Some weeks ago Marcelo posted the case of a lawsuit against important members of the Private Equity industry; I consider it very interesting so I’m writing my thoughts on it.
First, when reading Marcelo’s post and based on what I heard on other classes I noticed that an important argument PE firms make when defending from collusion is that the deal was so large and the amount of money required to buy the company was so high, that they need other companies to participate in the deal, otherwise they couldn’t make it.
I consider this argument is weak because it’s not questioning the accusation, they are not saying we were not colluded, for me this answer is just telling the reason they had to cooperate with their competitors. In other words, they are just saying we have to do it because one company couldn’t get the business by itself.
One could easily argues against them, that when confronted to situations where the deal is so big that they need other partners, they could search alternatives to get the money without getting their competitors involved, for example other financial institution that don’t have presence on the Private Equity Industry. These PE firms decided to form a consortium with their competitors but maybe they had to look for different partners to form the consortium. The fact that they were not able or did not want to do it, is not a justification to go an make an arrangement with your competitors. Also, people may think this is just a way to share the risk of the deal with your competitors, and it does excuse you from collusion.
Second, but totally unrelated with the previous point, I want to question the bargaining power that these PE firms had when making the business. I’m sure they had an important market share on the PE industry, but I don’t think we have to consider the PE industry as the relevant market to determine the bargaining power they had when making the bids to acquire a company, I think a broader definition is more appropriate. From target company shareholders perspective, they were not reduced to PE firms
when selling their companies. I don’t know how deep is the M&A market but I assume that there more alternatives to sell a company than PE firms. Therefore I consider that the market power these PE firms had, may mislead when determining the bargaining power that had when making the bid.
Third, regarding to Marcelo’s last thought, I agree with him that it would be hard to get a compensation in a deal that did not generate enough for the PE firms. But I think that if the courts determine there was collusion, there has to be compensation. Maybe instead of considering the returns that PE firms had on these deals, the compensation may be calculated based on the price that target companies shareholders would get in the absence of collusion. Also, and using the same idea, the fact that these deals didn’t generate returns for PE companies does not eliminate the potential damage that collusion generated, again the potential damage could be calculated considering the prices that would prevail
in the absence of any collusion.