The size of an LBO is usually constrained by the amount of capital that a private equity firm can bring to bear. Only recently has one approached half the size of Kohlberg Kravis Roberts’ iconoclastic $31 billion behemoth, the 1988 acquisition of RJR Nabisco, recounted in the bestselling Barbarians at the Gate by Bryan Burrough and John Helyar.

But fueled by a surfeit of private equity capital, a race to the bottom among lenders and still (somewhat) reasonable valuations in the public equity markets, targets have been ballooning in size. This has forced private equity firms to band together to pool enough capital to bring down their prey. The SunGard Data Systems ($11.3 billion), Hertz ($15 billion), GMAC ($7.4 billion) and Toys ‘R’ Us ($8.8 billion) deals of the past two years have all been accomplished by erstwhile competitors clubbing together.

Beginning on page 94, Worth senior correspondent John Ferry examines the economics of these mega-LBOs, and whether they will pay off for investors. The RJR deal is certainly a sobering precedent; its performance was uninspiring and it saddled KKR with an attention-draining business (tobacco) just when that sector was being savaged by class-action lawsuits.

The new breed of club mega-LBOs faces many of the same challenges as typical private equity investments–such as the need to determine the right price and an optimal mix of debt and equity. These LBOs also face challenges that arise from their scale–namely, the difficulty growing already large businesses at a clip that provides attractive returns within the time frame expected by private equity investors. But the real unknown is the effectiveness of the club structure itself.

Strength in Numbers
Private equity professionals claim that the consortia model offers a host of advantages in terms of additional expertise and the ability to share burdens. But it is difficult to see how these firms will not clash from time to time. Many of the decisions that bear on the fate of a transaction–from determining an acquisition multiple to deciding if and when to replace management–have a subjective element.

Disagreements over these issues may lead to better decisions, but it is also possible that compromise, or simple delay, will weigh on a deal’s performance–or its existence. A disagreement over the pricing of the SunGard deal caused two of the original consortia members, Thomas H. Lee Partners and The Carlyle Group, to drop out on short notice. The lead firm, Silver Lake Partners, was forced to find replacements, reportedly under a two-day deadline set by the company.

Firms that clash on one deal will be unlikely to join forces again. Industry observers (and some participants) describe the situation in terms of game theory’s classic Prisoner’s Dilemma, in which two criminals each have the incentive to act opportunistically (by ratting out the other guy), but both are better off if they cooperate and hold their tongues. In a one-time scenario, both will play the rat; in an iterated scenario–akin to LBO firms expecting to club together on a series of deals–it makes more sense to cooperate.

The real test will come when these deals approach milestones demanding difficult decisions: management changes, strategic shifts, liquidity events and the like. Only then will we see if the barbarians’ clubs begin to splinter.