Club Deals As Conspiracies

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At some level, of course all club deals are conspiracies among private equity buyers, and therefore bound to draw the attention of antitrust regulators. The question is whether they actually harm sellers—that is, the shareholders whose companies they purchase—or help them. Many of the larger private equity deals that get done would be all but impossible if various firms could not pool their resources and cooperate to make acquisitions—meaning, club deals are actually creating buyout premiums that wouldn’t exist otherwise. Trust me, when a guy in the antitrust divisiion reads about this sort of thing in the papers he starts writing memos to his boss about subpoenas.
On the other hand, every now and then you’ll read about how one group of private equity firms surprises another by making last minute bids on a target. This is considered “poor form” among the private equity folks, sort of like taking apples from the other guys basket instead of picking them off the trees. But that mentality is precisely what antitrust regulators are worried about—and probably can lead to some companies being sold for less than they would in a fully competitive environment.

At least some described the inquiry as an "inevitable" outgrowth of the evolution of the big-ticket buyout game. Wielding smarts, ego and capital, elite firms have clustered at auctions for a virtual buffet of the nation's largest companies: movie chains, satellite operators, newspaper companies, and semiconductor-makers among others.
To pay for such large targets -- with total price-tags of upward of $30 billion -- the firms have in recent years begun to partner into what have come to be known as "club deals." These clubs are largely limited to a handful of buyout firms with roughly more than $10 billion each in capital, such as Kohlberg Kravis Roberts & Co., Blackstone Group, Texas Pacific Group, and the investment arm of Goldman Sachs Group Inc.
These clubbing arrangements present both opportunities and problems for companies on the auction block. On the plus side, they allow for the assembly of the immense pools of cash necessary to bid on a large target in the first place. That in turn helps buyers spread the risk of any one transaction, which is another essential ingredient to making a bid.
Yet inside these clubbing arrangements is a fraught dynamic. While often ferocious competitors, the firms are just as likely to end up co-owners of a number of targets. For instance, two of the buyout world's top firms, Blackstone Group and Carlyle Group, are often on different sides of transactions. For example, when Kinder Morgan Inc. was considering a management buyout involving Carlyle earlier this year, Kinder's board hired Blackstone's advisory arm to evaluate the bid. But they are also bidding together to buy Freescale Semiconductor Inc.
In all, Carlyle has done 20 club deals since 2005, and Texas Pacific Group 25 club deals, according to Dealogic data. Some 44% of all $1 billion-plus buyouts are done in club deals this year.


Probe Brings 'Club Deals' to Fore
[Wall Street Journal]

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