woman signing contract on clipboard
Tuesday, October 31, 2017
Tom Snee

A new study by finance professor Erik Lie suggests that companies often deal with contentious unions by selling their unionized operations to other businesses, who can then disregard existing labor contracts.

The research shows that unionized firms are more likely than non-unionized firms to sell plants, offices, and other assets if the union employees have high pay, there has recently been a labor strike, and the firms are located in states without right-to-work laws where unions are most powerful. 

Lie says the results also show that selling these assets helps the unionized firm lower union pay, leading shareholders to bid up the stock price.

Lie says firms are more apt to use sales of union assets rather than engage in a merger/acquisition because federal law requires firms that do an M&A deal to honor existing contracts. Firms that acquire a unionized asset are not required to honor its labor contracts.

The study looked at more than 10,000 asset sales, mergers, and acquisitions between 1987 and 2009. It found that unionized firms are 7 percent more likely to sell assets than non-unionized firms, likely to avoid the requirement to recognize existing labor contracts.

If a division is newly unionized, there is a 5 percent higher probability it will be sold within two years. However, union victories lead to a lower likelihood of a merger or acquisition.

The study found 28 percent of contract negotiations that resulted in strikes led to the sale of that division in the same year; but fewer than 16 percent of negotiations that did not lead to a strike led to a sale. This suggests firms use asset sales as a way of managing union workforces.

Finally, Lie says that after a sale, the buyer was able to extract significant concessions from the union when negotiating a new contract. In cases of mergers or acquisitions, wages remained stable.

The study, “Union Concessions Following Asset Sales and Takeovers,” was co-authored with Tingting Que of the University of Alabama in Huntsville and is published in the current issue of the Journal of Finance and Quantitative Analysis.