The Employee Ownership Update
June 7, 1996
Is Avis Really for Sale?Avis, Inc., one of the country's largest employee-owned companies, has received an unsolicited purchase offer from HFS, a publicly traded hotel and real estate franchiser. Does the news mean that Avis is for sale? Not really. According to insiders at Avis, the company's public statement that the offer was unsolicited is precisely what the offer was. Because HFS is a public company, however, Avis officials are legally constrained from commenting more on the proposal, even to employee meetings, because any such comments could affect the price of HFS stock. So for now all Avis officials are saying is that they are considering the proposal.
Avis was bought by an ESOP in 1987 for $1.75 billion. The ESOP bought all the common stock, and General Motors bought preferred convertible into common worth 29% of the company. The ESOP was financed by a 30-year loan, part of which was to pay off acquisition costs (that part, $750 million, has been repaid) and part of which was to finance vehicle acquisition (that part operates through revolving credit). So far, 38% of the ESOP's shares have been allocated. The ESOP was in addition to existing benefits and pay at Avis, not in exchange for either.
An outside trustee oversees the plan and would have to make a final decision on the acquisition based on whether it was in the best interests of plan participants. In the past, Avis CEO Joseph Vittoria has said Avis might consider a partial initial public offering as a means to provide liquidity for Avis employee owners. Several large majority ESOP-owned companies have taken this route, although others, such as Parsons Engineering and Amsted Industries, continue to handle the repurchase of shares from departing employees out of their own funds.
Avis is not in financial difficulty. Its stock value has gone from $5 per share in 1987 to about $12 in 1995. The company has had ups and downs, however, with significant losses in 1994 related to increases in fleet acquisition costs. Other car rental companies have faced similar problems. 1995 was a very good year, however, and 1996 is shaping up as a much better year. Overall, Avis is outperforming the industry.
Employee Ownership in ChinaAccording to some reports, employee ownership is sweeping China; according to others, it is still just an occasional experiment. According to some government officials, employee ownership should be strictly limited to 20% of a company; other officials say it should be encouraged on a wide scale.
These divergent views come out of a recent conference on employee ownership in Beijing coorganized by the NCEO and the China Research Center. It is clear that at least some significant employee ownership is occurring at the township and village enterprise (TVE) level. This is the basic unit of local government in China, accounting for most of the country's enterprises. Many TVEs are in the process of transforming these enterprises into more market-driven companies, either selling them off, selling part of their ownership, or transferring ownership to worker-owned cooperatives. The cooperative movement is a spontaneous one, not sanctioned by specific federal law. Just how much of it has occurred is not possible to assess accurately and, as noted, estimates vary considerably.
At the central government level, the state owns most large enterprises. Some of these are making stock available, limiting the amount to minority interests. Employees have been eagerly buying shares in the companies, largely because the Chinese are great savers and have few investment options. Discussions at the highest levels of Chinese government are underway about further transformation of these enterprises.
Officials from the Chinese State Committee on Economic Restructuring took very different views of what course any new rules should take on employee ownership, one arguing that it should be limited to 20% at all levels, another arguing that it should be encouraged far beyond that. Predicting what course the government will take is simply not possible at this time, but, at the least, the possibility exists that employee ownership could play a substantial role in the future Chinese economy.
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