In a piece from Dealbook written by Peter Lattman and Eric Lichtblau, the article writes about a lawsuit against PEs for colluding on some of the biggest deals in the past few years. The antitrust civil lawsuit was filed by former shareholders against 11 of the largest private equities (e.g. Blackstone, KKR, Bain) who claim that their “anti-competitive behaviors” had cost them higher bids. E-mail exchanges between executives were also used as evidence for cooperation between the funds. Does the lawsuit hold water or are the plaintiffs just a bunch of opportunistic butt-hurt shareholders looking to cash in on an inconclusive investigation by the Justice Department? You decide.
In September 2006, for instance, Blackstone and K.K.R. were both circling the technology giant Freescale Semiconductor. After a Blackstone group outbid a K.K.R. consortium to buy Freescale for nearly $18 billion, Hamilton E. James, the president of Blackstone, e-mailed his colleagues about Henry Kravis, the billionaire co-founder of Blackstone’s rival. “Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote.
PE’s working together isn’t anything new. It's not surprising that PE’s would collude since PEs regularly engages in consortium's to diversify risks in a deal. Depending on your vantage point, both sides have plausible arguments. If you’re a former shareholder who felt cheated from a significant return, it wouldn’t be difficult to imagine one’s resentment especially if the law is on your side. If you’re a financier, then you would know how expensive an acquisitions could be. In fact, cash has been building up lately as deals have been drying up. As a result, PEs have been paying higher multiples (10.6 from 10.3 price to EBITDA) for companies according to another article by Dealbook. Ultimately, even if the plaintiffs do win, it still wouldn't deter collusion; dealmakers could simply be more discrete with their communication channels.
Note: The plaintiff's lawyer is also an Obama supporter, with Romney cited in the case.
What do you think? From a legal standpoint, does the lawsuit have merit? From an ideological standpoint, should PEs be able to collude or does it do legitimate harm to capitalism in general?
The lawsuit is BS -it has no legal merit.
In the Freescale case, Blackstone and KKR put in rival bids. Blackstone’s was around $800 million higher, and KKR opted not to top it. The plaintiffs argue that KKR stopped not because of price, but because Blackstone offered it a piece of its "next big deal". That deal turned out to be Clear Channel, on which Blackstone and KKR did indeed partner up. But they got outbid by Bain and THL Partners [who also are alleged co-conspirators]. There was no "collusion" or "conspiracy". So there never was a "next big deal".
As you've mentioned, the plaintiffs' attorney is a guy by the name of Chris Burke. [Obama supporter]
Although the lawsuit is frivolous, I won't be surprised if the PE shops will settle in the end. Reason being, who would wanna see their case before a MA jury who's been hearing about the "evils" of Bain and Romney for the past year ?
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