February 25, 2008
Club Deals in Private Equity Buyouts
There has long been a question about whether potentially competing private equity firms all after the same company could agree amongst themselves to make a joint offer, a club deal, rather than compete with each other on price. Is the joint offer a version of "price fixing" or "auction rigging" in violation of state and federal antitrust style statutes? A federal court in Seattle says no. The court dismissed an antitrust action brought against Vector Capital and Francisco Partners for a club deal to buy Watch Guard Technologies for $151 million. Several other similar actions are pending on other buyouts. Until clear antitrust standards are developed for club deals, the threat of antitrust litigation may well discourage deals that otherwise could close. These actions ought to be difficult to win because the public nature of any auction means than all buyout firms, as well as strategic acquirors, are potential bidders. A club deal for a discount price should, in theory, tempt other bidder to ante up. Strong evidence of a heavily constrained bidding market ought to be required to stop any given club deal.
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