Apollo Management and Texas Pacific Group, the companies behind a leveraged buyout bid (LBO) for Harrah’s Entertainment, are just two of the private equity firms named in a lawsuit brought by small investors. A class-action suit was filed yesterday in a Manhattan federal court alleging that wealthy buyout firms reduced share prices by combining forces to prevent competition in takeovers. A judge is to decide if the case will get class-action status.

The Harrah’s Entertainment bid is already being questioned in the US and Europe over trading in the credit-default market before the takeover deal was announced. LBOs have been criticised for using debt financing, usually around 70% debt to 30% equity, and using the acquired company’s cash flow to repay the debt. In his article ‘A World Awash in Dangerous Liquidity’ Philip Bowring wrote: ” The top 10 private equity funds now have US$100 bn of equity at their disposal, which can be leveraged by at least 50 percent to threaten almost any company the world over …”

Private equity firms are already under investigation by the US Department of Justice for possible antitrust dealings. The Manhattan lawsuit claims that investors are ‘squeezed out’ at artificially low valuations and seeks unspecified damages. Another ongoing lawsuit at a Manhattan federal court accuses twelve investment banks of rigging IPOs of technology companies in the late 1990s. The latest suit filed alleges violations of anttrust laws and seeks to represent tens of thousands of shareholders in many LBOs.

Three named plaintiffs in the lawsuit had shares in Harrah’s Entertainment and other companies that were the subject of LBOs. Their claim for damages, and that of other small investors, rests on whether their shares sold to private equity firms would have been worth more if there had been ‘free and open competition’ in the bidding process. In all 13 of the top US buyout companies have been named in the lawsuit plus investment bank Merrill Lynch. (E-11.16.06)

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