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Merrill Gets 'Club' Letter

Government lawyers add Merrill to their private equity probe.

Merrill Lynch's


private equity arm is the latest big money investor to draw scrutiny from government regulators.

The Wall Street Journal

says Merrill Lynch recently received a letter from the Department of Justice's antitrust division, seeking information about its investment in a number of private equity-sponsored buyouts. Merrill Lynch spokesman Mark Herr declined to comment.

The Justice Department's antitrust team in New York is looking into allegations of anticompetitive bidding practices in the bustling world of private equity. Last month government lawyers sent similar letters to at least four prominent buyout firms: Carlyle Group, Clayton, Dubilier & Rice, Kohlberg Kravis Robert and Silver Lake Partners.

The federal inquiry is said to be in its early stages. It's not clear that at the end of the day the government will be able to prove collusion between private equity firms, which have raised a record amount of money this year for corporate buyouts.

The government probe is focusing on so-called "club deals,'' a situation in which several private equity firms get together to buyout a company. Government lawyers are trying to determine if these club deals are a away for private equity firm to control the bidding process for a company by offering rival firms a chance to co-invest in deals.

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The allegation is that the lack of competition keeps the takeout price for a company relatively low.

Private equity firms usually make money by buying a company and cutting costs or reforming the business over a number of years. Depending on the investment, the private equity firm often will pay itself a dividend each year for its work, then sell the restructured business for more than the purchase price.

Merrill Lynch's private equity arm has been particularly active in recent years and has produced big profits for the Wall Street firm. Most notably, it was an investor in the proposed mega-buyout of


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and was one of the investors in the buyout of Hertz from


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. The private equity firms that bought Hertz last year are now planning to bring the company public again in an soon-to-be launched IPO.