New Labor Strikes Deals With 'Private Equity Guys'
By Dale Russakoff and David Cho Washington Post Staff Writers Sunday, June 10, 2007; A01
The Steelworkers union has an investment banker working down the hall from its president. A Service Employees International Union organizer is becoming an expert on leveraged buyouts. The Machinists are loading up their research department with MBAs.
The embattled labor movement is learning to think like capitalists, but not by choice. As burgeoning private equity funds bought U.S. companies last year worth more than half a trillion dollars -- a tenfold increase in only three years -- unions are shoring up their diminished bargaining power to try to negotiate worker-friendly financial deals with these new masters of the universe.
"In the union, we learn everything flat on our butt," said Ron Bloom, in-house investment banker for the United Steelworkers of America. "We get hurt and we say we're not going to get hurt again."
Strategies are evolving as fast as the deals. The strongest unions have traded concessions for a share of eventual profits and for limits on how much money investors can take out of a business. Others have formed alliances with investors who honored labor commitments, becoming finders for potentially lucrative deals elsewhere.
The Steelworkers are labor's most seasoned financial dealmakers, going back to the 1980s and 1990s, when the industry shed more than 400,000 U.S. jobs. "Companies were going bankrupt and putting themselves up for sale and the private equity guys were the only ones who showed up," Bloom said.
Now private equity funds are swinging multibillion-dollar deals in coal, textiles, food processing, hotels, real estate -- every sector of the economy. Pooling money from the super-rich and financial institutions, the funds buy companies on the cheap and mortgage them heavily, aiming to restructure and sell them in three to five years at profits that far exceed those in the stock market. Because wages and benefits are the biggest costs in most companies, the strategy puts maximum pressure on workers, which is where unions come in.
"We want these investors to make a lot of money," said David McCall, a Steelworkers negotiator. "We just want them to view these companies as long-term investments because our workers obviously have long-term investments. It's their lives."
Unlike much of corporate America, more than a few wealthy investors have emerged from such deals with nice things to say about unions.
"We found that if you approach the union with a realistic request -- in that you are not cutting them just to pay interest or just so management can live in the lap of luxury -- and if you have a quid pro quo so that they can share in the profits, you get along reasonably well," said billionaire Wilbur L. Ross Jr. of his deals in steel and textiles.
Unions, which represent a record-low 7.4 percent of private-sector workers, are hardly dealing from a position of strength. Often their dealmaking serves to only limit inevitable losses, particularly in companies already in serious financial distress.
The tradeoffs were on clear display last month when DaimlerChrysler announced the sale of its Chrysler division to private equity fund Cerberus Capital Management.
Barely a month earlier, United Auto Workers President Ronald A. Gettelfinger characterized private-equity bidders as "strip and flip artists" and vultures "hovering overhead right now." He told them in so many words to buzz off, saying the UAW liked Chrysler where it was.
Then came the May 14 announcement, and Gettelfinger declared -- with all the zeal of a horse dragged to water -- that the sale to Cerberus was "in the best interest of our membership." The union was powerless to stop the deal, he conceded, and was determined to make the best of what once looked like the worst.
Other unions have adopted tactics as diverse as the industries they work in. The United Food and Commercial Workers union now routinely negotiates language requiring new grocery store owners to restore any initial wage concessions over the life of a contract. If investors cash out early, a poison-pill clause requires the new owners to make workers whole. The effect, according to UFCW research director Howie Forman, is to give the union leverage to force prospective buyers to the bargaining table.
Several unions have developed relationships with individual equity funds after forging deals that traded certain concessions for guarantees of job security or protection of retirement benefits. Bruce S. Raynor, president of the hotel workers union, Unite Here, said private equity firms Blackstone and Cerberus, which own hotels in major markets, have helped move traditional hotel chains to acquiesce to higher wages and organizing rights.
"These guys are not anti-union," Raynor said. "They're just pro-money."
Unions also have developed some street tactics -- discovering, for example, that they can discourage deals with objectionable buyers by threatening labor strife or hasten deals with worker-friendly investors by declaring readiness to cooperate.
It's a steep learning curve, and each deal is different, packing potential peril for workers, but also, for the wily negotiator, possible openings.
"If you're a business agent for the textile workers in North Carolina, and your mill is about to move to Mexico, and Wilbur Ross shows up, you're going to try to cut a deal with him," said Santa Clara University law professor Stephen F. Diamond. "You're not going to like it, but you're going to do it."
Steelworkers Set Tone
Labor's evolving approach to private buyouts started with the Steelworkers. The unionized industry was collapsing, jobs were vanishing and bankruptcies had left tens of thousands of retirees and widows without health coverage and with sharply reduced pensions. The union cast its lot with Ross in 2002 when he began buying bankrupt mills, freed of costly obligations to retirees.
Ross, dubbed by Fortune magazine the "king of bankruptcy," said he could restructure what remained of the major mills into a profitable business with dramatically lower labor costs. The union agreed to job cuts and sweeping reductions in work rules. In return, Ross bought out departing workers, shared profits with those who remained and diverted some of his gains to a health fund to assist retirees.
The union also devised a safety net in case Ross cashed out and moved on (which he did, in 2005, netting a reported $300 million). It negotiated a contract saying that any future owner would first have to agree to a new labor contract -- giving the union, in essence, a veto over bidders unwilling to meet their terms. The new owner, Mittal Steel, met them.
In some deals, the union has negotiated controls over executive compensation, how much debt investors can pile on a business and how much capital buyers have to invest.
The Steelworkers' Bloom emphasized that the gains are small compared to the wreckage of lives and communities before the restructurings. "These were horrible situations," he said. "Has there been a huge amount of devastation and pain our folks have suffered? Yes. We like to believe that in an awful environment, we've done as well as could be done."
The United Mine Workers had a different experience when Ross began buying distressed coal mines in 2004. One of his purchases was Horizon Natural Resources, a bankrupt operator of both union and non-union mines. Another was the Sago mine, where an explosion killed 12 miners last year. As in the steel industry, thousands of retirees had lost health coverage and were in financial crisis. Encouraged by the Steelworkers' partnership with Ross, UMW Secretary-Treasurer Daniel J. Kane wrote him to request a meeting.
"We never heard back," said UMW spokesman Phil Smith. Ross's International Coal Group now runs only non-union mines.
Labor experts say the miners' experience highlights the hard-line calculus workers confront in negotiating with private equity funds. The Steelworkers union remains a dominant presence in integrated steel mills while the far weaker miners' union did not have the leverage to force a new player to the table.
"Labor has found that these investors operate in a brutally, economically rational fashion," said AFL-CIO Associate General Counsel Damon A. Silvers, an expert in financial strategies. "They have financial targets and they have to hit them. If they have to deal with a union to get there, they'll deal with the union."
Labor's Ideal Deal
A model deal in the eyes of the labor movement was a buyout of three faltering Boeing factories by Onex Corp. of Toronto. Onex managing director Nigel S. Wright said his team told workers exactly what it wanted from them: a reduction of 1,700 of 10,300 jobs, elimination of long-standing work rules and a 10 percent pay cut. The Machinists and United Auto Workers unions named their price: "skin in the game," or a share of the profits when the company went public. Both sides signed off in June 2005.
The rebound came far sooner than anticipated. Revenue soared as the new company, Spirit AeroSystems, won contracts for the new Boeing 787 and also from Sikorsky Aircraft and Airbus. When Spirit went public in November 2006, workers who took the pay cuts each got checks averaging $30,000 plus 1,000 shares of Spirit stock, now worth $34,000. Another beneficiary was the Machinists' pension fund, which was an investor in Onex all along.
The model does not work, however, for unions of less-skilled workers. Onex could not have run the Boeing plants without the highly skilled machinists, just as Ross couldn't run his steel mills without the steelworkers. Hotel workers, janitors and orderlies lack such leverage.
As a result, the Service Employees International Union is reaching for political instead of financial leverage as private equity floods its world -- most noticeably, with the Blackstone Group's buyout of 580 major office buildings, many cleaned by SEIU janitors. With contract talks due next year, the union is running an aggressive public relations campaign, complete with a Web site, highlighting huge profits reaped by private equity investors and prodding the Democratic Congress to raise tax rates on them. The union is hoping the tax threat will move the industry to give workers a say in its deals.
Hotel workers are similarly vulnerable in buyouts, and several interviewed at Cerberus-owned hotels were far from confident about wage increases they recently won in contract talks.
"Right now we're in a better place than we were," said Mason Chung, a bartender at the Sheraton Waikiki in Honolulu. "But they could sell any time and I wonder where in that picture we will be then. We're just a little dot on a very large map that Cerberus controls."