Not All Buyers Avoid Union Lable
June 30, 2009
In a stretched economy, it's easy to see the tightrope many unions walk. In its most basic form, a "successful" union negotiation yields few concessions, and seizes as many benefits and as much remuneration for workers as possible. The problem this poses for potential acquirers is that it doesn't always leave a viable business, and few buyers want to take on the headache of trying to negotiate concurrently with management and its employees.
"Whenever we are in a sale-type process, the buyers will ask if there is a union involved," said one investment banker.
"Depending on what the answer is, buyers either want to hear more or walk away. Some firms can work with unions to create change, but most buyers see the unions as too cumbersome."
The enduring image of organized labor involves picket signs and strikes, and rarely instills the idea of compromise. Moreover, every month it seems a new instance of union abuse emerges. In New York, for instance, the Long Island Railroad Employees were retiring in their forties and collecting pensions and disability payments that together exceeded their working salaries. According to an expose by the New York Times, the disability rate was as high as 97% for the retired rail workers. Meanwhile, the "job banks" created by the auto unions received even more scrutiny, paying out-of-work employees their full salaries. The United Auto Workers union (UAW) had to forfeit the program as part of the government's bailout package.
While a union presence adds more complexity to a transaction, and at times introduces a recalcitrant third party to the negotiations, not everyone sees it as a nonstarter.
"We know what we need to make a deal to happen, and it may require changes to work rules or pension plans," Justin Hillenbrand, a principal with Monomoy Capital Partners, said. "If the union doesn't agree, we won't do the deal."
"The unions have to be part of the solution," added Cliff Roesler, a managing director with WY Campbell. "It's not fair to say they are always uncooperative, but they do have the opportunity to choose between being constructive or not."
Take the recent attempts by Dura Automotive to sell its hinge and latch business. The company had negotiated a deal with a strategic buyer, who went directly to the union to arrange work rule modifications and wage reductions. The union ultimately agreed. However, Dura was never able to cinch terms with the buyer that it felt were reasonable and ended up pulling the deal off the table. The management then asked the union to accept the same concessions that had been arranged with the potential buyer. The union rebuffed and the plant was shut down.
While union issues are a consideration for deals in both the small and large markets, one of the more high-profile showdowns occurred between the UAW and Fiat Group. The union waited until three days before Chrysler filed for bankruptcy to strike a deal with management. It was only after Fiat had threatened to walk that the union softened its resistance to cost cuts. At one point, Fiat CEO Sergio Marchionne put the odds of a deal happening at 50/50, saying the biggest threat was the lack of progress in the labor negotiations.
The union did offer some concessions. The olive branch still didn't keep the company from having to file for bankruptcy, from which the union will emerge with a 55% stake in the reorganized company.
Increasingly, unions will even play a role in attracting buyers. The International Brotherhood of Teamsters reportedly brought Ripplewood Holdings in to help jumpstart a standstill in negotiations with Interstate Bakeries. The company, which had been in bankruptcy for almost four years, eventually worked out a deal that saw the workers retool their contract and Ripplewood invest $44.2 million of cash into the company and another $85.5 million that took the form of convertible debt. The alternative may have been liquidation.
"It doesn't behoove the union for their employer to go bankrupt," said Bret Caldwell, director of communications for the Teamsters. "Once they enter bankruptcy, the courts get to decide on all the outstanding issues... And workers want to work."
Knowing this, a few private equity firms have established themselves as being particularly labor friendly, such as Yucaipa Partners, headed by Ron Burkle. The Los Angeles firm most recently was rumored to be interested in buying the heavily unionized Hartmarx out of bankruptcy, according to story in the New York Post. A separate report in Women's Wear Daily described that Bruce Raynor, the president of the UNITE HERE labor union, has actually taken on the role of banker, orchestrating a road show to pitch the company to would-be buyers interested in keeping the company intact.
Meanwhile, one area that will surely get more attention in the coming months is the debate over card check. The labor groups invested a lot of money in the hopes that a Democratic Congress would pass legislation that ends secret ballots in union elections. The Services Employees International Union, for instance, donated $85 million that went to Democratic candidates, and reportedly withheld another $10 million earmarked for opposition to legislators that renege on campaign promises.
The Employee Free Choice Act, which is currently in limbo in Congress, would eliminate the right of employers to force a secret-ballot election to determine unionization. President Obama and Vice President Biden had sponsored earlier drafts of the bill during their time in the Senate.
Critics argue that the open elections favored by card check proponents would lead to coercion on the part of labor organizers. Most small businesses generally oppose the legislation for obvious reasons, not the least of which is that it would accelerate collective bargaining and introduce a federal arbitration panel to settle contract disputes.
KPS Capital Partners, meanwhile, has used the debate to help foster its strong reputation among the unions. The firm recognizes card check neutrality, allowing workers to establish a union at its portfolio companies through a public ballot. KPS is among the few firms to publicly take such a position.
The Carlyle Group, in contrast, waged a pitched battle against the SEIU when the union tried to organize workers at its portfolio company, HCR ManorCare.
Hillenbrand notes that the role of the buyer can often be to serve as a mediator. While it's never easy, he adds that patience can go a long way for acquirers.
"There is always friction between labor and management and everyone blames the other side because it's easier to point the finger," Hillenbrand said. "It's not a natural instinct for anyone to say 'let me be the one that gets cut,' so it takes time to come to agreements that make everyone relatively happy."
And if acquirers can bridge that gap, settling on the deal terms will seem easy in comparison.
For more information on related topics, visit the following:
