Peanuts by Aramark, a Goldman Sachs (and Matt Levine!) buyout of the boom era. Source: Aramark Corp. via Bloomberg
Peanuts by Aramark, a Goldman Sachs (and Matt Levine!) buyout of the boom era. Source: Aramark Corp. via Bloomberg

(Corrects table, and footnotes 5 and 9, of article published June 12 to reflect that Goldman Sachs was involved in TXU deal.)

Back in the mists of time there was a leveraged-buyout boom. It was a heady time for the private equity firms doing all the leveraged buyouts: They were all very busy, and they were all getting very rich. At some point they discovered a nice way to be less busy, and more rich. This was to avoid bidding against each other to buy companies. There were plenty of targets for everyone, and by not all chasing the same deals, they saved themselves some work and also avoided overpaying for the companies.

Now this was obviously a good idea, and these were smart people, so you can just about imagine that they all came up with it separately. But in fact there's some suggestive evidence, in the form of ill-considered e-mails between private equity executives, that they had informal agreements not to bid against each other. This would be Bad; the particular flavor of Bad would be Antitrust Bad. These agreements, if they existed, would amount to a conspiracy to keep down the prices of leveraged buyouts.1

There seems to have been a Justice Department investigation but nothing ever came of it, because, while there are some unfortunate e-mails, there wasn't a lot of evidence of any conspiracy to keep down deal prices. But plaintiffs' lawyers abhor a vacuum, so they sued all the private equity firms, dug up a few bad e-mails, and kept a case going for lo these last, like, seven years.

And today they finally got something for their efforts. They had originally sued 11 private equity firms,2 over a huge number of deals; a judge later narrowed the lawsuit to cover just eight deals in which the firms allegedly colluded not to jump each others' already-signed merger agreements. Two of the firms, Bain Capital and Goldman Sachs, settled today,3 for $54 million and $67 million respectively.

Here are the eight deals subject to the lawsuit:4

Source: Company filings.
Source: Company filings.

So Bain and Goldman are paying a total of $121 million to settle claims over $121.7 billion in buyouts.5 That works out very nicely to 0.1 percent of the deal value, or just under six cents a share, for the shareholders who were supposedly cheated out of higher buyout prices by private equity collusion.6 I mean, that's before lawyers' fees. Obviously the lawyers will take one or more of those six pennies.

The other private equity firms haven't settled yet. They continue "to believe the litigation is without merit," but then so do Bain and Goldman:

“The court never cited any evidence -– no document, no witness, no meeting -– tying our firm to any of the alleged claims,” [Bain spokesman Ernesto] Anguilla said in a statement. “We continue to believe the case is meritless and baseless, but ultimately determined that it was best for our investors and our firm to put this matter behind us in light of the costs and distraction of six years of litigation.”

It's maybe a little rude for Goldman and Bain Capital to abandon their co-defendants, if they all think the case is meritless, but I guess that's part of the point. Everyone's acting independently now, even though it's sometimes against each others' interests. That proves there was no conspiracy, right?

Back in the mists of time, not that long after the LBO boom, this case sort of looked like a case. There was a justice department investigation! There were bad e-mails! And then it fizzled into this thing, where the defendants are outright (and correctly) saying that they paid a bit of money to get rid of a nuisance lawsuit. I mean, $121 million is a lot of money, but probably not much more than the defendants' legal fees, and as a recovery for the supposedly aggrieved shareholders it barely qualifies as pocket change. Even if the remaining defendants settle for a similar price, you're looking at less than a quarter per share on all of those buyouts.

The way ordinary mergers work is:7

  • You announce a deal.
  • Some lawyers sue you.
  • You make some cosmetic changes to the deal -- a little extra disclosure, mmmaybe an extra five cents a share but probably not -- to make the lawyers happy.
  • You pay them a fee in exchange for a release from all future liability.

This is a pretty lame model, in that it is a tax on deals, paid to lawyers without necessarily protecting shareholders' interests; the lawyers have some incentives to settle for a quick payday on every merger rather than digging deep to find wrongdoing in the occasional deals where it exists.8 On the other hand, it's very convenient for buyers, in that a settlement is a quick way to cut off any future liability: Once they sign off on a deal with the plaintiffs' lawyers, no other shareholders can sue the buyers for more money.

One early defense that the private equity firms raised in this antitrust case is that the releases they got on those nuisance merger lawsuits should protect them from the antitrust case. I'm still not quite sure why that didn't work, but it almost doesn't matter: They ended up with another nuisance lawsuit, and settled it for a few pennies a share on their old deals.9 Most likely that's just an annoying additional tax on deals, enriching plaintiffs' lawyers at the expense of private equity limited partners. But it does, I guess, buy Goldman and Bain insurance against future LBO-boom antitrust claims. If there really was a giant conspiracy, then this pre-trial, pennies-per-share, continue-to-call-it-frivolous settlement is a great result for the private equity firms.

1 I should say here that, in addition to disputing whether there was an actual agreement not to bid against each other, the private equity firms also dispute that there was even a norm of bidding against each other. In fact, there were occasional bidding wars, even during the heyday of club deals.

2 Apollo, Bain, Blackstone, Carlyle, Goldman, JPMorgan, KKR, Providence Equity Partners, Silver Lake, TPG Capital and Thomas H. Lee. The cases against Apollo, JPMorgan and Thomas H. Lee [update: and Providence] have since been dismissed.

3 Here is Bain's settlement agreement, and Goldman's.

4 Disclosure! When I was a lawyer, I did a little work on the Aramark deal, representing Goldman Sachs Capital Partners. It is safe to say that I am not giving away any confidential client information here.

5 I mean, Bain was only involved in $32.6 billion of those buyouts, and Goldman in $64.4 billion, but that's not the point, right? The point is that the private equity funds were supposedly all agreeing not to bid against each other in all of these deals, so I guess you can blame Goldman and Bain even for the deals they didn't do.

6 Roughly speaking:

Source: Company filings.
Source: Company filings.

These numbers don't quite add up to $121.7 billion, due to options, etc., plus there are exclusions from the shareholder class (management members who participate in the buyouts, etc.) that are probably important.

7 Ronald Barusch has excellent overviews of what he calls the "useful corruption" of merger lawsuits here and here, which I draw on for this description.

8 The lawyers would dispute this, and point to the fact that every now and then they actually get big settlements for shareholders.

9 Depending how you count. It's 2.5 or 3 cents a share (Bain/Goldman) if you count all the deals, which I guess is relevant from the perspective of the shareholders cheated out of topping bids by collusion or whatever. But it's 8 or 6 cents a share if you count only their own deals, which is probably more relevant to the actual private equity funds.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.