Private Equity: Antitrust Concerns with partial Acquisitions
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ARTICLES
Private Equity:
Antitrust Concerns
With Partial Acquisitions
BY LAURA A. WILKINSON AND JEFF L, WHITE
HE EXPLOSION OF PRIVATE-EQUITY
financing in global capital markets resulted in a
record year for 2006. In that year alone, private-
equity firms raised more than $400 billion, estab-
lished over 600 new funds, and spent roughly
$737 billion globally on buyouts.' In addition, the wide-
spread availability of debt and equity financing has enabled
the size of the buyouts conducted by private-equity firms to
increase dramatically. In fact, more than ten of the largest
fifteen buyouts of all time occurred in 2006, including
the $33 billion buyout of HCA, the $21.7 billion buyout of
Kinder Morgan, Inc., and the $26.7 billion buyout of Clear
Channel Communications, Inc.2
While the influx of private equity capital has had a
tremendous impact on financial markets in recent years,
many overlook its impact on another important, if less
prominent, aspect of the economy: antitrust. Indeed, the
rapid growth of private-equity investment, the tendency of
many private-equity firms to specialize their investments in
certain industries, and the fact that particular industries tend
to be more attractive to private-equity investors in general,3
have formed a perfect storm in which private-equity firms
often hold partial ownership interests in competing firms.
Not surprisingly, the tentacle-like reach of these overlapping
ownership interests in competitors has caught the watchful
eye of U.S. antitrust regulators, including the Federal Trade
Commission and the Department of Justice.'
The private-equity boom also coincides with a time in
which antitrust regulators are taking a keen interest in the
competitive effects of partial acquisitions. In recent years, the
U.S. antitrust agencies have obtained consent agreements in
a number of transactions involving the partial acquisition of
a competitor.5 In April 2003, the DOJ challenged the acqui-
sition by Dairy Farmers of America, Inc. (DFA) of a 50 per-
cent ownership interest in Southern Belle Dairy Co., LLC as
a violation of Section 7 of the Clayton Act.6 At the time of
the acquisition, DFA owned a 50 percent interest in National
Dairy Holding, L.P., the owner of the Flav-O-Rich brand and
a competitor of Southern Belle in the market for school milk
in 40 school districts in Kentucky and Tennessee. Although
the district court found that DFA exerted no control over
Southern Belle's business decisions and granted summary
judgment in favor of DFA, the Sixth Circuit Court of
Appeals reversed, holding that a lack of control or influence
in a partial-ownership acquisition does not preclude a viola-
tion of Section 7.7
Armed with the Sixth Circuit's opinion in Dairy Farmers,
antitrust regulators now have the green light to scrutinize the
investments of a private-equity firm in two competing port-
folio companies-even where the investments result in no
controlling interest by either competitor and the levels of
cross-ownership are relatively small. Complicating the mat-
ter from an antitrust perspective is that private-equity firms
often seek, or even may require, board representation and
other governance rights in their portfolio companies. FTC
Commissioner William E. Kovacic recently acknowledged
the increasing scrutiny of these transactions, calling it
'inevitable that the competition authorities in the U.S. and
abroad will be spending more time looking at transactions
involving private equity institutions.'8 Similarly, private-
equity industry participants and the financial press also antic-
ipate greater scrutiny of private-equity deals.'
This article will examine the antitrust concerns that can
arise from a private-equity firm acquiring minority partial
ownership interests in two competitors and will provide prac-
tice pointers to aid counsel in developing winning arguments
to get their client's deal through. In addition, the article will
discuss the FTC's recent precedent-setting settlement in the
Kinder Morgan buyout, in which private-equity firms sought
to acquire minority interests in Kinder Morgan while also
holding a partial ownership interest in a competitor.
Competitive Effects from Partial Acquisitions
by Private-Equity Firms
As a general matter, if a complete merger between two firms
would not present antitrust concerns, then it is reasonable
to anticipate that a private-equity firm acquiring partial-
ownership interests in both companies should not either.
Nevertheless, Areeda and Hovenkamp have suggested that
because there may be few, if any, efficiencies created by
partial acquisitions without the integration of control,
[a] n argument can be made for totally prohibiting partial
stock acquisitions that have any potential for anticompeti-
tive effects, even though a full acquisition involving the
same parties would be allowed under § 7.' Areeda and
Hovenkamp's concerns, however, appear to be premised on
a competitor taking a direct interest in one of its rivals,
which has raised issues of potential coordination or anti-
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Private Equity: Antitrust Concerns with partial Acquisitions
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