When several hundred engineers at Parsons Corp. were called into an auditorium in Pasadena last year to hear how their retirement funds would be used in a complex leveraged buy-out of the firm, some of the professionals walked out after only 15 minutes dazed and confused.
The brief meeting and others like it were called to notify the employees formally that Parsons would be taken private through an Employee Stock Ownership Plan (ESOP), reputedly the largest such deal in U.S. history.
The Parsons plan purchased $518 million worth of the company's common stock last fall that will be put into accounts for the retirement of all current and future Parsons employees, ostensibly a great boon.
But after slogging through the legalese of the deal described in several lengthy proxy statements, many employees have become suspicious.
They have concluded that the buy-out has severe flaws that discriminate between groups of employees, keeps control of the company in the hands of a select few and unfairly rewards management and directors.
At least three employee groups have written protest letters, carrying between them several dozen signatures, to the Labor Department and the Internal Revenue Service, The Times has learned. Copies of the letters were obtained by The Times with the understanding that the names of the signers would not be disclosed. The letters request confidentiality because jobs would be jeopardized by publicity, they say.
Labor Department officials acknowledge receiving the letters and say they raise "valid issues" that will be looked into.
Specifically, the employees complain that the same officers and directors of Parsons who designed the ESOP and set a "premium price" (in Parsons' own words) for the plan to pay for Parsons' common shares will take $19 million worth of cash out of the deal.
The employees are worried that their future retirement funds have been encumbered with hundreds of millions of dollars of debt that substantially reduces the value of their future benefits. In fact, Parsons will have a $386 million negative net worth after execution of the deal, according to the proxy statement.
"This is a fait accompli ," says one disgruntled senior engineer. "Nobody thought you could do something like this in America."
Parsons executives say the plan treats all shareholders fairly and that its proxy statements fully disclosed everything relevant about the deal.
"All employees share equally in the ESOP plan," says Parsons general counsel and secretary Gary L. Stone. "This is looked at as a benefit to (ESOP) members."
Unlike some other companies whose ESOP deals have been criticized, Pasadena-based Parsons is a healthy and respected firm in the international engineering and construction industry. The firm reported income of $45.7 million on revenue of $839 million in 1983, an improvement in profit during a difficult period for the industry.
Parsons Chief Executive William E. Leonhard declined to be interviewed by The Times, because of the legal sensitivity of the deal. The company says it has been "hamstrung" by legal requirements in the way it can describe the plan to employees.
A shareholder vote is scheduled next Monday on the deal. Following that formality, all employees will be fully briefed on the plan, according to Dorn Dicker, vice president and director of corporate public relations.
But the disgruntled employees feel the company should offer a plainer explanation before the deal is locked up.
The buy-out plan is paying $32 per share for 65.5% of Parsons' outstanding shares. An existing ESOP plan created 10 years ago already owned 29% of the company at the time of the tender offer last September.
Over the years, some Parsons executives had obtained stock for as little as $1 per share outside of the ESOP under special rights and options. Now, under the plan, those shares will eventually be cashed in for $32 per share.
Leonhard will receive $5.9 million for his shares, a substantial premium over past market value. The $32-per-share price represents about a 33% premium over the trading value of Parsons shares before the tender offer.
Meanwhile, employee stock that has been accumulated through the existing ESOP will be worth much less than $32 per share after the deal is executed, thanks to the debt incurred to complete the deal.
One of the letters to the Labor Department asserts that the shares will be worth as little as $5 to $12 per share. The proxy statement acknowledges that the shares will be worth less but does not say by how much.
"I am outraged," says one senior project manager at Parsons. "The stock plan paid $32 for everybody else's shares, but my shares aren't worth $32. I thought these plans were to reward employees, but the whole ESOP plan is only to protect management."