The Carlyle Group’s recent settlement of a long-running antitrust lawsuit generated some fireworks in what appears to be the twilight of the deal structure challenged in that case: so-called “club deals.” The settlement, which brought the case to a close before trial or appeal, leaves the legal status of club deals under U.S. antitrust laws uncertain, at best, and the district court’s interim decisions in the case highlight the continued risks of such a deal structure.
The lawsuit, originally filed in 2007 in the U.S. District Court for the District of Massachusetts, was initiated by investors in companies purchased by private equity consortiums during the M&A boom of the mid-2000s. The investors alleged that, instead of competing against each other through open bidding, club deal participants conspired to “work together to allocate deal outcomes and purchase the target companies at artificially suppressed prices,” in violation of Section 1 of the Sherman Act.
The original complaint implicated some of the largest leveraged buyouts of the last decade, including HCA, Kinder Morgan, Freescale Semiconductor and SunGard Data Systems. The plaintiffs claimed that the acquisition premiums and/or the price/equity ratios in those deals were significantly less than in other, non-club deals during the same period. The plaintiffs’ claims expanded substantially over the years of litigation, eventually alleging collusion in dozens of additional transactions from the mid-2000s, including TXU, Clear Channel, Alltel and Harrah’s. Relying on a 2010 economic analysis of club deals published in the Journal of Financial Economics, the plaintiffs claimed that absolute measures of deal premiums showed that club deals had consistently lower premiums than sole-sponsored LBOs and strategic acquisitions during the same period.
The Carlyle Group’s recent settlement, reportedly $115 million, combines with earlier settlements by six other defendants for a total of nearly $600 million. Bain Capital Partners and Goldman Sachs Group settled in June of this year for $54 million and $67 million, respectively, and Silver Lake Partners followed suit in July with a comparatively small $29.5 million settlement. Blackstone Group, Kohlberg Kravis Roberts and TPG jointly settled for $325 million in early August, just weeks before Carlyle’s announced settlement. Other investment banks and private equity firms named as defendants, including Apollo Global Management and Thomas H. Lee Partners, managed to secure dismissals or summary judgment of the claims against them over the course of the litigation. Carlyle’s settlement, like other settlements reached in this case, does not entail any admission of wrongdoing. The settlements remain subject to review and approval by the district court.