Someone is whining about Private Equity again..

The Journal recently covered the beginnings of a lawsuit being filed against basically everyone who has money (Bain Capital, Blackstone, the Carlyle Group, Goldman, JP Morgan, KKR, Mother Merrill....the list goes on), claiming the way PE groups and I Banks buy out firms and take them private is illegal.

Well, LBOs can be pretty shady, and probably relatively unethical, but I'm not so sure about it being actually illegal. Either way, the article does a good job of explaining how these buyouts work, including this awesome graph explaining the process. Essentially, there are a couple key issues: PE groups form 'illegal' bidding clubs in order to rig the bids and fix prices. I won't go into too much detail here, because everything is explained beautifully in that graph.

There is certainly a lot of cloak-and-daggers behind these big bids, though. Barbarians at the Gate is an awesome example. Back in the late '80s there was a huge LBO craze, and the deal behind taking RJR Nabisco private became infamous. Ross Johnson, the CEO of RJR Nabisco gets together with the rest of the C-suite to try to buy back all of RJR Nabisco, whose profits they had been severely deflating through accounting trickery (tricks that are essentially impossible to do post-SoX) and poor performance after black monday. KKR (a private equity group) smells a deal, and things turn into a bid war. As the prices climbed, KKR stared to get nervous, but John Greeniaus, the President and CEO of the Nabisco part of RJR-Nabisco, explained how he could boost profits with essentially no work (like I said, Nabisco's profits were being hidden with sneaky accounting) and KKR dives in.

The price soars from $42 a share to $109 a share, and KKR wins it, EVEN THOUGH they offered a lower bid in the end than Ross Johnson. Apparently, KKR's win was largely due to the fact that their bid was guaranteed, while management's wasn't. Also, Johnson apparently had a ridiculous golden parachute.

The Journal doesn't expect the lawsuit to go very far: "The lawsuit is full of accusations of bid rigging, collusion and other supposedly illegal conflicts. But aside from some circumstantial asides, there is precious little in the way of evidence backing it all up."

Had Romney not dropped out, we would have been hearing a lot more of these kinds of articles - simply as a Liberal interest group attack to hurt Romney's credibility - and a rich PE mogul (Romney founded Bain Capital - one of the firms being sued) is pretty easy to slander.

Just ask poor 'ol Stevie Schwartzman... all he wanted was a multi-million dollar birthday party! Is that so wrong? Oh, I guess it is. Well, at least Steve paid for his.