Private Equity Collusion

Quick post in NYT Dealbook today regarding the latest prosecutorial muscle-flexing against corporate America; this time a DOJ inquiry into the possibility that private equity outfits are colluding to keep prices low.

I'm sure DOJ's investigators have thought about this a lot more than I have, but it doesn't seem to pass the smell test. Private equity is playing in bigger and bigger deals, and prices as a multiple of EBITDA (or any other measure you choose) keep rising. This hardly seems an environment colored by collusion.

Yes, as Dealbook points out, average premiums in $1B+ deals (those where consortia of PE firms are likelier to submit club proposals) are smaller at 16.5% than the 27.4% fetched by sellers in the $100M - $1B price range. But bigger companies are typically associated with mature markets, lower growth, etc. - all factors that keep a damper on the mark-up paid.

In fact, PE firms cobbling together clubs to compete for big game - bigger, at least, than any of the constituent members could take down solo - would seem to enhance, rather than detract from, competition. Finally, there's the issue of market harm - $1B+ companies are not clueless naifs being forced to take cut-rate prices. Beyond their sophistication, these companies have alternatives in strategic buyers and, of course, continuing to run independently.

If DOJ really has a bone to pick with PE, perhaps its energies would be better spent looking at all of those dividend recaps . . .