More Thoughts on SEIU Report

The Service Employees’ International Union has issued a 44-page report that essentially asks buyout firms to share their prosperity with portfolio company workers. I wrote a bit about it yesterday, and had a few more thoughts once I woke up this morning. So here goes:

*** Are you thinking something along the lines of: “Who cares what SEIU says? They don’t understand private equity.”

If so, pull yourself out of the LBO cocoon for a moment, and trust me when I tell you that what SEIU says matters – whether you agree with its underlying facts or not. Not only is it the nation’s largest labor union with 1.8 million members, it is expected to keep growing as America transitions more and more into a service economy. In other words, SEIU has clout (particularly with Democrats in charge of Congress).

*** I am sympathetic to SEIU’s basic premise: Portfolio company workers should share in a company’s success. After all, a buyout firm or CEO might come up with strategies for success, but only the workers can implement them. We’re talking basic fairness here. A handful of buyout deals have resulted in employee stock options, for example, but this is still the exception rather than the rule. It shouldn’t be.

We already know that the opposite is true: Workers suffer from a company’s failure – usually by losing their jobs or benefits.

*** It’s worth noting that SEIU also included portfolio company management in the above conversation, but I’m not so sure it’s as pressing an issue. More and more buyout firms already are granting options to senior management, or asking them to contribute equity to the initial buyout. For example, there was that story about SunGard’s CEO Cris Conde asking a dozen or so managers to write down what would be a “meaningful” personal equity contribution on a piece of paper, and then put the paper in an envelope. Conde accepted each contribution. But, in cases where management doesn’t have a stake, it should.

*** SEIU is proposing far greater transparency prior to transaction closes. This would include GP income, company-specific restructuring plans, specifics about debt plans and risks associated with that debt. This is a total wishlist, because it basically asks private equity firms to share what they legitimately consider to be trade secret (save, perhaps, for GP income).

For example, imagine that Blackstone is bidding $25 per share for a company, while KKR is bidding $27 per share. The discrepancy is caused by KKR having spotted an operational inefficiency that Blackstone did not. If forced to disclose that item, Blackstone might raise its bid — thus negating KKR’s competitive advantage.

I raised this scenario with the SEIU guys, who responded that if correcting the “operational inefficiency” would result in the loss of thousands of jobs, then they don’t have much sympathy for the sanctity of trade secret. In other words, we might have a stalemate.

One possible compromise would be for buyout firms to keep most biz plan issues confidential, but to reveal any expected large-scale layoffs or benefit changes. KKR, for example, just publicly promised to job cuts or close stores at Alliance Boots, were it to buy the company. Of course, it would be a much different case were Boots a turnaround situation.

*** A bigger issue is enforcement. Assume for a moment that LBO firms agreed to disclose employee plans prior to a buyout close. What then? What if they lied? Or what if the situation changes? Very few LBO firms know exactly what they’re getting when they buy into a company – no matter how good the due diligence. In almost every case, new owners unearth some employment-related plusses and minuses. How would firms be held to their promises, or even should they be? Extra regulation? I just don’t see any viable means of enforcement here.

*** Private Equity Council chief Doug Lowenstein issued a brief statement in response to the SEIU report, in which he criticized the union for not also noting that “the largest investors in private equity are public employee pension funds, foundations, and universities who have flocked to the sector because top PE firms have generated returns more than triple the S&P 500.” SEIU itself does not serve as a limited partner in PE funds, but acknowledged

Lowenstein’s basic point during yesterday’s conference call. It declined, however, to concede that such pensioners have done better with PE than they could have with other investments. Instead,they said they hadn’t done the math, because each pensioner contribution is different, and would have to be matched against what else he/she would have invested in. Methinks S&P 500 is still a good control index.