Private Equity Buyouts: Anti- Or Pro-Competitive?

Antitrust authorities intervene in mergers and acquisitions involving private equity (PE) firms. For example, in October 2011 a federal judge in the U.S. stopped H&R Block from acquiring 2nd Story Software, owned by the PE firm TA Associates. The Justice Department argued that the merger would harm competition in the market for digital tax preparation services, which was dominated by only three players (H&R Block, 2nd Story Software and Intuit). There has also been a class action law suit accusing seven PE groups — KKR, Blackstone, TPG, Bain Capital, Goldman Sachs, Silver Lake Partners and Carlyle — of conspiring to fix prices in some of the world’s biggest leveraged buyouts. In November 2014, Judge Young approved settlements related to the class action, which claimed these PE firms teamed up to keep leveraged buyout prices low.

PE firms have also come under the scrutiny of competition lawyers in the European Union. In April 2014 the European Commission found that 11 producers of underground and submarine high voltage power cables operated a cartel, and imposed fines totaling €302 million. The EC found Goldman Sachs’ PE unit to be “jointly and severally liable” with its portfolio company Prysmian. Goldman Sachs was fined €37 million. PE firms have also been fined in the EU Member States. In November 2014, the Dutch regulator ACM imposed fines on a number of firms engaged in cartel conduct in the flour industry. The ACM fined three PE firms €1.9 million for exercising decisive influence over one of their portfolio companies, Meneba, a Dutch flour producer, which was involved in the cartel. Thus, even though PE firms are not “traditional” parent companies, they can be held responsible for the actions of their portfolio companies if regulators believe that they exercise decisive influence or control over the portfolio company.

Our article discusses the antitrust implications of an active PE market and whether there are any special characteristics of PE ownership that are important for antitrust regulation and enforcement. We approach the question from three pillars of industrial organization:

1. identifying and blocking mergers that create substantial market power;
2. detecting and preventing predatory behavior; and
3. detecting and preventing collusive behavior.

Our overview of existing studies supports some initial insights of relevance to policy.  First, if antitrust enforcement is working efficiently, PE ownership should be pro-competitive, since diversity among bidders expands the choices facing antitrust authorities in the enforcement of merger control. In particular, temporary ownership by PE firms in concentrated markets should be associated with more restructuring, leading to decreased marginal costs, increased product quality or more product variety. This is likely to benefit consumers. This aggressive firm behavior is indeed consistent with empirical stylized facts finding that PE ownership is conducive to stronger governance structures, higher leverage, and increased productivity in the wake of buyouts.

Second, in areas where antitrust enforcement is more difficult and costly, PE ownership needs to be more carefully assessed. Concerning the risk of collusion in the product market, it seems likely that PE ownership is not a serious concern. PE ownership seems likely to create asymmetries in the product market regarding production costs and time horizons, making collusion harder to sustain. However, collusion within the PE industry itself when bidding for target firms seems more of a concern. Regarding the effects of PE ownership on predatory behavior, different mechanisms point in different directions, suggesting that specific market conditions must be taken into account.
Finally, the literature on PE and antitrust is also related to the research examining how ownership type affects corporate behavior. Recent evidence show how corporate cross-ownership among institutional owners of corporations might lead to less strong competition in the product markets. This literature has so far not accounted for the role of temporary ownership and product market effects in shaping difference in bidding and investment behavior between different type of owners. Our overview of existing studies suggests that PE ownership could potentially be a counter force against the less aggressive investment behavior that might follow the increase in cross-ownership in the stock market.  More generally, our review reveals that the existing research on PE and antitrust clearly suggests that more attention should be devoted to understanding how different forms of corporate ownership affect antitrust policy.