Where to Turn When Portco Workers Strike
Labor strikes are at a 23-year high, but experts say PE sponsors have tools at their disposal to mitigate risk and improve outcomes with unionized workers
Labor unions again made U.S. headlines earlier this year, when the Supreme Court agreed to review a lower court ruling in a case involving union organizing efforts at a Tennessee Starbucks location. The case reached the court months after Starbucks employees at hundreds of locations across the country went on strike, organized by Starbucks Workers United, after unionization efforts at several stores stalled in the collective bargaining phase.
The Starbucks case is far from the only union-related headline to have reached front pages in the last year or so. Bureau of Labor Statistics analysis finds U.S. labor union strikes hit their highest volume in 23 years last year, involving workers in industries spanning food service to automotive, and healthcare to Hollywood.
Experts say they’re not surprised by the trend. “We are seeing a much greater level of interest on the part of employees who are not represented by unions and seeking representation,” says Steve Swirsky, a shareholder and co-chair of the Labor Management Relations practice group at law firm Epstein Becker & Green. He points to COVID-era strike activity that captured the nation’s attention and exposed more employees to the unionization opportunity.
As a result, adds Troutman Pepper partner Seth Ford, a grassroots movement has spread across smaller businesses, resulting in a higher volume of strikes across the country (though, he notes, not necessarily a higher number of employees on strike).
Experts say PE firms are responding by integrating unionization and labor strike risk analysis from deal sourcing through exit, and embracing new tactics to understand and mitigate risks.
Beyond Business Interruption
Historically, acquirers in industries like manufacturing have been well-versed in the risks posed by strikes. Labor disputes often arise around wages, employee benefits and working conditions. Automotive manufacturing labor union United Auto Workers, for instance, initiated strikes at General Motors, Ford and Stellantis factories last year after negotiations stalled as the union called for wage increases in response to rising inflation.
Related content: Midmarket Suppliers Brace for Impact Amid United Auto Workers Strike
New factors that result in labor disputes are quickly emerging, too. The 2023 SAG-AFTRA strikes were sparked by Hollywood screenwriters’ calls for guardrails against the use of artificial intelligence, for example.
As strike activity proliferates, acquirers across sectors are having to educate themselves on evolving worker concerns and the resulting strike risks they create.
For private equity investors, that risk can impact their ability to make changes and build value within a portfolio company. Swirsky says potential acquirers may be caught off-guard by ancillary impacts from labor strikes, and more broadly by labor disputes at unionized businesses. In cases of asset purchases, buyers may not be bound to a seller’s existing collective bargaining agreement, allowing the new owner to renegotiate terms with unions. But investors can still face hurdles when working to implement changes at an acquired company, depending on the extent of a union’s involvement, and must weigh the benefits of making changes against initiating labor disruption.
Swirsky recalls one case in which an acquirer sought to exit a multi-employer pension plan that a seller had been contributing to, because it would create potential withdrawal liability down the road. While that action may fit an investor’s growth model, it could also become a flash point with the union. “What that employer realized is that it wasn’t worth it on this go-around of negotiations to draw that line in the sand and risk a strike,” he says.
In another instance, an employer wanted to exit a health plan at a unionized business. “I sat down with the client and talked through the realities of how important that health plan is to a union and to the relationship it has with employees,” Swirsky notes. Ultimately, he says, the financials revealed exiting the health plan was not worth the strike risk.
Mitigating Risk, from Due Diligence to Exit
Mike Warech, Ph.D., a managing director at Centri Business Consulting and leader of its Human Resources Advisory Practice, agrees that strikes can cause “measurable damage” for a company and its PE sponsors. “But I do think there is room for common ground,” he says.
Experts agree that acquirers must maintain that common ground throughout the transaction life cycle. Many risks can be uncovered during due diligence, with potential for negotiations before a transaction clears.
Post-transaction integration is a crucial moment that experts say should include efforts to lean on third-party experts like mediators who understand unions.
“From what I’ve seen, a lot of private equity investors are still dipping their toes into the acquisition of portfolio companies that have unions in place,” says Troutman Pepper’s Ford. “They are leaning more heavily on outsourced professionals to provide support and guidance to those subsidiaries they’ve acquired and utilizing them to help understand the decision-making process, and perhaps most importantly, to understand better what operational needs are critical—what changes, if any, are really worth the risk exposure of a strike.”
From what I’ve seen, a lot of private equity investors are still dipping their toes into the acquisition of portfolio companies that have unions in place.
Seth Ford
Troutman Pepper
And when it comes time to sell a company, mitigating risks to quell buyer concerns is just as important. “If you’re the seller, you know what types of liabilities are going to be triggered,” notes Swirsky. “Are there commitments that have been made in terms of severance that the seller may have to pay? Is there going to be a withdrawal from the pension plan, which is going to create a significant liability for the sellers that may or may consume a significant part of the purchase price? These are all factors that go into it.”
When Strikes Happen
As evidenced by the current state of strike activity in the U.S., walk-outs are happening even with mitigation efforts. While PE sponsors and operators can take action to reduce the risk of a strike, experts urge investors to also put measures in place in the event that employees decide to walk out.
“An employer cannot give the impression to the union that the union could take advantage of walking out on strike, even if it’s for a short period of time, without the employer being ready for it,” emphasizes Ford. Collaborating with a staffing company to understand which roles will need to be filled in the event of a strike is one impactful strategy, he adds.
Swirsky notes that during the strike, sponsors and operators must have a clear understanding of what the impact will be, both on public and local community reaction to the strike, and its economic impact on the business.
Warech maintains that prioritizing common ground remains essential during a strike, too. “You have to have a really good understanding of what’s driving the dissatisfaction and get management involved quickly,” he says.
Ultimately, adds Warech, it’s important not to panic. Even if a strike happens, it doesn’t necessarily mean the consequences will be completely negative. Rather, the process of communicating and collaborating with a union to understand what striking workers are demanding can guide investors to a more effective value-creation plan. “Rather than the workers’ interests being inherently at odds with the business’s interests, aligning them through the collective bargaining process and paying attention to the employee experience can actually improve business outcomes and benefit all stakeholders in the equation,” Warech says.
At the same time, there are signs that the unionized workforce is growing more assertive with its demands. Warech pointed to cases in which unions are pursuing employee rights when voting on board members, for example.
Still, M&A activity in sectors with high union density is happening. With dealmaking volume expected to climb this year, opportunities to invest in businesses with a unionized workforce could climb with it.
Private equity firms are paying attention, and while sponsors may initially be spooked, there are resources at their disposal to mitigate risk. “There is probably a greater level of awareness (of strike risk), and what I’m seeing is, people don’t look at this as a one-size-fits-all issue,” says Swirsky. “There’s greater concern about it, but that doesn’t mean acquisitions are not taking place at unionized businesses.”
Carolyn Vallejo is ACG’s digital editor.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.
