Pomerantz LLP

Private Equity Firms Fail to Get Antitrust Case Dismissed

Pomerantz Monitor, May/June 2013 

Five years ago, investors sued 11 of the world’s largest private equity firms, including Kohlberg Kravis, TPG, Bain Capital, Apollo Capital Management and Goldman Sachs, on the grounds that defendants violated the antitrust laws by rigging the market for more than two dozen multibillion-dollar acquisitions of public companies, depriving those companies’ shareholders of billions of dollars they might have received in a true competitive bidding process. They claim that defendants had a gentlemen’s agreement not to outbid each other to acquire these companies. Defendants had tried nearly a dozen times in four years to get the suit tossed, with no luck. 

They were only partially successful this time. A federal judge in Boston has now refused to grant summary judgment dismissing the entire action. He narrowed the case significantly, however, dismissing all claims relating to 19 of the 27 deals that were targeted in the actions; and he dismissed JPMorgan Chase completely from the case. Nevertheless, he concluded that there was enough evidence of at least some collusion on eight of the deals among the rest of the defendants to take the case to trial. 

At the center of the case are “club deals,” acquisitions made by members of this “club” of private equity firms. Plaintiffs allege that there was a secret quid pro quo arrangement: If you don’t bid on my deal, I won’t bid on yours. 

In his summary judgment decision, Judge Harrington concluded that there was no grand conspiracy across all the 27 deals, but rather “a kaleidoscope of interactions among an ever-rotating, overlapping cast of defendants as they reacted to the spontaneous events of the market.” Yet he decided that there was enough evidence to sustain claims relating to 8 of the deals. 

As happens so often in litigation in the internet era, emails played a decisive role in this decision. Among them were comments from unnamed executives at Goldman Sachs and TPG in reference to the $17.6 billion takeover of Freescale Semiconductor by a consortium led by the Blackstone Group and the Carlyle Group. The Goldman executive said that no one sought to outbid the winning group because “club etiquette” prevailed. “The term ‘club etiquette’ denotes an accepted code of conduct between the defendants,” the judge wrote. “The court holds that this evidence tends to exclude the possibility of independent action.” 

Another email, from a TPG official said, “No one in private equity ever jumps an announced deal.” The judge also pointed to an e-mail sent by the president of Blackstone to his colleagues just after the Freescale deal was announced. “Henry Kravis [the co-founder of K.K.R .] 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.” 

The court singled out the $32.1 billion buyout of the hospital chain HCA as particularly problematic. K.K.R. expressly asked its competitors to “step down on HCA” and not bid for the company, according to an e-mail written by a then partner at Carlyle who is now the CEO of General Motors. One e-mail from Neil Simpkins of Blackstone Group to colleague Joseph Baratta said, “The reason we didn’t go forward [with a rival HCA bid] was basically a decision on not jumping someone else’s deal.” Baratta said, “I think the deal represents good value and it is a shame we let KKR get away with highway robbery, but understand decision.” 

KKR’s $1.2 billion investment in HCA has nearly doubled in value to $2 billion in four years.