DOJ To Investigate LBO Firms

 At 4:18 yesterday afternoon, I was on CNBC to discuss public-to-private buyouts (based, in part, on the proposed Cablevision deal). Just as I was saying that LBO heavyweights are disingenuous when complaining about inflated valuations, our segment got interrupted. Seems Google had picked that moment to confirm that it will purchase YouTube for $1.65 billion in stock.

 

No complaints from me, of course, since the GooTube news is huge for Web 2.0 startups, Google shareholders, venture capitalists, copyright infringement attorneys, copright infringers and amateur videographers. In retrospect, however, I wish that CNBC had come back to me after the break.

 

Why? Because the next question would have been something like: “Do you expect regulators to begin taking a look at the private equity market?” My answer would have been affirmative, since with great visibility comes great scrutiny. And then I would have looked like a sage, because today’s Wall Street Journal reports that the U.S. Justice Department has launched an inquiry into anticompetitive practices among private equity firms.

 

WSJ says that firms like KKR and Silver Lake Partners have received letters that “asked for a range of information and documents related to deals and business practices.”

 

The DOJ investigation so far looks like a fishing expedition, as the letters do not allege any wrongdoing ror do they even disclose the probe’s subject (if any). Many people, however, suspect that the waters may be well-stocked. Some of this popular distrust can be dismissed as ignorance about how private equity firms work, but some of it actually comes from the exact opposite position.

 

As to the ignorant: There is a perception that LBO firms preempt competition by forming buying consortia, but that charge rarely holds up. Firms need large buying groups to complete multi-billion deals, in order to reduce risk and diversify portfolios. Moreover, plenty of mega-auctions this include competing groups. And the year’s biggest deal to date – HCA – specifically prevented other LBO firms from joining the consortium, for the explicit purpose of attracting competing bids.

 

But there is another issue here, which may not yet have received major DOJ consideration. As a private equity LP wrote in an email this morning: “Once these things start rolling, it’s hard to know where they go.If the Feds start looking into possible collusion, it may be that the information they collect has them more even concerned by the fees that are charged. Remember Warren Buffet’s words to his managers about the five most dangerous words: “Everyone else is doing it.’” Amen.

 

*** Google/YouTube: I don’t really have many insights here, except that the deal continues to validate Sequoia Capital’s standing as the world’s leading VC firm. Also worth noting that a hedge fund called Artis Capital Management invested alongside Sequoia in YouTube’s $8 million Series B round earlier this year. As for the next major Web 2.0 deal, my money is on Yahoo-Facebook.