In May, Stephen A. Schwarzman, chairman and chief executive of
Blackstone Group LP, sent a pointed email to Lloyd Blankfein, his
counterpart at Goldman Sachs Group Inc., saying he was disappointed
that Goldman had agreed to settle a lawsuit alleging collusion to
keep down prices of private-equity takeovers.
Blackstone, the world's biggest buyout firm by assets under
management, also had been sued along with a number of competitors,
and Mr. Schwarzman was unhappy that Goldman decided to settle the
suit without discussing the move with Blackstone executives,
according to people familiar with the email.
Moreover, Mr. Schwarzman told the Goldman CEO that the bank's
move would make it more expensive for Blackstone and other buyout
firms if they, too, decided to strike a deal, one of the people
said. It isn't clear how Mr. Blankfein responded.
Mr. Schwarzman's concerns bore out when Blackstone, along with
KKR & Co. and TPG, agreed to pay a combined $325 million to
settle the litigation without admitting wrongdoing, according to
court papers filed in U.S. District Court in Boston on Thursday.
Each company's share of the settlement wasn't disclosed. Goldman
agreed to pay $67 million without admitting wrongdoing, according
to a June 11 court filing.
Plaintiffs' lawyers often "give discounts to earlier settlers as
an encouragement to step forward," said Tom Bush, who is
co-chairman of the antitrust practice at law firm Edwards Wildman
Palmer LLP, which isn't involved in the case. "You slowly ratchet
up the pressure on the guys that are left standing."
Lawyers brought the case in December 2007 on behalf of investors
in companies sold to a number of private-equity firms during the
run-up to the financial crisis.
The lawsuit cites 27 transactions and alleges that the buyout
firms, which before the financial crisis often teamed up to acquire
multibillion-dollar companies in what are known as club deals, had
agreements to not compete with one another on certain takeovers,
thus driving down prices paid to shareholders.
In the 2006 buyout of Freescale Semiconductor Inc., Blackstone
President Hamilton "Tony" James said in an email that KKR
co-founder Henry Kravis called him with congratulations and to
inform him that KKR was "standing down" from competing for the deal
"because he had told me before they would not jump a signed deal of
ours," according to the lawsuit. Jumping a bid means trying to
trump the offer in an agreed-upon buyout deal.
Messrs. James and Kravis declined to comment through
representatives.
Mr. Schwarzman's message to Mr. Blankfein shows how tempers can
flare when Wall Street firms' interests diverge. For Goldman, Mr.
Schwarzman's displeasure is particularly tricky. In addition to
pursuing its own private-equity investments, Goldman advises
Blackstone and other private-equity firms on corporate takeovers, a
lucrative business that can deliver big fees. Goldman also helps
buyout firms sell shares in the companies they own.
Along with Goldman, Bain Capital LLC in June agreed to settle
for $54 million. Thursday's agreement by Blackstone, KKR and TPG
brings the case's settlement tally to $475.5 million.
Carlyle Group LP is the lone defendant now in the nearly
seven-year-old lawsuit, which is set to go to trial in November.
"These claims are without merit, and we will continue to vigorously
contest the allegations," a Carlyle spokesman said.
Many of the firms have decided to settle the litigation in part
to avoid the risk of a large judgment should they lose at trial
and, more immediately, to put an end to expensive wrangling with
lawyers over producing documents and giving depositions. Other
private-equity firms were earlier dropped as defendants by the
judge.
On Thursday, KKR said the allegations are spurious, but the firm
determined it was "best for KKR and our limited partners to put an
end to the distraction and expense of this litigation." The firm in
a regulatory filing Thursday said the settlement isn't expected to
"have a material effect on KKR's financial results."
Blackstone, KKR and TPG have certain rights to back out of the
settlement deals, which are set to be considered at a Sept. 4 court
hearing. A judge must later this year give the case's plaintiff
shareholders class-action status for the settlement to remain
valid.
Carlyle believes the judge could decide against giving the
plaintiffs that status, according to a person familiar with the
firm's thinking. The Washington-based private-equity firm also is
set to argue for the case's dismissal at an October hearing.
Thursday's settlement agreement moves the litigation closer to
resolution after years of depositions, hearings and production of
documents. Along the way, emails embarrassing to top private-equity
executives emerged.
According to the lawsuit, Blackstone's Mr. James told KKR
co-founder George Roberts in an email: "We would much rather work
with you guys than against you. Together we can be unstoppable but
in opposition we can cost each other a lot of money."
In an email referring to the Freescale deal, according to court
papers, Mr. Kravis wrote that Messrs. James and Schwarzman were
"very happy campers that we are not going any further, since they
now have a signed agreement. We got lucky!!!! They told me that
they are working on a large one, which they say is "right up our
alley" and they will be happy to have us work with them. We will
see!!!" Messrs. Roberts and Schwarzman declined to comment.
That large deal was Clear Channel Communications Inc.,
eventually purchased in July 2008 by Bain and Thomas H. Lee
Partners LP. A judge dropped Thomas H. Lee Partners from the
lawsuit last year.
Gillian Tan and Liz Hoffman contributed to this article.
Write to Mike Spector at mike.spector@wsj.com and Gillian Tan at
gillian.tan@wsj.com
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