Thursday, March 14, 2013
The antitrust action in the Federal district court in Massachusetts against the private equity industry is back in the headlines. We looked at this last after the New York Times successful motion to unseal the complaint against the industry. In response to a motion for summary judgment, Judge Edward Harrington permitted the lawsuit to survive the motion in part, but narrowed it in important ways. The case deals with two claims. First, there is a specific claim with respecet to the HCA transaction. In that allegation, the plaintiffs claim that there was an agreement for other PE firm to step down from competing for HCA. In the second claim, plaintiffs allege an industry-wide conspiracy not to compete in post-signing auctions for sellers.
In the 38 page_order (which includes more PE email excerpts), Judge Harrington made some useful observations about the use of deal protections and the private equity industry and the plaintiffs allegations. Judge Harrington summarized the plaintiff's allegations of clubbing in the following way:
Plaintiffs assert the rules to be as follows: First, Defendants formed bidding clubs or consortiums, whereby they would band together to put forth a single bid for a Target Company. The Plaintiffs assert that the purpose of these bidding clubs was to reduce the already limited number of private equity firms who could compete and to allow multiple Defendants to participate in one deal, thereby ensuring that every Defendant got a “piece of the action.” Second, Defendants monitored and enforced their conspiracy through “quid pro quos” (or the exchange of deals) and, in the instances where rules were broken, threatening retaliatory action such as mounting competition against the offending conspirator’s deals. Third, to the extent the Target Company set up an auction, Defendants did their best to manipulate the outcome by agreeing, for example, to give a piece of the company to the losing bidders. Fourth, Defendants refused to “jump” (or compete for) each other’s proprietary deals during the “go shop” period. This gave Defendants the comfort to know they could negotiate their acquisitions without the risk of competitive bidding.
For the most cynical observers in the pile, this is a pretty good description of the way private equity goes about its business and suggests a conspiracy or at least an industry custom of not competing in post-signing auctions. With respect to the HCA transaction, the plaintiffs allegations were enough to survive at this very early stage (which is deferential to the plaintiffs):
While some groups of transactions and Defendants can be connected by “quid pro quo” arrangements, correspondence, or prior working relationships, there is little evidence in the record suggesting that any single interaction was the result of a larger scheme. Furthermore, unlike other cases where an overarching conspiracy was found, here there is no single Defendant that was involved in every transaction or other indication that the transactions were interdependent.
When pressed at the second day of oral argument for the evidence supporting the “larger picture,” the Plaintiffs largely abandoned the above arguments to focus on the following statement by a TPG executive regarding the Freescale transaction, a proprietary deal: “KKR has agreed not to jump our deal since no one in private equity ever jumps an announced deal.” Plaintiffs contend that this statement, in combination with the fact that Defendants never “jumped” a deal during the “go-shop” period, as well other statements such as the Goldman Sachs executive’s observation that “club etiquette prevail[ed],” with respect to the Freescale transaction, provides a permissible inference of an overarching conspiracy.
The statement that “no one in private equity ever jumps an announced deal” and the fact that no announced deals for the propriety transactions at issue were ever “jumped,” tends to show that such conduct was the practice in the industry. On its own, these two pieces of evidence would be insufficient to provide a permissible inference of an overarching conspiracy. They do not tend to exclude the possibility that each Defendant independently decided not to pursue other Defendants’ proprietary deals because, for instance, a pursuit of such deals was generally futile due to matching rights.
When viewed in combination with the Goldman Sachs executive’s statement and in the light most favorable to the Plaintiffs, however, the evidence suggests that the practice was not the result of mere independent conduct. Rather, the term “club etiquette” denotes an accepted code of conduct between the Defendants. Taken together, this evidence suggests that, when KKR “stepped down” on the Freescale transaction, it was adhering to some code agreed to by the Defendants not to “jump” announced deals. The Court holds that this evidence tends to exclude the possibility of independent action. Count One may, therefore, proceed solely on an alleged overarching agreement between the Defendants to refrain from “jumping” each other’s announced proprietary deals.
So, the alleged industry etiquette against deal jumping in the specific case of the HCA transaction survives to go to trial. At the same time, the "overarching conspiracy" allegation falls:
Furthermore, the frequent communications, friendly relationships and the “quid pro quo” arrangements between Defendants can be thought of as nothing more than the natural consequences of these partnerships. Defendants that have previously worked together or are currently working together would be expected to communicate with each other and to exchange business opportunities. That is the very nature of a business relationship and a customary practice in any industry. Accordingly, the mere fact that Defendants are bidding together, working together, and communicating with respect to a specific transaction does not tend to exclude the possibility that they are acting independently across the relevant market.
Being friendly with your competitors does not a conspiracy make.
Although it's been narrowed quite a bit, I'm sure this case will continue to generate headlines and attention, especially if more emails come to light.
Update: Ronald Barusch at the WSJ Dealpolitik blog suggests the outcome of the summary judgment motion will push defendants to push hard for a settlement.
Sunday, March 10, 2013
Joe Nocera in the Times today unearths some Goldman emails about the eToys IPO from the dotcom era. eToys raised $164 million in a 1999 IPO and then subsequently failed. The story is familiar by now. The IPO was underpriced and Goldman spun shares off to preferred clients. After the company failed, creditors sued. It's emails produced in connection with that suit that Nocera uncovered. The emails and creditors raise an important question: who was Goldman working for during the IPO?
The plaintiffs charge that Goldman Sachs had a fiduciary duty to maximize eToys’ take from the I.P.O. Instead, Goldman purposely set an artificially low price, so that its real clients, the institutional investors clamoring for the stock, could pocket that first-day run-up. According to the suit, Goldman then demanded that some of those easy profits be kicked back to the firm. Part of their evidence for the calculated underpricing of eToys, according to the plaintiffs’ complaint, was that Lawton Fitt, the Goldman executive who headed the underwriting team and was thus best positioned to gauge the market demand, actually made a bet with several of her colleagues that the price would hit $80 at the opening.
If you are interested in learning more about this kind of thing, Sean Griffith has a good article on the practice of spinning in IPOs that appeared a couple of years in the Brooklyn Law Review.