Private Equity Antitrust Inquiry Richard M. Steuer
Questions How real is the risk? How do you continue doing deals? What s next? What do you need to know? 1
Initial Reports October 10 press reports: New York field office, Justice Department Antitrust Division letters to: Kohlberg Kravis Roberts Carlyle Group Clayton, Dubilier & Rice Silver Lake Partners Subsequent letter to: Merrill Lynch 2
Seeking general information on voluntary basis, regarding business practices and deals since 2003 3
Private Class Action November 15 Private antitrust class action (S.D.N.Y.) on behalf of former shareholders of companies sold to private equity funds at below market rates 4
Companies Listed Univision HCA Harrah s Linens n Things Jacuzzi, Metals USA Sourcecorp Michaels Stores OSI Restaurant Systems Warner Chilcott Burlington Coat Factory Sungard Data Systems Freescale Semiconductor CarrAmerica Realty La Quinta Wyndham Extended Stay America Meristar Hospitality HealthMarkets, Inc. Boca Resorts Prime Hospitality Kinder Morgan Open Solutions Toshiba Ceramics P&I Personal & Informatik Breed Technologies Masonite International Yankee Candle Kerzner International Education Management Corp. Serena Software Pacific Edge Software Neiman-Marcus Group Aleris International Petco Intergraph Lenovo Group Aramark West Corp. Somera Communications Sintex Industries Vaibhav Gems 5
Defendants Clayton, Dubilier & Rice Silver Lake Partners Blackstone Group Bain Capital Thomas H. Lee Partners Texas Pacific Group Madison Dearborn Partners Apollo Management Providence Equity Partners Merrill Lynch Warburg Pincus 6
Plaintiffs Counsel Wolf Haldenstein Adler Freeman & Herz 7
Justice Department Inquiry Suspected conduct resembles bidders for art, antiques and used machinery prosecuted years ago To understand where government coming from, helpful to understand those prosecutions 8
Auction Cases Bidders formed auction pools One bid; others sat out or made dummy bids Afterwards, private auction among themselves Difference in price divided among pool members 9
Auction Cases Distinguishing feature: Secrecy Otherwise, seller could consent or not, but not misled 10
Bidding Pools Not all bidding pools unlawful Legitimate reasons to form pools: Need for funds Need for expertise Need to spread risk 11
Bidding Pools Justice Department endorsed formation of joint venture pools years ago Pools formed for legitimate reasons and not secret are not anticompetitive 12
Justice Department Inquiry Reportedly, government interested in whether, after funds form pools (or clubs ), other funds forebear from forming competing pools on understanding that they will enjoy similar treatment when forming pools of their own in future deals Also, government may be interested in whether funds not originally included in pool are invited to participate after pool succeeds in buying company 13
Private Class Action Private suit alleges that in going private transactions 1) Once a firm or group signed a definitive agreement others could not submit competing bids 2) Funds formed clubs to submit only a single bid 3) Losers were given a piece of the deal after company taken private; and 4) Funds shared information to limit bids and depress prices 14
Antitrust Applicability Threshold issue: Whether antitrust laws apply or the SEC has exclusive jurisdiction. 15
Credit Suisse v. Billing Last June, Supreme Count asked views of Solicitor General in case involving claimed antitrust liability for IPO underwriters Second Circuit had ruled antitrust liability possible Solicitor General filed brief November 9th, urging Supreme Court to examine scope of antitrust immunity 16
Exposure? Felony: Fines of up to $100 million or more For individuals, fines of up to $1 million plus up to ten years in jail Private class actions: Automatic treble damages plus attorneys fees Joint and several liability No right of contribution 17
Real Trouble? Consortiums not secret Capital and expertise needed to make these bids Value of spreading risks Existence of many sources of capital = difficult to show pools unreasonably anticompetitive 18
Plus Without evidence of actual agreements, difficult to prove collusion Potential bidders not obligated to bid or form competing groups Parallel decisions by similarly-situated businesses facing same economic circumstances do not prove conspiracy 19
What s Next? So far, government inquiry on least formal basis: Voluntary request letters, not civil investigative demands or subpoenas Private action brand new: How much activity likely before government makes next move? 20
Impact on Health of Private Equity Funds? Government inquiry: Prophylactic effect Attention Sensitizing Private action: Expensive to litigate Settlement value even if no merit? 21
How to Protect Yourself? Business as usual? Consortiums? Post-acquisition arrangements? Quid pro quo? Communication? 22
Remember: Competition, competition, competition 23