EMI and Sour Grapes

Originally posted 05/11/10
I was extremely pleased today that Terra Firma yesterday failed in its lawsuit against Citigroup over Terra Firma’s investment in EMI.  I have been extremely interested in this litigation, both because it is an interesting result of the amazingly rapid damage to the global recording industry from new music distribution models, and more importantly because something would be very wrong if an equity investor could prevail in a “sour grapes” lawsuit simply because it made a bad investment.  Suppose we accept Terra Firma’s core contention that Citigroup lied about the existence of another bidder?  Even if true, lying about bidders in auctions is common behaviour by investment bankers, and was questionable here only because Citigroup was itself playing both sides of the deal by acting for Terra Firma too.  Much more important, any Citigroup lies about the auction process have almost nothing to do with whether EMI was a good investment at the price paid, which is primarily a matter for due diligence, financial analysis and Terra Firma’s investment judgment.  The credibility and viability of the private equity and venture capital investment process would have suffered a huge blow if Terra Firma had won — thank goodness they did not.