Strange Bedfellows: Labor & Capital
Posted on May 20th, 2009 by Tim Eavenson | No Comments »Filed under: ., Labor Law |
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Some unions in troubled companies are finding an unlikely source of salvation and partnership: private equity.
Yesterday, the Chicago Chapter of LERA invited Steve Sleigh, a member of the private equity group Yucaipa Companies, to discuss the current state of labor and capital. Sleigh admitted that private equity is most often associated with greedy takeovers, where the investor comes in to sell off profitable pieces of a foundering company, instituting layoffs and forcing concessions from unions. Increasingly, private equity is the third seat at the table of industrial relations, and disliking its interference is sometimes the only thing unions and management can agree on.
But it doesn’t have to be that way, according to Sleigh. Yucaipa occupies a unique position in the private equity arena: their partners come from backgrounds in all three camps – labor, management and finance, and their focus is on companies with unionized workforces and a solid product. The investments come in large part from multi-employer pension funds, which means the private equity group essentially becomes a conduit for unions to reinvest in the labor movement.
Like most private equity investors, Yucaipa buys companies in hopes of retooling them and selling them. But Sleigh thinks that the prevailing model of reducing payroll and benefits in order to accomplish the quick turnaround is short-sighted. Instead, Yucaipa starts its analysis by assuming that the labor costs are fixed, and then asks what else at the company can be adjusted.
In one example, a large, Midwestern cold storage company had each of its locations making individual contracts and operating decisions. Every facility had its own IT contracts, its own practices and guidelines. “They had 120 fiefdoms,” Sleigh said. By consolidating operating decisions, the company was made profitable with no loss of employment or benefits.
The secret, according to Sleigh, is in getting labor and management to focus on the good of the company together. “We often say that we’re mediators with money,” he said. By the time a company is failing, though, the two sides are often either giving up or at each other’s throats. ”My number one question is always: Who cares about the firm?” The number one answer, Sleigh said, is usually the workers – not just because they want to keep their jobs, but because longstanding workforces develop senses of community that will be lost if a company is grossly restructured or closed. By working with the unions – and having partners with history in labor organizations – Yucaipa can get early information on issues like cash flow and productivity that guide its investment decisions.
Sleigh also pointed out one of the key areas where companies get into trouble with their unionized workforces: lack of transparency. Sleigh said that, during a restructuring, they require annual presentations to both management and union representatives on the health of the company. That way, no matter what changes are needed during the turnaround, they’re not a shock to anyone. Putting unions and management on the same informational page also fosters cooperation between the parties, according to Sleigh.
Here, though, Sleigh said unions presented the biggest obstacle. Often, the union doesn’t have anyone to represent them who truly understands the financials. He said unions needed to start thinking of themselves as partners in the process.
It seems there would be some inherent conflicts in using private equity – with union pension fund backing – to restructure unionized workforces. First, what happens when a company won’t survive unless pension benefits are cut, or a defined benefit plan has to be changed to a contribution-based plan like a 401(k)? It seems like robbing Peter to pay Paul. Sleigh said that Yucaipa actively avoids those investments, and that they would ask for concessions where necessary. But drastic measures like replacing plans are much less necessary than people think.
“In 20 years of doing this,” Sleigh said, “I don’t think we’ve ever replaced a DB plan.”
Sleigh was also quick to dispel the notion that his work was less investment and more labor activism. “It’s not our business model to just be nice to unions,” he said. “It’s that being nice to unions is good for our business.”
How good? In the twenty or so years that Yucaipa has been doing this type of private investing, their average annual ROI sits above 40%. In the past few years, when overall investing has seen losses of about 35%, private equity (including Yucaipa) has lost more like 5%. That makes pension plan fiduciaries happy to invest, Sleigh said. The benefit to unionized workforces is a happy side-effect.
So what’s the next step for this blended investment model? Employee ownership. Sleigh said that he’s working on a business model that would use ESOPs as an exit strategy. So, once a company was healthy, instead of putting it up for sale on the open market, an ESOP would be put in place to turn ownership over to the employees without requiring the massive debt that’s made recent ESOP use such a disaster (think: Sam Zell’s Tribune takeover).
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