Oops: Mistakes in LBO Suit

It’s now been two days since a few disgruntled shareholders filed what they hope will become a class-action lawsuit against 13 top private equity firms. I hope that it doesn’t.

To be clear, I am not an apologist for private equity firms. I think many of them charge unfair transaction fees to their limited partners, and often bilk their own portfolio companies via paid management agreements (let alone breakup fees related to the termination of said agreements). But there is simply no evidence to support the allegations of antitrust violations. None.

All the filing attorneys have is a belief that the U.S. Department of Justice has some sort of smoking gun. As one of them said to me: “The Department of Justice would not be making inquiries of a firm as politically-connected as Carlyle if it didn’t have some sort of substantial information.”

Like what? Perhaps a quid pro quo email from Henry Kravis to David Rubenstein, saying: “I know we’re both interested in Masonite and Kinder Morgan. Why don’t you let us have Masonite, and you can have Kinder Morgan?” Even that wouldn’t necessarily be a clear breach of antitrust statutes – since it could just be a way for firms to conserve resources, not to drive down prices – but it would be close. But the filing attorneys have no idea what such a smoking gun would contain (if it exists), which is why they’ve sued almost every large U.S. buyout firm (save for Goldman and Hellman & Friedman) and want shareholder plaintiffs from every public company taken private. Throw everything up against the wall, and see what sticks.

When I asked the attorneys for evidence, all they could do was point me to the final two pages of their complaint, which are labeled Exhibit A. It’s a matrix of sorts, with each defendant listed on the X axis and a potpourri of 45 public-to-private deals listed on the Y axis. It’s also meaningless.

For starters, some of its information is wrong. Silver Lake is not listed as an investor in SunGard, even though it led the deal. Carlyle is incorrectly included in Blackstone’s acquisition of Wyndham International. Then there are some odd inclusions, including: A three-year-old deal by Carlyle (Breed Technologies); TPG’s acquisition of a minority stake in Lenovo (which helped facilitate Lenovo’s purchase of IBM’s ThinkPad division) and; Silver Lake’s acquisition of Pacific Edge Software, a private company purchased by Silver Lake portfolio company Serena Software (which also is listed).

The matrix does not seem to have been determined by any quantitative metrics, like 25 largest deals of the past few years. So one would assume that it’s supposed to include instances where the alleged collusion had an impact. If so, the matrix fails on that account as well.

At least seven of the 25 companies received multiple buyout bids, according to published reports. This includes such slugfests as Freescale and Warner Chilcott. Moreover, several of the companies actually rejected the initial bids as being too low, which resulted in increased bids that were then accepted. Examples include Kinder Morgan and Kerzner International. And what about Clayton, Dubilier & Rice. It is listed as a defendant, but didn’t participate in a single one of the listed deals (since Hertz et. all didn’t make the matrix cut). Is the allegation that CD&R simply opts out of every deal, so as not to disrupt the secret club?

Again, all of this has been prompted by short and vague DoJ inquiry letters that read a lot like a Private Equity for Dummies request for proposal. These plaintiffs should either get some evidence, or get a life.