Private Equity firms Bain Capital LLC, Goldman Sachs Group, Inc. (NYSE:GS) and The Blackstone Group L.P. (NYSE:BX), along with other firms have been accused of a bid-rigging conspiracy in a class lawsuit filed in 2007 by shareholders of the companies they acquired.
A report from the New York Times cited that shareholders alleged that the private equity firms agreed not to bid against each other, in order to reduce the acquisition price of the more than two dozen companies. According to investors, they lost billions of dollars because of the private equity firm’s bid-rigging practices.
The report cited court documents and showed that Bain Capital’s competitors did “stand down” in bidding against the firm to acquire Hospital Corporation of America (HCA), the largest hospital chain in the United States, due to understanding on their e-mails and meetings, that they will not compete against each other on future transaction targeted leveraged buyouts. Bain Capital, together with KKR & Co. L.P. (NYSE:KKR) and Merrill Lynch, bought HCA for $32.1 billion in 2006.
One of the competitors identified in the report was TPG Capital. E-mails revealed that executives from TPG discussed the HCA acquisition with its counterparts, Bain Capital and KKR & Co. L.P. (NYSE:KKR), and eventually decided not to compete in the bidding process, citing that its relationship with both firm is “more important.”
Court documents also revealed that Bain Capital, K.K.R., and Silver Lake Partners conspired in the $9.4 billion transaction to acquire the semiconductor unit of Philips (BIT:PHIA). Prior to the submission of the final bidding, Philips (BIT:PHIA) demanded that Bain Capital should submit a separate proposal to purchase the business.
According to the lawsuit, Bain, K.K.R., and Silver Lake Partners ignored the demand of Philips to submit a competitive proposal for its business unit. The firms sealed a “secret deal whereby Bain would permit K.K.R. and Silver Lake to submit the winning bid, then invite Bain into its deal on equal terms.”
The report also noted separate a transaction involving The Blackstone Group L.P. (NYSE:BX), TPG and Apollo Global Management. Instead of competing with TPG and Apollo Global Management (NYSE:APO) to buy Harrah’s Entertainment, Blackstone co-invested a small amount in the transaction.
Investors cited in the complaint, “Blackstone’s quid pro quo relationships with TPG and Apollo Global Management (NYSE:APO) prevented it from submitting a competing bid.”
K. Craig Wildfang, a lawyer for the complainants said, “I think you can tell, even though there are substantial redactions, there is enough to show that there was very active collusion going on between the leading private equity firms, including Bain.”
According to the report, other companies involved in the case were acquired by the private equity firms from 2003 to 2007, including Neiman Marcus, Toys “R” Us, Michaels Stores, Univision, Loews Corporation (NYSE:L), and AMC Theaters.
On the other hand, legal counsels for the private equity firms dismissed the accusation of the complainants. Executives from private equity firms also denied the allegations that they conspired to lower the prices of the businesses they acquired.
A senior executive from one of the private equity firms, who requested the New York Times not to reveal his identity, said, “These shareholders should be grateful that we purchased their companies when we did, right before the financial crisis hit.”
Earlier this month, New York Attorney General Eric Schneiderman launched an investigation against 12 private equity firms regarding their tax strategies. The attorney general’s office issued a subpoena directing the firms to submit significant documents to find out if they reported certain management fees, collected from investors, as investment funds to avoid paying higher taxes.
Private Equity firms under investigation include Bain Capital, Clayton, Crestview Partners, Dubilier & Rice, H.I.G. Capital, KKR & Co. L.P. (NYSE:KKR), Silver Lake Partners, Sun Capital Partners, Vestar Capital Partners, and Providence Equity Partners.