Much Ado About Nothing? The Antitrust Implications of Private Equity Club Deals

In May 1976, with merely $120,000 and a few metal chairs left behind from a prior tenant, Kolberg Kravis Roberts & Co. (KKR) opened its doors. Though few people outside Wall Street circles knew of this start-up company, by the 1980s its reputation as a takeover machine brought it notoriety. One can only imagine what went on behind closed doors, but whatever happened, it worked. By 1989, KKR had become the largest client of accounting giant Deloitte & Touche, with General Motors following as a close second. The “Age of Leverage” peaked in 1990 when KKR took over RJR Nabisco. Until 2006, this takeover was the largest in history and is still considered one of the largest ever. The deal almost ruined KKR, yet KKR managed to acquire many other companies in the ensuing years. In late February 2007, KKR and other private equity firms announced another record-breaking deal. An investor group led by KKR and Texas Pacific Group (TPG) purchased TXU Corporation, a Texas-based energy company, for an unprecedented $45 billion. GS Capital Partners, Lehman Brothers, Citigroup, and Morgan Stanley became equity partners at closing. An official statement explained that the new owners planned to have stronger environmental and climate stewardship policies, to invest in alternative energy, and to focus on the electric consumer market by delivering both price cuts and protection. Although a deal of this volume may seem extraordinary, it is only one of the many mega-deals in the realm of private equity, which has become a vital engine for investment in our economy. Generally, private equity is any equity investment that is not freely tradable on public stock markets. A trend contributing to the success of private equity is a strategy known as “clubbing.” Clubbing occurs when at least two buyout firms join forces to purchase a company. Buyout firms cite many reasons for clubbing, such as spreading the risk of a single deal or amassing sufficient capital to acquire a huge corporate target. But clubbing can carry negative consequences as well, especially if companies use the practice to inhibit competition. This concern apparently worried the Department of Justice (DOJ), which in October 2006 launched an inquiry into the potentially anticompetitive behavior of private equity firms—an inquiry that could unearth antitrust violations. The DOJ is examining the possibility of collusion among private equity firms and is trying to discover attempts by clubs to reduce purchase prices. The inquiry started with a two-page letter sent to several of the largest private equity firms seeking voluntary, general information about club deals since January 2003. Although seemingly straightforward, the inquiry presents many complex issues that cannot be easily resolved. Irrespective of the outcome, the private equity industry is paying attention. Private equity will likely need to change if it wishes to continue assembling mega-deals like the TXU deal. This Note addresses the antitrust issues that clubbing raises and argues that the antitrust laws should not restrict clubbing—absent some egregious conduct—and that courts should apply rule of reason analysis rather than per se rules to these sorts of antitrust claims. Part II provides a general background of antitrust law and the various standards that courts apply to private equity clubs. Part III explains private equity and fleshes out what a club deal is and how it works. Part IV discusses antitrust law within the context of joint ventures and sets out the varying standards that could apply to private equity clubs. Part V applies the antitrust analysis to private equity clubbing. Finally, Part VI concludes by suggesting ways to deal with antitrust problems and by examining some of the underlying issues