There’s a field of mathematics called “game theory,” and in that field mathematicians write papers about math, and those papers are read by other mathematicians. Meanwhile, in another part of town, people who do M&A deals are all “let’s talk about the game theory here,” and then they all nod sagely and punch each other in the face and think back fondly on the time they got an A- in freshman calculus.

Prisoner’s dilemma! Nash equilibria! Coöperate! Defect! I will build you a model though I am neither a mathematician nor a person who does M&A deals:

  • If you want a thing, you bid for it.
  • If you get a thing at your bid, you are happy.
  • If you get outbid for a thing, you are sad.
  • If you outbid someone for a thing, you are initially happier than if you got outbid, but sadder than if you didn’t have to outbid anyone.
  • (Later, you might be sadder than if you got outbid.)
  • You keep doing that.1
  • You are smart.
  • You start to feel feelings and think thoughts.
  • You stop jumping your rivals’ bids.
  • They stop jumping your bids.
  • Except sometimes you do! And sometimes they do!
  • Because, y’know, you really want the thing more than they do, or whatever.
  • And so you muddle along, not getting into horrible bidding wars over every deal while still trying to get the things that you want much more than other people want them.

Now, I am not an antitrust lawyer, but nonetheless, I say unto you, that is an okay model. It’s even an okay model if you do stupid, stupid, but still basically okay things like this:

Two colleagues at the private equity firm TPG e-mailed each other about the firm’s reasons for deciding to not compete for HCA, according to the lawsuit.

“All we can do is do [u]nto others as we want them to do unto us,” Jonathan Coslet, a TPG executive, wrote. “It will pay off in the long run even though it feels bad in the short run.”

We’ve talked before about the private-equity antitrust lawsuit but now it comes with 100% more incriminating emails, due to the Times‘s intrepid motion practice. At least some of which are less strictly incriminating and more “WHAT I WAS QUOTING JESUS,” but others of which … I continue to not be a mathematician/lawyer/banker/anything but this skeeved me out a bit:

After a Blackstone group outbid a K.K.R. consortium to buy Freescale for nearly $18 billion, Hamilton E. James, the president of Blackstone, e-mailed his colleagues about Henry Kravis, the billionaire co-founder of Blackstone’s rival.

“Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote.

Two days later, Mr. James sent an e-mail to Mr. Kravis’s cousin and co-founder, George R. Roberts. “We would much rather work with you guys than against you,” Mr. James wrote. “Together we can be unstoppable but in opposition we can cost each other a lot of money.”

“Agreed,” responded Mr. Roberts.

Now of course you can explain this away too. That “together we are Voltron” email maybe means “I enjoy spending time with you and your cousin,” or even – nefarious but legal! – “I like it when managements ask us to work together to construct a joint bid because we end up paying less than when we don’t coordinate,” more than it does “let’s have a secret conspiracy in restraint of trade.” And I actually read “he had told me before they would not jump a signed deal of ours” with the emphasis on “signed” rather than “would not jump”: lots of private equity firms have good reasons, grounded in reputation and reliance on management and board goodwill (and breakup fees) rather than price-fixing, to prefer not to lob in hostile bids or ask companies to breach signed contracts. But if you read this as Q. “Conspiracy in restraint of trade, anyone?” A. “‘Agreed,’ responded Mr. Roberts,” I would not be able to say you were insane.

Still the basic gist of this complaint looks more, not less, insane after looking at the emails. For some reason it doesn’t occur to the plaintiffs’ lawyers to say “you sent dumb emails now give me money,” so instead they build a massive and all-pervasive multi-year conspiracy and since that is plainly false they just end up sounding like cranks. Here is Dan Primack:

Worth noting that Blackstone and KKR did bid together on Clear Channel, but they were beaten out by a rival offer from Bain Capital and Thomas H. Lee Partners. Somehow, all four firms are named as defendants in this suit (sometime co-conspirators, sometime rivals?).

In fact, such contradictions are peppered throughout the entire suit. As I wrote back when the complaint was originally filed, it’s tough to argue conspiracy against so many firms on such a large number of deals, particularly when the record is clear that many of the defendants competed against each other on some of those very transactions.

BUT THEY BID AGAINST EACH OTHER TO THROW THE COPS OFF THE SCENT, etc. etc., if you want to be nonfalsifiable about it. I don’t, so I’m kind of not a fan of the all-pervasive conspiracy theory. I prefer the theory in which (1) they often didn’t jump each others deals because it was expensive, (2) they sometimes did because they really wanted that deal, and (3) there were dumb emails.

But if there’s one thing that I do know, and I tell you this both as your lawyer and as your mathematician, it’s that dumb emails –> money, so this looks kind of good for the plaintiffs’ lawyers.

How does it look for everyone else? How do you “fix” this? One thing to do is build a system where private equity firms are somehow forced to bid against each other more fiercely – maybe they all agree to extensive go-shops and fewer consortia, or whatever. It’s hard to imagine that working – you can force PE firms to create the conditions for overbids, but it’s harder to force them to actually overbid each other – and it’s not clear a priori what it would do to deal prices. Making consortia dangerous means making consortium deals scarce.

The other fix is to let private equity firms keep doing much of what they’re doing – playing repeat games, and deciding by their informed selves not to bid against each other in situations where that will cost them money – but just stop emailing each other about it. That seems like a more likely solution.

E-Mails Cited to Back Lawsuit’s Claim That Equity Firms Colluded on Big Deals [DealBook]
Unsealed docs: Did private equity firms conspire? [Fortune / Dan Primack]

1. This is called a “repeat game.”

21 comments (hidden to protect delicate sensibilities)
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Comments (21)

  1. Posted by Jim Downey | October 11, 2012 at 10:56 PM

    Mr. Levine, what you've just written is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent post were you even close to anything that could be considered a rational thought. Everyone in this forum is now dumber for having read it. I award you no points, and may God have mercy on your soul.

  2. Posted by Sec Reg Warren G | October 12, 2012 at 1:14 AM

    Nice value add there bro, I'm pretty sure even UBS' chief Gartman impersonator predicted that Matt would apply game theory to this article because the premise of this being an antitrust violation is ludicrous.

  3. Posted by Bemused | October 12, 2012 at 1:36 AM

    These emails are like sports stars and Twitter. If you can't be trusted to not say or do anything stupid, you shouldn't be allowed to play with the toys.

  4. Posted by mac | October 12, 2012 at 8:12 AM

    Do you want to do the repeater?

  5. Posted by foster | October 12, 2012 at 8:13 AM

    Do YOU want to do the repeater?

  6. Posted by Wire | October 12, 2012 at 9:22 AM

    Yes. This is why we can't have nice things, like email.

  7. Posted by Analogies Quant | October 12, 2012 at 9:25 AM

    So kind of like UBS and an equities based trading desk?

  8. Posted by S. Archer, TPG MD | October 12, 2012 at 9:36 AM

    Also, how you get ants, just FYI.

  9. Posted by Name | October 12, 2012 at 9:37 AM

    Dude looks like a creepy Nazi war criminal who fled to Argentina.

  10. Posted by Guest | October 12, 2012 at 9:52 AM

    what the fucking fuck

    -Friday

  11. Posted by Corsage Capital LP | October 12, 2012 at 9:56 AM

    Matt, how big was the game tree you constructed to graphically represent the feelings you were feeling and thoughts you were thinking about who to ask for prom back in high school?

  12. Posted by guest | October 12, 2012 at 10:12 AM

    Excuse me….. No

  13. Posted by guest | October 12, 2012 at 11:08 AM

    The worst part is that now Tony James is going to get a cease and desist letter from Gryphon financial's lawyers about his unauthorized use of "together we are unstoppable."

  14. Posted by 2 cubes over | October 12, 2012 at 11:39 AM

    Sometimes I read a Matt article and think, this is interesting etc. Then I read the comments and think, am I the only one that actually looks forward to these pieces? Who knows.

    But I feel this raises the question, why the emails? Not a conspiracy theorist, but I can believe that they're that dumb…

  15. Posted by Synopsis-izer | October 12, 2012 at 2:22 PM

    "The other fix is to let private equity firms keep doing much of what they’re doing – playing repeat games, and deciding by their informed selves not to bid against each other in situations where that will cost them money – but just stop emailing each other about it."

    Also known as the difference between competing and colluding. You know, the *conspiracy* to restrain trade? Aka, the illegal part?

    Thanks for the other 1,200 words, though.

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