Feeding The Collusion Beast


Private equity collusion will clearly go down as one of this year’s most over-hyped private equity stories. There have yet to be any formal allegations – save for what’s in that sloppy class-action suit – and the DoJ inquiry letters were vague enough to double as RFPs for a Private Equity for Dummies tome. In short, it is a meatless bone that we reporters keep gnawing on in hope of scandalous marrow (i.e., the stuff we use as a substitute for high salaries).

But the media feeding frenzy in this case might be more than just self-sustaining. It might also be self-generated.

Before continuing, let me clearly state that I have absolutely no inside information as to why the DoJ sent out its inquiry letters. But I’ve now heard a near-identical theory from three different senior members of three different brand-name buyout firms, and figure it’s worth sharing with you. It goes like this:

On October 16, 2005, Andrew Ross Sorkin of the New York Times authored an article titled “One Word Nobody Dares Speak.” The word to which Sorkin referred was “collusion,” and his second paragraph went like this:

Virtually any big company that puts itself up for auction these days is deluged with interest from private equity firms, which have too much money and too little time to spend it. Witness the $15 billion sale of Ford’s Hertz rental car unit to a consortium of private equity players including Clayton, Dubilier & Rice Inc., the Carlyle Group and Merrill Lynch Global Private Equity. Or the $11.3 billion sale of SunGard to a supersized group of seven buyout firms led by Silver Lake Partners. What has gone largely unquestioned is whether the formation of these consortiums of firms, or ”clubs” in industry parlance, has the potential to artificially depress buyout prices and hurt corporate shareholders.

Notice something very important about this paragraph. Specifically, the four firms Sorkin cites are the exact same firms reported to have received DoJ letters of inquiry. This limited scope has always seemed odd, particularly given that a relatively small player like Merrill Lynch was lumped in with Carlyle, CD&R and Silver Lake. Oh, and the fact that established market heavyweights like Apollo, Bain, Blackstone, Goldman Sachs, KKR, TPG, etc. apparently didn’t get letters.

So the theory goes like this: Someone in the DoJ’s New York office picked up his Sunday Times, read Sorkin’s article and thought: “I don’t know really what private equity is, but I sure know what collusion is. In fact, it’s my job to investigate collusion. But we’ll keep it low-level for now. No need to bother the big boys in DC… Now where is the cream cheese?”

Again, this might not be accurate. But it certainly is becoming conventional wisdom.