Job Protection : Takeovers--Workers Join Fray
In recent months, waitresses and maids, represented by the Hotel Employees and Restaurant Employees union, petitioned casino authorities here and in Atlantic City to force Holiday Inn’s parent corporation to protect workers’ salaries and benefits against the risk of bankruptcy posed by the company’s $2.5-billion recapitalization program.
In early April, United Airlines’ pilots, fearing that the company would become the object of a hostile takeover bid, offered to buy the carrier for more than $4.5 billion.
Late last August, thousands of retail clerks and meat cutters, represented by the United Food and Commercial Workers, sued Safeway Stores for fraud in Oakland in the midst of a leveraged buyout that the union believes will lead to massive layoffs at the supermarket chain.
Innovative Methods
As these examples illustrate, employees and their unions throughout the country are attempting to cope in innovative ways with the massive wave of mergers and hostile corporate takeovers that have swept the nation in recent years. The takeover wave, according to the AFL-CIO and a growing number of economists and politicians, has had a devastating effect on workers and communities.
About 80,000 union jobs have been eliminated as a result of mergers in the last five years, according to the AFL-CIO. Other studies say that takeover fights have dislocated upward of 500,000 workers, but there is no definitive research on the topic.
Additionally, increased merger and acquisition activity has tended to lower wages, according to a recent study by Richard S. Belous, labor economist with the Conference Board, a New York-based business research organization.
‘Most Important Issues’
“The impact of mergers and acquisitions on unions is one of the most important issues facing the labor movement today,” said Charles Craypo, professor of economics at Notre Dame University.
In response, the AFL-CIO and several unions are pushing a variety of legislative proposals on Capitol Hill in an attempt to put some brakes on merger mania and to give workers--both union and non-union--greater protection from the adverse results of corporate takeovers.
They also are taking their case to the public in other ways. In late March, members of the Hotel Employees and six other unions held a demonstration at the Wall Street office of Drexel Burnham Lambert contending that the firm’s role as a financier of corporate takeovers has led to quick profits for a few individuals and companies but job losses, lower wages, worsened working conditions and other hardships for thousands of employees.
Joe Uehlein, director of special projects for the AFL-CIO’s Industrial Union Department, said that in February the department held a first-of-its-kind seminar for union officials on the effect of mergers and acquisitons on collective bargaining. He said the meeting “clearly reflects the realization that we need to be players in this corporate change game.”
“There’s now a willingness to say that in order to represent people we need to play a role in affecting the outcome of a transformation in corporate structure or control,” said Randy Barber, who has served as a financial adviser to several unions and is the director of the Center for Economic Organizing in Washington.
Barber acknowledges that in most instances there is no way a union can stop a merger. Nonetheless, Barber said labor’s efforts at protecting its members from the negative effect of corporate takeover wars are bearing some fruit.
For example, Barber noted, in 1985, the Amalgamated Clothing and Textile Workers was able to help block a management-proposed $400-million leveraged buyout at Scott & Fetzer Co., a Westlake (Ohio)-based company. In a leveraged buyout a company is purchased with borrowed money that is secured by a company’s assets. The money is repaid with cash generated by company operations or by sale of its assets.
Stock Ownership Plan
Bill Patterson, the Clothing Workers’ national field representative in Washington, said the union became involved when representatives of one of Scott & Fetzer’s subsidiaries told workers during an organizing campaign that if they voted for the union they would not be able to participate in an employees stock ownership plan that was being created to help finance the buyout.
Barber said the union persuaded the Labor Department to block creation of the stock plan on the grounds that it was unfair to employees. “Because the ESOP (employees stock ownership plan) was crucial to the financing of the entire transaction, the deal fell apart after the Labor Department intervened,” Barber said.
The Safeway suit, filed by members of the United Food and Commercial Workers, is clearly a test case. The suit claims that 117,000 members of the food workers union at Safeway have what amounts to creditors’ rights--stemming from wage and work rule concessions they gave the company earlier--that were violated when the chain went private last July in a $4.2-billion leveraged buyout. (The union estimates that ultimately 15,000 workers will lose their jobs as a result of the deal.)
The case, filed by San Francisco attorney Richard McCracken, asserts that the buyout is, in essence, a “fraudulent conveyance” of assets. This means that Safeway transferred assets in a manner that will deprive union members of vacation pay and other benefits that they are owed.
Safeway contended in documents filed with the court that the union does not have standing to file the suit and that the California fraudulent conveyance law is inapplicable. But the suit survived an initial court challenge by the company and is proceeding.
Negative Effects Detailed
During hearings held by the Senate Committee on Banking, Housing and Urban Affairs in early April, several labor leaders described the negative effect of takeovers on members of their unions, including the loss of jobs at numerous companies in a variety of industries.
Tom Donahue, secretary-treasurer of the AFL-CIO, explained how workers lose their jobs in these situations. “The job loss (at an individual company) is the direct result of the need of the acquirer--or of the target which has successfully resisted a raid--to sell off assets in order to retire some of the heavy debt created by the takeover process,” he said.
The AFL-CIO is supporting legislation that would strengthen the restrictions on and penalties for insider trading, require quicker disclosure of large stock purchases by speculators, enhance shareholder democracy, change the tender offer process, prevent collusive sales of assets to incumbent management and outlaw “greenmail”--in which a company purchases its stock from a corporate raider at a premium price.
Additionally, the federation advocates several other measures that would specifically protect workers.
Donahue said the federation is calling for legislation that would mandate that all contracts voluntarily entered into by a corporation--including collective bargaining agreements--should be binding on the corporate successors or new owners for the term of such contracts.
“To allow such pre-existing contracts to be ignored if a reorganization occurs incites restructuring for the sole purpose of whatever gains can be achieved from breaching contractual commitments,” he said, noting that some mergers have been consummated with the specific intent of nullifying an existing labor agreement.
The AFL-CIO also contends that corporate acquisitions should not be financed by tapping a pension fund for so-called “surplus funds”--those assets in excess of the estimated projected payments of the plan.
‘Golden Parachutes’
Finally, the labor federation maintains that top managers of an acquired company should not be permitted to escape from a reorganization on so-called “golden parachutes”--lavish severance benefits that protect top officers in the event of a takeover or other financial problems--at the expense of rank-and-file workers.
“Just as employers are, at present, prohibited from discriminating in favor of highly compensated employees in paying retirement benefits, employers should likewise be prohibited from engaging in such discrimination with respect to contingent severance benefits, such as those provided by a golden parachute agreement,” Donahue told the Senate committee.
Labor may not achieve all of its legislative goals, but individual battles can be expected to continue.
Two of the most interesting involve workers at opposite ends of th economic spectrum--the well-paid United Airlines pilots and the low-income maids working for Holiday Corp.
In several instances in the past, unions attempted to buy companies only as a last-ditch measure when a financially ailing firm was on the verge of bankruptcy. Belous of the Conference Board said the pilots’ move to buy United, a thriving company, shows how the unions have advanced beyond what he calls “lemon socialism.”
In announcing their bid, the pilots, who had planned the move for a year, said they feared they would be left out in the cold in the event of a takeover, which has been rumored.
“Lacking influence in the company’s management, we are concerned that events beyond our control may result in a transaction being forced on the company with consequent traumatic disruption in its business and operations, loss of jobs and the realization of less than maximum values for its stockholders,” noted a letter from F.C. (Rick) Dubinsky, chairman of the Air Line Pilots Assn. Master Executive Council in a letter to Richard J. Ferris, chairman of United Airlines Inc.
Offer Not Accepted
Thus far, United is spurning the pilots’ offer.
But the pilots have made it clear that they won’t give up easily. Late last month, Salomon Bros., the New York-based investment banking firm, announced that it could raise $1.5 billion to help finance the pilots’ takeover. The union is currently seeking additional financing from commercial banks and is looking for a partner to further its efforts.
The battle between the Hotel Employees and Holiday Corp., the parent firm of Holiday Inn hotels and Harrah’s Casinos, stems from the company’s decision last November to undergo a massive recapitalization in an attempt to insulate the hotel chain from a hostile takeover attempt by financier Donald Trump or other raiders.
The recapitalization plan calls for Holiday to raise $2.4 billion through a combination of bank financing and the sale of bonds or other debt securities. The huge debt will increase Holiday’s interest costs substantially and, according to its own proxy materials, it will be required to sell almost all of its 110 hotels to help pay the increased interest. The corporation would retain ownership only of casino properties in Nevada and New Jersey, although it would continue to manage the other 110 on a contract basis.
About $1.6 billion of the money raised would be used to pay a $65-per-share dividend to stockholders, and the balance would go to refinance existing debt.
The plan also provides lucrative incentives for the company’s top managers, who will be rewarded by dividing among themselves 10% of the company’s stock. The present value of severance agreements for five ranking Holiday officials exceeds $1 million each, topped by $11.8 million for Michael D. Rose, the company’s chairman and chief executive officer. The plan also insulates the top officials from lawsuits if the deal fails.
$80-Million Bond
In late February, armed with data prepared by union researcher Mark Atkinson, Jeff McColl, chief executive of the Hotel Employees’ large Las Vegas local, asked the Nevada Gaming Control Board to order Holiday to post an $80-million bond on behalf of 6,000 employees at three Nevada casinos, including 750 who are represented by the union here. (The workers at Harrah’s Reno and Harrah’s Lake Tahoe, also owned by Holiday Corp., are unorganized. Nationwide, Atkinson said, the union represents about 15,000 Holiday Corp. workers.)
At about the same time, Hotel Employees Local 54 in Atlantic City asked the New Jersey gaming regulators to compel the hotel chain to post a $30-million bond to guarantee the wages and benefits of 2,500 workers (1,100 of whom are unionized) at Holiday’s Harrah’s Marina Casino in Atlantic City for a year.
Atkinson, a Yale graduate who specializes in financial analysis for the union, noted that the company’s own proxy materials state that the plan contains a number of risks, including the possibility of default.
He noted that in the last year casinos in both Nevada and New Jersey have declared bankruptcy, leading in one instance to the abrogation of union contracts and the prospect that other employers, in turn, would demand concessions to remain competitive. “We’re not waiting for a disaster to happen before we request those bonds, because by then it would be too late,” Atkinson said.
“It is our perspective that with this enormous debt the first place the company will come to cut costs is wages and benefits,” he added. “We’re anticipating significant layoffs. There has to be some way of protecting the workers. It’s clear that the gaming boards in New Jersey and Nevada have the authority to do something.”
The gaming industry is one of the few places where unions have a direct method for raising questions about corporate mergers and recapitalizations. By statute in Nevada and New Jersey, companies have to demonstrate that they have sufficient capital and financial stability to maintain casino operations.
In late March, the New Jersey Gaming Control Commission awarded a partial victory to the hotel workers. After a two-day hearing, the commission ruled by the minimum 4-1 vote that Holiday Corp,’s financial stability could be maintained under the recapitalization plan. However, the commission imposed two conditions--that the firm maintain a working capital balance of $11 million and that it set aside a $5.5-million reserve fund to guarantee workers’ wages and benefits for one month in the event that problems arose.
Carl Zeitz, the New Jersey commissioner who cast the swing vote, conditioned his approval of the Holiday Corp. plan on the creation of the reserve fund for workers. He explained his rationale in a telephone interview: “The shareholders’ interests were being looked after and the management’s interests were being protected, but we had another obligation under our charge. The primary public purpose of casino legalization in Atlantic City was the economic revitalization of the city. Employment is the basic building block of economic redevelopment. Therefore that interest had to be given some consideration and protection.
“I think we have all watched, first with fascination and then with mounting alarm, the manipulation of our capital markets,” Zeitz added. “One of the things that Congress has to focus on is the dislocation that manipulation is causing to employment. Corporations are plunging themselves into massive debt and one of the consequences is they are reducing operations, selling assets, producing less and laying off thousands of workers. There’s got to be something wrong with all that. Except for the people receiving bloated investment and legal fees and an acquisitive and arrogrant management class that’s benefiting, who is being served?”
Different in Nevada
Barton Jacka, chairman of the Nevada Gaming Control Board, believes otherwise. A few days after the New Jersey commission acted, he informed the Hotel Employees here, by letter, that its claims were too speculative, noting that Holiday Corp. had not had financial trouble in the past. “Although certain aspects of the recapitalization undoubtedly pose risks to the operation of the company, at the present time there is no evidence that the gaming licensees will be actually impaired in their ability to satisfy the financial requirements imposed by state law.” No public hearing was held.
Holiday Corp. officials have maintained that their plan is sound. And Philip G. Satre, chairman of the company’s gaming division, asserted in February that the union’s actions were merely an attempt to gain leverage to get the company to agree to allow the union’s cash-rich Southern Nevada pension plan to be merged with its national pension fund. Union officials vociferously denied that charge and in mid-March filed a $50-million libel suit against Holiday Corp., Satre and another company official.
Subsequently, the union appealed Jacka’s decision to the Nevada Gaming Commission and John Wilhelm, a Hotel Employees international vice president, said that the union is prepared to go to court if it does not prevail at the commission. He and Atkinson also indicated that the union was contemplating action of the same nature here and in New Jersey to protect workers who may be adversely affected by the current takeover battle raging around Caesars World Inc., which owns casinos in Las Vegas, Lake Tahoe and Atlantic City.
Belous of the Conference Board called the Hotel Employees strategy “brilliant. It’s moving organized labor into dealing with one of the key variables--the capital market--which they haven’t dealt with.”
Barber, the labor strategist, praised the actions of the Hotel Employees while acknowledging that few unions currently could take advantage of their tactics. He also lauded the long-term approach of the United pilots while noting that not every union would be able to raise the money to buy a large company. Barber also acknowledged that a healthy percentage of union members still have reservations about workers becoming owners of companies, often because they fear employee ownership sets up inherent conflicts that erode worker solidarity.
In fact, he said, there is no “magic bullet” for unions in the takeover wars. “It totally depends on circumstances,” he said. “Sometimes you find something that is absolute dynamite, and sometimes you find absolutely no handle at all and you have to go back to the trenches. . . . But as long as the environment promotes corporate takeovers, unions don’t have any choice but to get involved.”
