Justice Probes Private Equity Firms
It's called private equity. But at a time of frenzied deal flow, the sector is increasingly drawing public scrutiny.
Citing sources close to the matter, The Wall Street Journal reported Tuesday that the Justice Dept. has opened an inquiry into potentially anticompetitive behavior by private equity firms. This comes at a record time for tag-team private equity dealmaking, marked by such leveraged buyouts as the $33 billion deal for HCA Inc. (HCA), the $22 billion bid for Kinder Morgan (KMI), and the $18 billion bid for Freescale Semiconductor (FSL).
Group buyouts are all the rage, with the more than $201 billion in deals announced this year representing more than six times the total for all of 2001. These collaborative efforts to take down outsized targets almost invariably include firms sporting multibillion dollar funds: Kohlberg Kravis Roberts & Co., Bain Capital, The Carlyle Group, and Silver Lake Partners are among this rarified elite.
Regulators are ostensibly worried about how collaborating buyout firms share information about acquisition targets—and the subsequent if/then scenarios that ultimately determine the number and prices of bids. In the worst case, the private equity world is essentially acting as one big syndicate, where otherwise competing firms may tamp down their competitive interests (and offers) in order to achieve the broader gain of a successful club deal.
The allegation is that the lack of competition keeps the takeout price for a company relatively low. Another line of inquiry: Do these clubs observe implicit agreements to avoid bidding up deal prices?
"Raising capital and limiting risk is the whole concept behind these private equity companies coming together," says Sean Boland, a Washington-based partner in the antitrust group of law firm Howrey LLP. "But what happens if you share information beyond that?"
Justice Dept. officials have reportedly sent letters to at least Kohlberg Kravis Roberts and Silver Lake Partners. BusinessWeek has learned that The Carlyle Group also received a letter from a Justice Dept. official, according to someone familiar with the matter. Bain Capital and The Blackstone Group declined to confirm or deny whether they received letters.
The letters ask the firms to cooperate voluntarily with an inquiry being conducted related to antitrust statutes by providing basic information related to transactions since January, 2003. Last year, private equity giants collaborated in the $15 billion takeout of rental car leader Hertz. Data backup concern Sungard was bought for just under $12 billion, and 2006 alone has seen an explosion of mega-size buyouts, including a $26 billion bid for casino operator Harrah's and a $14 billion club deal to acquire Spanish media player Univision Communications.
The probe, says Boland, has huge implications for sector rollups, where information is increasingly concentrated and valuable as the number of category players shrinks.
He thinks that target companies who in hindsight think they didn't get a fair bid from a group of private equity firms may be making investigative overtures to the Justice Dept. "There have been an awful lot of transactions, so you have a data-rich environment for regulators."
But Perrie Weiner, partner and international co-chairman of securities litigation at DLA Piper US, says it would be highly unlikely for club players to collude: "There are so many of them," he says. "There's too much dispersion.…There are always companies that believe that they were the target of some sort of collusive activity, but the truth is that no fund really wants to be outdone by another. It would be unusual to find evidence of an actual overt plan to collude together."
Weiner believes the Justice Dept. inquiry was sparked by a target company that post-buyout felt it was low-balled in what it originally believed was an open, fully competitive marketplace. "It could be a case of sour grapes by the company. These [cases] usually arise because there's some disgruntled individual or company that is unhappy with the transaction or how it occurred. If the company felt it did not get the best price it could have, it complains." He thinks it could all amount to nothing.
For his part, Boland thinks there is unmistakable regulatory signaling in the news: "If nothing else, the Justice Dept. is probably trying to tell private equity that it is subject to antitrust laws."