    Corporate financing
    ESOPs

    provide benefits midway between debt and


    equity financing
    Can bring additional debt capacity to highly
    leveraged firms
    Debt interest expense under leveraged ESOP had
    been lower than straight debt financing when
    interest exclusion was permitted
    Provide market for equity financing for closely held
    firms

    Useful

    device for transferring ownership


    Most leveraged ESOP funds used to buy back stock
    from existing shareholders and not for capital
    expansion

    Control of stock
    Management

    continues to control ESOP


    Employees who wish to maintain status quo or who
    do not want an outside company to take over firm,
    more likely to support management when ESOPs are
    used as takeover defense

    Economic dilution
    ESOPs

    potentially transfer shareholders' wealth to


    employees
    If ESOP contribution not offset by reduction in other
    payments to workers, employees gain at expense of
    shareholders
    Any borrowing by ESOP uses some debt capacity of
    firm

    Equity position dilution


    Infrequent

    use of ESOP loans suggests that nontax


    costs of using ESOP are high
    Large equity stake that goes to contributing
    employees significantly reduces equity stake to
    managers and buyout promoter
    Potential advantage: Shares can be sold at higher
    prices over the years as ESOP contributes to higher
    earnings through tax advantages and improved
    motivations of employees

    Comparison

    with profit sharing (Mitchell, 1995)

    Deferred profit sharing plans in 16% of all firms


    compared with only 3% for ESOPs
    ESOP's coverage of workers relatively small despite
    tax subsidies
    Noninsured private pensions held $1.2 trillion in
    equity in 1991 compared with equity holdings of $47
    billion for ESOPs
    Compared to other pension plans, ESOPs have lesser
    impact on helping workers achieve equity holdings

    Profit sharing has economic advantages over


    ESOPs
    Flexibility

    in worker compensation improves


    stability of employment
    ESOP does not add to pay flexibility because it
    involves a form of bonus to employment

    Owners have incentive to overvalue stock assigned


    to employees in ESOP plans in order to increase tax
    subsidy
    Profit sharing schemes are more worthy of
    favorable tax treatment since they provide
    macroeconomic benefits

    Effects

    on company productivity

    ESOP and stock voting rights


    Most

    studies indicate ESOP's stock ownership


    percentages of 10% or less
    Voting rights associated with stock of ESOP accounts
    may be exercised by plan trustees (usually company
    management) without input by participants
    ESOPs can be used by management to obtain tax
    benefits without sharing control with employees

    General Accounting Office study (1987)


    No

    significant gains in either profitability or


    productivity
    Significant improvement in growth rate of sales in one
    study
    No significant improvement in growth rate of
    employment

    Park and Song (1995)


    On

    average, firms with ESOPs improve performance


    Sample firms partitioned into firms with large
    outside blockholders (block firms) and firms without
    (nonblock firms)

    Improvement in performance only in block firms


    For nonblock firms, negative relation between fraction
    of ownership held by ESOPs and changes in
    performance
    No systematic relationship for block firms

    Conte, Blasi, Kruse, and Jampani (1996)


    Returns

    of firms with ESOPs significantly higher than


    comparable non-ESOP companies
    Financial returns decline after companies adopt
    ESOPs
    Results consistent with ESOPs used as takeover
    defenses
    Adoption of ESOPs in large companies lowers
    financial returns but no significant effect in smaller
    firms

    Systematic studies of ESOPs in U.S. do not


    document performance improvement
    Anecdotal evidence of positive effects on
    individual companies, e.g., United Airlines
    Many cases where management has been
    unwilling to grant employees full shareholder
    rights when ESOPs are formed

    Master Limited Partnerships


    (MLPs)
    Business

    organizational forms in general

    Proprietorships and partnerships


    Most

    numerous
    Mostly small businesses

    Corporations
    Dominant

    in terms of total assets

    Four

    advantages in raising large sums of money

    Limited liability for shareholders


    Unlimited life
    Ownership divided into many shares limits risk
    exposure
    Shares freely tradable for liquidity, diversification,
    transferability of ownership

    MLPs relatively new form of business


    organization

    Master

    Limited Partnerships

    Type of limited partnerships whose interests are


    divided into units that are traded on organized
    exchanges
    First developed in oil and gas industry
    Some advantages
    Unit

    tradability similar to stock


    Limited liability (for limited partners)
    Continuity of life
    No double taxation of business earnings

    http://www.jpmorgan.com/tss/General/Master_Limited_Partnerships_
    Understanding_an_Evolving_Asset_Class/1320477769983

    General

    partner of MLPs

    General manager (partner) of MLPs has unlimited


    liability
    Virtually autocratic power
    Difficult to change general partner in absence of
    provable fraud
    Alignment of interests between general partner
    and public unit holders
    Management

    incentive fees
    Ownership of significant number of limited
    partnership units

    Types

    of MLPs

    Roll-up MLPs
    Combine existing limited partnerships into one
    publicly traded partnership
    First type of MLPs organized; began in oil industry
    by Apache Petroleum Company in 1981
    Provide liquidity for nontraded limited partnerships
    Nature of roll-up

    Before roll-up, there are a number of limited partnerships in


    existence
    General partners enter into agreement to combine a number
    of previously sponsored limited partnerships; in return for
    their old shares, units in new MLP are issued
    After MLP has been formed, there is a general partner and
    units which are owned by limited partners; units may trade
    on stock exchange or over the counter

    Roll-out (spin-off) MLPs


    Formed by a corporation's contribution of operating
    assets in exchange for general and limited
    partnership interests in MLP
    Sold on a yield comparison basis
    First roll-out MLP created by Transco Corp in 1983
    Nature of roll-out
    Corporation holds a number of business segments
    Corporation places assets of one or more of its business
    segments into MLP
    Avoid double taxation of corporate dividends
    Establish a new value on undervalued assets
    MLP transfers MLP units to corporation which in turn
    distributes them to its shareholders
    Stockholder hold stock in corporation and own units in MLP
    Corporation could sell portion or all of units to outside public

    Start-up (new issue, or acquisition) MLPs


    Formed by a partnership that is initially privately
    held but offers its interests to the public in order
    to finance internal growth
    Nature of start-up

    Existing entity transfers assets to MLP


    Management company may be involved that provides
    services to MLP and probably will be its general partner
    In return, management company receives certain
    percentage of cash flows of MLP
    General partner does not have to hold units in order to
    receive income

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy