Where to go if Portco workers go on strike?

Experts say they are not surprised by the trend. “We are seeing a lot more interest from workers who are not represented by unions and are seeking representation,” says Steve Swirsky, shareholder and co-chair of the labor relations practice group at law firm Epstein Becker & Green. He points to strike activity during the COVID era that captured the nation’s attention and opened the possibility of unionization to more workers.

As a result, adds Seth Ford, a partner at Troutman Pepper, a grassroots movement has spread in smaller companies, leading to a larger number of strikes across the country (though, he notes, not necessarily a larger number of striking employees).

Private equity firms are responding by conducting unionization and strike risk analysis from deal closing to exit, and using new tactics to understand and mitigate the risks, experts say.

More than just business interruption

In the past, buyers in industries such as manufacturing have been aware of the risks of strikes. Labor disputes often arise over wages, benefits and working conditions. For example, the United Auto Workers union initiated strikes at General Motors, Ford and Stellantis factories last year after negotiations stalled because the union demanded wage increases in response to rising inflation.

Related content: Medium-sized suppliers are preparing for the impact of the United Auto Workers strike

New factors leading to labor conflict are also emerging quickly. The 2023 SAG-AFTRA strikes, for example, were sparked by Hollywood screenwriters’ demands for guardrails against the use of artificial intelligence.

Given the increasing strike activity, clients across all sectors need to keep themselves informed about the changing concerns of employees and the resulting strike risks.

For private equity investors, that risk can affect their ability to make changes and increase the value of a portfolio company. Swirsky says prospective buyers could be surprised by the side effects of labor strikes and, more generally, labor disputes in unionized companies. In asset purchases, buyers may not be bound by a seller’s existing collective bargaining agreement, allowing the new owner to renegotiate terms with unions. But investors can still face obstacles when trying to implement changes in an acquired company, depending on how involved a union is, and must weigh the benefits of making changes against initiating labor stoppages.

Swirsky recalls a case where a buyer wanted to exit a multi-employer pension plan that a seller had contributed to because it would lead to a potential exit obligation later. While this move might fit into an investor’s growth model, it could also become a point of contention with the union. “This employer realized that it wasn’t worth drawing a clear line and risking a strike in this round of negotiations,” he says.

In another case, an employer wanted to opt out of a unionized company’s health plan. “I talked to the client about how important that health plan was to a union and to the relationship with employees,” Swirsky notes. Ultimately, he says, the financials showed that opting out of the health plan wasn’t worth the risk of a strike.

Risk minimization from due diligence to exit

Mike Warech, Ph.D., managing director at Centri Business Consulting and head of executive search, agrees that strikes can cause “measurable damage” to a company and its PE sponsors. “But I think there’s room for some common ground,” he says.

Experts agree that buyers need to maintain this common ground throughout the transaction cycle. Due diligence can uncover many risks and there is an opportunity to negotiate before a deal is approved.

Post-transaction integration is a crucial moment and experts say it should also consider involving external experts such as mediators who are familiar with unions.

“From what I see, many private equity investors are still trying to acquire portfolio companies where unions are present,” says Ford of Troutman Pepper. “They rely more heavily on outside professionals to support and advise the acquired subsidiaries. They use them to understand the decision-making process and, perhaps most importantly, to better understand what operational needs are critical – what changes, if any, are really worth the risk of a strike.”

As far as I can see, many private equity investors are still venturing into acquiring portfolio companies in which unions are represented.

Seth Ford

Trout pepper

And when it’s time to sell a business, it’s equally important to mitigate risks to address the buyer’s concerns. “As a seller, you know what types of liabilities will be triggered,” notes Swirsky. “Are there severance obligations that the seller may have to pay? Will there be a retirement plan payout that will be a significant liability for the seller, potentially eating up a significant portion of the purchase price? All of those factors come into play.”

If there are strikes

As the current strike situation in the US shows, work stoppages continue to occur despite all efforts to contain strikes. While private equity sponsors and operators can take steps to reduce the risk of strikes, experts are urging investors to also take measures in case employees decide to go on strike.

“An employer must not give the union the impression that it can take advantage of a strike, even if it is short-lived, without the employer being prepared for it,” Ford stressed. One effective strategy is to work with a staffing agency to find out which positions need to be filled in the event of a strike, he added.

Swirsky points out that during the strike, sponsors and operators must have a clear understanding of what impact the strike will have, both in terms of the public and local community response to the strike and its economic consequences for the company.

Warech believes it is important to find common ground even during a strike. “You really have to know exactly what is causing the dissatisfaction and get management involved quickly,” he says.

Ultimately, Warech adds, it’s important not to panic. Even if a strike does occur, that doesn’t necessarily mean the consequences will be entirely negative. Rather, the process of communicating and working with a union to understand what striking workers are demanding can guide investors toward a more effective value creation plan. “Instead of workers’ interests inherently being at odds with the company’s interests, alignment through the collective bargaining process and considering employees’ experiences can actually improve business outcomes and benefit everyone involved,” Warech says.

At the same time, there are signs that unionized workers are becoming more confident in asserting their demands. Warech pointed to cases in which unions asserted workers’ rights, for example in the election of board members.

Nevertheless, there is M&A activity in industries with a high union density. With deal volumes expected to increase this year, opportunities to invest in companies with unionized workforces may also increase.

Private equity firms are paying attention, and while sponsors may be initially spooked, they have resources at their disposal to mitigate the risk. “There’s probably a higher awareness (of strike risk), and I see that people don’t see it as a problem that’s the same for everyone,” Swirsky says. “There’s more concern about it, but that doesn’t mean there aren’t buyouts at unionized companies.”

Carolyn Vallejo is ACG’s digital editor.