Antitrust vs. takeovers

The WSJ has a followup on the Justice Department investigating of potentially collusive "club" bidding in private equity deals I discussed yesterday. The story reports on the legal uncertainties involved in this investigation, and on the practical realities that give rise to the uncertainties:

To pay for such large targets -- with total price-tags of upward of $30 billion -- the firms have in recent years begun to partner into what have come to be known as "club deals." These clubs are largely limited to a handful of buyout firms with roughly more than $10 billion each in capital, such as Kohlberg Kravis Roberts & Co., Blackstone Group, Texas Pacific Group, and the investment arm of Goldman Sachs Group Inc.

These clubbing arrangements present both opportunities and problems for companies on the auction block. On the plus side, they allow for the assembly of the immense pools of cash necessary to bid on a large target in the first place. That in turn helps buyers spread the risk of any one transaction, which is another essential ingredient to making a bid. ***

The political aspect of this story intrigues me: If Justice raises a question, it could scare off a potent mechanism for making the biggest deals happen, which would be nice for incumbent managers of potential targets.  So if actual and threatened uses of the securities laws against big hedge funds don't make these deals go away, the antitrust laws are waiting in the wings.

It's worth noting that this tension between the antitrust laws and the agency cost controls inherent in the market for control started the whole modern economic literature on takeovers, Henry Manne's Mergers and the Market for Corporate Control, 73 Journal of Political Economy 110 (1965).  Plus ca change. . .