DealBook: Inspired by Professor, Investor Makes Big Gift for Black Studies

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Deal Professor: How Judge’s Ruling Ends Legal Threat to Dell Buyout

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Deal Professor: In American Greetings Deal, Echoes of Larger Buyout for Dell

Deal Professor: With His Magic Touch, Buffett May Be Irreplaceable for Berkshire

Harry Campbell

Acquisitions usually come with a nice premium for the seller. But when Warren E. Buffett is the buyer, there is typically something of a discount.

The ability to make acquisitions on favorable terms is a testament to Mr. Buffett’s personality and skills as a deal maker. It also highlights an almost unsolvable problem for his company, Berkshire Hathaway, and its shareholders. When its 82-year-old chief executive is gone, who will negotiate such sweet deals?

A case in point is the $28 billion buyout of the H.J. Heinz Company by Berkshire Hathaway and a partner, the investment firm 3G Capital. The deal, announced in February, is expected to be completed by the end of the summer.

Heinz had three investment bankers to advise it: Centerview Partners, Bank of America Merrill Lynch and Moelis & Company. Going through Heinz’s disclosure of the bankers’ analysis, it is pretty clear that Berkshire and 3G did not pay top dollar.

Berkshire Hathaway and 3G are paying a 19.1 percent premium over the closing price of Heinz shares the day before the acquisition was announced. This is below the average premium of 31 percent in the industry that Heinz’s own investment banking firm Centerview Partners used to determine the fairness of the transaction.

The two buyers are also paying a multiple of 11.9 times the last 12 months of Heinz’s earnings before interest, taxes, depreciation and amortization, or Ebitda. This compares with a range of 8.8 to 15.6 times, the ratio paid in comparable acquisitions of food companies disclosed by Bank of America Merrill Lynch.

The bottom line is that the bankers’ disclosure shows that the amount that 3G and Berkshire paid was below that of many other deals in the food industry.

The two buyers did not pay top dollar, but they did pay a fair price for Heinz and are certainly not paying as low a multiple as in other deals, like Kohlberg Kravis Roberts’s $5.3 billion acquisition of Del Monte Foods in 2010, which had a multiple of almost nine times.

Where it gets really tasty, though, are the terms that Berkshire negotiated for its own investment. In addition to putting up half the equity with 3G, or $4.12 billion each, Berkshire made an $8 billion investment for preferred stock.

And boy, is that preferred stock investment on good terms. It pays 9 percent interest, and has a redemption feature at “at a significant premium price,” according to Mr. Buffett.

This gives real downside protection to Berkshire for the investment. Not only that, but in exchange for the preferred investment, Berkshire was also issued warrants to buy 5 percent of Heinz for a “nominal” price, or in other words, pennies.

Mr. Buffett is getting 55 percent of Heinz plus an interest payment of $700 million a year. This is an extraordinarily good deal.

To see why, you need only to look at the terms of the rest of the financing. Heinz is taking on $14.1 billion in additional debt to help finance this deal. The debt takes several forms, and one part of it is $3.1 billion of high-yield notes at a 4.25 percent interest rate.

This yield is extraordinarily low, given that high-yield debt is ordinarily in the double digits. But this is no ordinary time, and despite the low yield, the issue was more than three times oversubscribed.

In this light, the relatively high 9 percent payment on the preferred stock investment plus its bonus features seem out of whack. 3G could have found cheaper financing by a few percentage points lower than it will pay on the preferred investment, even though Heinz will be laden with debt. The higher rate on the preferred investment will translate into a couple hundred million dollars more each year for Berkshire Hathaway.

As for Berkshire, it just sold five-year debt yielding a measly 1.3 percent. Basically, Berkshire’s financing costs for its preferred investment are most likely around 1 percent, meaning that it is earning in the double digits on the preferred investment. Then there is the upside on the $4 billion equity investment.

The Heinz deal aptly illustrates the huge issue looming for Berkshire shareholders. Simply put, Mr. Buffett negotiated a deal almost no one else on the planet could have received.

If this deal was better for Berkshire than 3G, you may ask why 3G would agree to it. I suspect that it is really paying to be associated with the Oracle of Omaha and his magic. Mr. Buffett has a unique ability to not only score a low acquisition price, but he can scare off competitors and attract other investors. Boards of target companies also appear to run into his grasp.

Heinz is again a good example. According to Heinz, 3G and Berkshire Hathaway made a first bid at $70 a share and then after one round of bargaining raised their bid to a best and final offer of $72.50 a share. That was it. Heinz accepted the bid without speaking to any other parties.

The reason that Heinz gave for failing to look for other bidders was that its investment bankers informed the Heinz board that “strategic acquirers” were unlikely.

Moreover, these bankers also told the board that if Heinz did solicit “alternative acquisition proposals,” 3G and Berkshire Hathaway were likely to withdraw their proposal.

In other words, Heinz’s board decided to deal only with Berkshire. And when Heinz requested the chance to solicit other bidders after announcement of the deal, through a so-called go-shop period, Berkshire and 3G said no.

Heinz and 3G declined to comment on the deal. Berkshire did not respond to a request for comment.

The Heinz board’s quick acquiescence is not unusual for Buffett deals. In Berkshire’s $9 billion acquisition of Lubrizol and $26.5 billion acquisition of Burlington Northern, neither board appeared to negotiate particularly hard. In Lubrizol’s case, its board accepted Mr. Buffett’s first bid of $135 a share. In Burlington Northern’s case, the board accepted Mr. Buffett’s first bid of $100 a share after he said that was all he could pay. The Heinz shareholders are lucky their board held out for at least one raise.

When it comes to Mr. Buffett, boards roll over. According to a draft paper by Shane Corwin, Matt Cain and myself, the median number of bidding rounds in public deals from 2006 to 2011 was four, and only 16 percent of bidders made a best and final offer.

Mr. Buffett is thus an outlier in that he will not raise a bid significantly from his first or contemplate target companies speaking to other possible buyers. But unlike other bidders, boards do not push back with Mr. Buffett.

Only someone with his magic touch could do this. Boards, buyers and everyone else want to be associated with Mr. Buffett. This is perhaps why he was also able to work his magic on 3G, getting a financing co-partner deal that others couldn’t.

As for competing bidders, they too appear to be unwilling to challenge him. In Heinz’s case, Mr. Buffett not only got a better deal with his partner, he may have saved a few dollars a share in the total price paid. It all adds up over time.

Heinz’s shareholders don’t appear to be complaining about the possible loss of a few dollars a share. Happy to get a premium, they approved the deal, a transaction recommended by the proxy advisory services.

The question really is what happens once Mr. Buffett isn’t around. Berkshire will still be a gigantic company with a lot of cash, but there are other companies out there of the same ilk. It all means that unless Berkshire can find another Warren Buffett, it may find its returns just aren’t as good.

Even though Mr. Buffett has hired and groomed other executives, he is a true star, and he cannot just create or transmit those qualities, which are the very ones that get those great deals. Unfortunately, there is only one Oracle of Omaha.

Preoccupations: Lessons From Mom Serve a Yale Professor Well

But if I really reflect on how I, a Latina from Las Vegas, was able to become a scientist at an elite university, it wasn’t my own curiosity. It was the influence of a blackjack dealer who also happens to be my mother.

My mother may not know the ins and outs of academia, but she taught me the essential ingredients needed to make it as a scientist in a white, male-dominated field.

A blackjack dealer works for tips. As you can imagine, a stodgy personality will not do well in a profession where you have to entertain a diverse clientele. My mother can interact with wealthy families from faraway continents as capably as she does with the locals.

As a professor and researcher, I interact with students and colleagues from all over the world, and I must communicate with each of them in an intellectual yet relatable manner. If I fail to do so, the far-reaching implications of my work are lost on the audience.

My mother’s most powerful weapon is her sense of humor. Her smile draws customers to the table, and once they are there she can gently tease a shy person into conversation or draw guffaws from an abrasive personality with a crude joke.

Likewise, whether dealing with an egotistic colleague or an insecure or disengaged student, the ability to find common ground and laugh together is the closest thing that we in academia have to a magic bullet.

My students can easily become bored or distracted when I discuss the chemistry behind metal oxidation. However, when I relate the science to descriptions of “bling-blinging rims” on car wheels, I am guaranteed a look of shock, an outburst of laughter and enough attention to relate the basics of the oxidative process. These kinds of interactions have led to the most professionally and personally rewarding experiences I’ve had as a professor.

My mother never gave up. She raised my brother and me on her own. I cannot recall a time in my life when she did not work. As a single mother, she provided the only source of income to our small family. I know there were days that she wanted to walk out of the casino and never return. Anyone who has worked in the service industry for over 30 years, as she has, knows the feeling. But an overriding sense of responsibility stopped my mom from doing so. I recall asking her, after she had spent a long night bent over the blackjack table, “How do you deal with all of those personalities every day?”

“What choice do we have?” she answered, referring to our family.

Even though I love my work, there are days when I want to run out of the lab or classroom, too. While not every day at work is the best, I stay for the “we,” just like my mom. I’ve made a commitment to myself, my employers, my students, my own family, and anyone else who relies on my accomplishments. I don’t have the choice to give up because I’m not really an “I” after all.

My mother was the first innovator I knew. Considered by her friends and family to be a creative genius, she can sew, crochet, paint, cook, sculpture, and do woodworking and metalworking. As fashion trends came and went, it was impractical for my mother to purchase name-brand designer clothes that I would outgrow within a season. She made me some harem pants that would have made MC Hammer jealous!

THE ingenuity and imagination behind this talent have become extremely valuable in my approach to engineering tissues and biomedical tools. In a field where inventiveness and innovation are keys to success, reallocating existing technologies and developing highly effective, yet low-cost, solutions to biomedical problems is what I have come to do best. It’s a little embarrassing now to think back on those harem pants, but I’ll never regret witnessing my mom’s ingenuity growing up.

Though she is not college educated and has been a blue-collar worker all of her life, my mom provided a model for much of my professional development. What are the odds?

Professor Sues Columbia, Alleging Misuse of Funds

A tenured professor at Columbia University’s Graduate School of Journalism and co-director of that school’s business program filed a lawsuit on Tuesday accusing the university of misdirecting $4.5 million in funds over the last decade.

The professor, Sylvia Nasar, who is the John S. and James L. Knight professor of business journalism at Columbia and author of the book “A Beautiful Mind” that inspired the movie of the same name, charges in the suit that the university mishandled funds from a $1.5 million endowment provided by the Knight Foundation to improve the school’s business journalism. The suit, filed in State Supreme Court in New York, also claims that Nicholas Lemann, the dean of the journalism school, “intimidated and harassed” Ms. Nasar for making complaints about the funds.

Elizabeth Fishman, a spokeswoman for the journalism school, said in an email that “we don’t comment on matters in litigation.” Mr. Lemann was not immediately available for comment.

The lawsuit comes at a time of transition for Columbia’s Journalism School, which on Monday named Steve Coll its new dean. He succeeds Mr. Lemann, who led the school through a turbulent decade as journalism underwent fundamental shifts. Mr. Lemann announced last fall that he planned to step down by the end of the academic year.

According to the 27-page complaint, the journalism school created a professorship called the Knight chair in 1998, with a $1.5 million grant from the Knight Foundation, a nonprofit organization that seeks to support quality journalism. Columbia was expected to match the grant.

Terms of the agreement called for Columbia to pay the professorship’s salary on its own, and use Knight Foundation funds for additional salary and benefits, like research.

In 2000, the university hired Ms. Nasar, who is a former reporter for The New York Times, without outlining the details of how her position was to be paid for. According to the lawsuit she was given a base salary, which the university paid for out of Knight Foundation funds, and was asked to pay most of her additional expenses out of her own pocket.

According to the suit, when Ms. Nasar asked to reduce her course load to focus on research and a book she was working on, she had to take a pay cut, even though the Knight Foundation grant provided for such circumstances. Ms. Nasar noted in the suit that over time she spent $174,000 of her own money for research and other expenses. She is asking for punitive damages.

Ms. Nasar said in an interview that September 2010 she received an e-mail from the university listing more than $70,000 in what she described as “phantom I.T. charges” — expenses attributed to her that she says she never incurred. Ms. Nasar said that when she looked into the matter, she learned that the misspending expanded to include “the fruit of the endowment,” meaning that it went beyond the technology charges and included Knight’s $1.5 million gift, Columbia’s $1.5 million match and the income earned on the endowment over the decade.

She said that she contacted the Knight Foundation about the disparities and they hired the accounting firm KPMG to audit the endowment. Court papers say that KPMG calculated that Columbia’s “misappropriations and defaults” added up to as much as $4.5 million. The audit also revealed that the endowment had not been used for its original purpose — “to supplement the salary and benefits of the holder of the Knight chair and to subsidize her research and service.”

After the audit, the university and the Knight Foundation reached an agreement to forgive Columbia the $4.5 million and to release the university from its obligation to match the $1.5 million grant. In return, the university promised to spend future income generated by the endowment in ways “consistent with the purpose of the chair.” Ms. Nasar’s reimbursement for research expenses was limited to $20,000 a year.

Eric Newton, senior adviser to the president of the Knight Foundation, said in a statement about the lawsuit, “We have broad guidelines for our endowment grants, for example, they generally aren’t intended to pay core salaries, but we don’t prescribe details.”

In the lawsuit, Ms. Nasar said that after she complained about the misspent funds, Mr. Lemann “intimidated and harassed” her by telling her that the Knight Foundation “was dissatisfied with her performance as Knight chair because Knight objected to her work on books.”

Ms. Nasar said she was filing the suit now because she felt that Columbia had not listened to her complaints or addressed its shortcomings. She is currently doing research and is not receiving pay from the journalism school, even though she remains the Knight chair.

In early January, Ms. Nasar filed a notice of intent to sue which was not as extensive as the lawsuit filed on Tuesday.

SMU Law Professor Teaches From Hospital Bed While Battling Leukemia

Sarah Tran with her daughter
Image: Josh Geller

Sarah Tran was determined to continue teaching property law in the fall of 2012, despite a 28-day hospital stay for the treatment of leukemia.

"I was diagnosed with acute leukemia on October 13," says Tran, an assistant law professor at Southern Methodist University Dedman School of Law in Dallas. "Actually, it was my second time getting it," she says.

She had undergone a bone marrow transplant from a brother four years earlier, but she learned during the fall semester that the disease had returned.

"I felt like the students had been planning to take my exam and should be able to rely on a certain style of teaching," Tran says. "I felt like I couldn't abandon them."

So on Wednesdays and Fridays, from 1:00 to 2:20 p.m., a sign on her hospital room door at Baylor University Medical Center at Dallas asked those entering to be quiet while she conducted class for 80 first-year students via Skype.

"Sometimes, a machine I was hooked up to would start beeping, but they [medical staff] knew not to talk to me while they fixed it," she says.

Her husband brought her a suit jacket that she would wear over hospital clothes.

"I pretended like I was wearing a suit," she says.

As she began to lose hair, a typical side effect of chemotherapy treatment, Tran says she kept changing her look.

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Deal Professor: Ackman, Herbalife and Celebrity Short-Sellers

Harry Campbell

It’s good to be a rock star investor these days, particularly if you are betting against a company.

Celebrity investors like William A. Ackman of Pershing Square Capital Management and David Einhorn of Greenlight Capital can move a stock by the billions of dollars simply by disclosing their bet. It’s something ordinary investors can’t do, which gives these star investors a tremendous advantage. But it also makes the truth about a company harder to discern.

Take the case of Herbalife. About two weeks ago, Mr. Ackman gave an impressively lengthy, 343-slide presentation on Herbalife at an event sponsored by the Sohn Conference Foundation in Manhattan.

Herbalife sells nutritional supplements through its own network of recruited sales representatives (think of Avon or Amway). Mr. Ackman’s fundamental thesis is that Herbalife is a pyramid scheme. He asserts that the company relies primarily on pushing products to its recruited sales staff for its profits, rather than sales to retail customers and outlets.

Herbalife has heatedly criticized Mr. Ackman’s assessment. After his conference appearance, the company said in a brief statement that Mr. Ackman’s presentation was “a malicious attack on Herbalife’s business model based largely on outdated, distorted and inaccurate information.” The company has scheduled an analyst day for Jan. 10 to try to rebut Mr. Ackman’s arguments.

The presentation appeared to set off panic among Herbalife shareholders, and the stock tumbled 38 percent that week. The presentation and the stock’s decline were widely covered in the financial media. Mr. Ackman’s presentation was posted to Henry Blodget’s Business Insider Web site, where it has been downloaded more than 2.8 million times.

As for Mr. Ackman, he is not required by securities laws to disclose his position in shorting, or betting against, a company’s stock. But based on his own disclosure in the media, it appears he has shorted well over $1 billion in Herbalife stock and is already up hundreds of millions of dollars on his bet. (In the spirit of the Sohn Conference Foundation, which supports the treatment and cure of pediatric cancer and other childhood diseases, Mr. Ackman has promised to donate his personal profits to charity.)

There is a culture of worship around Mr. Ackman and a small circle of hedge fund deities like Mr. Einhorn, John A. Paulson of Paulson & Company and even Steven A. Cohen at a somewhat tarnished SAC Capital Advisors. When one of them says or does something, it quickly reverberates in the market.

We have seen this before with Warren E. Buffett, when a new investment by him pushes the stock of the company up instantly. But more often these days, it is the bets of hedge fund managers that a stock will go down that move share prices.

You can tick off the list: Mr. Einhorn and St. Joe Company; Steve Eisman and the profit-making education sector; Carson Block of the investment firm Muddy Waters Research and Olam International.

These managers are able to make their mere presence — and the whiff of a short position — move stocks down. If you need evidence, Mr. Einhorn asked just a few questions on a conference call with Herbalife’s management in May and the stock immediately plunged.

Of course, these stocks may be falling because these investors are right. Muddy Waters, for example, made its name by exposing what regulators have since said was outright fraud at the Sino-Forest Corporation, a Chinese company. And shorting is an important part of the market, helping ensure that stocks are priced correctly.

There can also be a more sinister dynamic at work. Wall Street loathes uncertainty. So when investment celebrities disclose their bets against companies, particularly in very public places like a Sohn Foundation event, they create momentum, pushing investors to make decisions based not on the information but on fear.

In the wake of Mr. Ackman’s presentation, an analyst with B. Riley & Company stopped coverage of Herbalife for the reason that trading was now no longer based on fundamentals but the pressure from short-sellers. And if you were a mutual fund manager right now, you would probably much rather be seen as not owning Herbalife; after all, why take the risk when you can just invest in other stocks to try to beat the market to earn your bonus?

Mr. Ackman’s accusations may very well justify the sell-off, but that remains to be seen. (Herbalife’s stock has been rising of late, although it is still below where it was before Mr. Ackman intervened.)

But in these celebrity short bets, the truth often seems beside the point to the market. The question of what the facts are gets overtaken by the spectacle of a titanic struggle between company and hedge fund operator. John Hempton of Bronte Capital, who owns Herbalife stock, calls this “hedge-fund porn” and has characterized the struggle over Herbalife as “the hedge-fund equivalent of Stalingrad. Someone is going to lose big. And the victor will be so bloodied that the word victory will sound hollow.”

Yet the battle over Herbalife is not really Stalingrad. Rather, it is more like the United States invading Grenada.

Mr. Ackman, a brilliant investor by any measure, is already up a couple of hundred million dollars, and because securities regulations do not require him to disclose his position, he may already have taken money off the table. In all probability, he is at least adjusting his position. So he is likely to break even at worst. And even if he loses, he survived a big loss in Target and made billions in other investments. It’s just another day at the office.

But Herbalife is mired in a public relations drama when it just wants to get back to normal. It is doing the customary things in a war against a short-seller: trying to depict the investor as misguided while correcting the facts — or putting its own spin on them.

Herbalife has also accelerated a stock buyback, almost Step 1 in any such campaign, and it has hired the investment bank Moelis & Company to represent it. In the end, though, Herbalife will be lucky if it gets back to where it was before Mr. Ackman’s presentation, and it will be a struggle to do so.

Herbalife, to be sure, has been in the cross hairs of short-sellers for a while. It would be nice if instead of a panicked reaction when a celebrity investor steps in, Wall Street kept its head and coldly assessed the facts. It certainly had the time to do so.

It is hard to stop shareholders from acting out of fear, but perhaps it is time for the Securities and Exchange Commission to require short-sellers with significant positions to disclose them as they are required to do for long positions, or those bets that a company’s stock will go up. It would help for the market to at least know what the positions are when large short bets are announced, which might help limit panicked reactions.

To be fair, in response to S.E.C. regulatory proposals on the issue, Pershing Square has supported a requirement for additional disclosure on short-sale positions.

At Herbalife’s conference next week, and in the days to come, there will be more information and no doubt more spin. Investors may even give Herbalife the thoughtful and rational scrutiny it deserves. But I doubt it.

Deal Professor: An American-Made Business Model Has Less Success Overseas

Harry Campbell

For years, the titans of finance have held out the promise that they could export their business model overseas and mint billions in the process. Yet, there are increasing signs that global deal-making was always a myth.

If you’ve been anywhere near a Wall Street conference in the last five years, you know the drill. Deal makers bemoan the United States as a mature and overregulated economy. They talk about heading abroad, as emerging market economies leave us far behind. To listen to them, one might think the rest of the world was a paradise out of “Atlas Shrugged,” where capital flows and where private equity, investment banks and other investors can freely seek opportunities.

So what country is No. 1 in initial public offerings so far this year? Yes, it is the United States, according to Renaissance Capital, with 75 I.P.O.’s raising $39 billion in total. Compare this activity with China, where 41 I.P.O.’s raised just $8.1 billion.

And in mergers and acquisitions? Again, it is the United States, with 53 percent of the worldwide deal volume, up from 51 percent from last year, according to Dealogic. For investment banks, this means that the United States has a 46 percent share of the $63 billion in worldwide investment banking revenue, up from 34.6 percent in 2009.

With the slowdown in once-hot emerging markets, the tide is going out, baring all of the problems and issues associated with global deal-making.

China is a prime example. Huge amounts of foreign and state investment produced an economic miracle. And in that time, wealth was there to be had.

But let’s be clear about where that wealth came from. In the United States, deal makers make money primarily by buying underperforming assets, adding some financial wizardry and riding any improvements in the stock market. Sometimes, they get lucky by making a quick profit, but often private equity works to squeeze out inefficiencies and make operating improvements in companies and then takes them public a few years later.

In China, what increasingly appears to have been a stock market and asset bubble spurred by hundreds of billions in direct investment has created some spectacular early profits for deal makers. The private equity firm Carlyle Group, for example, has made an estimated $4.4 billion on an investment in China Pacific Insurance, which it took public on the Hong Kong Stock Exchange.

But now, with the Chinese I.P.O. market at a virtual standstill and the Shanghai market down more than 30 percent from its high last year, that avenue to riches is over. People are starting to say that investment in China resembles a “No Exit” sign.

Deal makers are left with a back-to-basics approach that looks to make money from companies through economic growth or improving their performance. Yet most of these investments are made with state actors and minority positions, meaning that there may be little opportunity to actually do anything more than sit and wait and hope. And you know what they say about hope as a strategy.

It appears that deal makers are starting to realize the problem. Foreign direct investment in China was down 3.67 percent from last year to $9.6 billion, and it is likely to remain on a downward trend.

And China has been among the friendliest places for deal makers. Other emerging markets have been less accommodating. Take India, which has been criticized for excessive regulation, high taxes and ownership prohibitions. David Bonderman, the head of the private equity giant TPG Capital, recently said that “we stay away from places that have impossible governments and impossible tax regimes, which means sayonara to India.” The comment about India highlights another problem with foreign deal-making: it’s foreign. Sometimes, the political winds change and local governments that initially welcomed investment change their minds. South Korea, for example, invited foreign capital to invest in its battered financial sector after the Asian currency crisis. But when Lone Star Investments was about to reap billions in profits on an investment in Korea Exchange Bank, a legal battle almost a decade long erupted as Korean government officials accused the fund of vulture investing.

And the political problems are sometimes not directed at foreign investors. South Africa, for example, is undergoing the kind of political turmoil that can stop all foreign investment in its tracks over treatment of its workers and continuing income inequality. Things are not much better in the more mature economies.

Europe is in the economic doldrums, and its governments are increasingly protectionist of both jobs and industry. France, for example, recently threatened to nationalize a factory owned by ArcelorMittal, which sought to shut down two furnaces. The national minister said the company was “not welcome.” It’s hard to see a deal maker profiting from buying an inefficient enterprise that it can’t clean up without risking national censure.

Buying at a low is the lifeblood of any investment strategy — but this assumes that there will be an uptick, and on the Continent, that is uncertain given the state of Greece and the other indebted economies in Southern Europe.

This is all a far cry from the oratory vision-making at conferences. Now that the global gold rush has ended, the belief that the American way of doing deals is portable is being upended.

We are left with a fragmented world where capital moves not so freely, the problems of politics and regulation are more prominent and investing in emerging markets becomes what it always has been: the province of more specialized investors who are in tune with the political and regulatory requirements. Regardless, the easy riches that many thought these countries would bring are now far out of sight.

And the winner in all of this is likely to be the much-maligned United States, where the economic conditions and regulatory environment first gave birth to these deal makers.

This is not to say that there will still not be global deal-making or that American multinationals will not continue to expand abroad. Of course, there will still be profits in deals overseas. But the vision that deal-making will instantly and seamlessly go global is increasingly exposed as one that was more a fairy tale than reality.

Deal Professor: Reading the Fine Print in Abacus and Other Soured Deals

A common refrain from the financial crisis is that poor disclosure was a big contributor, if not the cause, of the financial crisis. Buyers of even the most complicated financial instruments were misled or were not provided full information concerning their investments. The results were catastrophic when the mortgage market crashed.

The story sounds convenient: investors were deceived! That would imply that all we need to do to prevent a similar problem in the future is to provide better disclosure.

The problem is that when you actually look at the documents from some of the troubled investments during the financial crisis, in many cases the disclosure was copious. There were warnings of the risks; investors just failed to heed the warning signs that should have led them to further investigation. In other words, the disclosure failed to work.

In a new paper, “Limits of Disclosure,” Claire Hill and I examine the types of disclosure that were made before the financial crisis. Specifically, we examine disclosure made in connection with the sale of synthetic collateralized debt obligations, or C.D.O.’s, where the reference securities were mortgage-backed securities. These were synthetic bets on the value of mortgage securities with one party taking the long side and the other the short.

The investments had names like Timberwolf and Class V Funding III. The now infamous Abacus C.D.O. promoted by Goldman Sachs was also a synthetic C.D.O. And these products were at the epicenter of the financial crisis. One analysis estimates that asset-backed C.D.O. write-downs alone will be $420 billion, or 65 percent of the original balance, with C.D.O.’s issued in 2007 losing 84 percent of their original value.

In the wake of this colossal failure, allegations have been made that the banks promoting these financial instruments did not disclose that they also had short positions in them. Alternatively, in the Abacus case, the allegation was that Goldman allowed John Paulson’s hedge fund to hand-select the securities to bet against, thereby creating an investment that was “doomed to fail.”

But a review of the offering documents for these deals shows that there were ample warning signs, had buyers looked deeper. Take the Abacus C.D.O., for example. The pitch book for the deal stated specifically that Goldman Sachs “shall not have a fiduciary relationship with any investor.” That is, Goldman was not bound to see if the investment was suitable for an investor or to act in investors’ best interest.

Not only that, these materials warned investors that they should do their own investigation. Again, the Abacus pitch book stated that “Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information.” It continued, “Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.” In other words, Goldman told its customers to do their own investigation and not rely on the firm.

As for allegations that Goldman’s trading arm was simultaneously taking a short position in the housing market, there is disclosure on that too. The Abacus offering memorandum stated that “Goldman Sachs is currently and may be from time to time in the future an active participant on both sides of the market and have long or short positions” adding that the firm may have “potential conflicts of interest.”

Despite the warnings, the evidence is that the buyers of these synthetic collateralized debt obligations did not do a thorough investigation into the securities themselves, let alone follow up on the above disclosure.

The recent S.E.C. case against the Citigroup employee Brian Stoker shows this. The S.E.C. contends that Citigroup had sold another such investment, the Class V Funding III C.D.O., while simultaneously planning to short the security, a fact it did not disclose to buyers. Citigroup settled the action, but Mr. Stoker disputed the allegations.

The largest buyer of Class V Funding III was Ambac, the mortgage-backed security insurer, which was a very sophisticated investor. When David Salz, the Ambac manager who made the decision to invest in this security, was asked at trial whether he had done an investigation of the securities underlying the C.D.O., he claimed that Ambac had not because it had relied on the work of the portfolio selection manager, Credit Suisse Alternative Asset Management.

Yet, the offering memorandum for Class V Funding III stated that the Credit Suisse unit was not acting as “advisors” or “agents” to the buyer, and that any buyer should make its investment decision determine “without reliance” on either. The memorandum further stated that not only could Citigroup and Credit Suisse have conflicts, but also that the firms’ “actions may be inconsistent with or adverse to the interests of the Noteholders.” And the offering memorandum had the same disclosure as the Abacus that place the onus on the investors to do their own homework.

All these various offering memos did not even acknowledge that the mortgage market was heading downward. This disclosure taken from Timberwolf C.D.O., a residential mortgage-backed security and another Goldman deal that has resulted in litigation, began to appear in 2007: “Recently the residential mortgage market in the U.S. has experienced a variety of difficulties and changed economic conditions that may adversely affect the performance and market value of R.M.B.S.” It continued: “In addition, in recent months, housing prices and appraisal values in many states have declined or stopped appreciating. A continued decline or expected flattening of those values may result in additional increases in delinquencies and losses on R.M.B.S. generally.”

Yet, not only did investors ignore this disclosure, they ignored it despite reading it. At the Class V Funding III trial, Mr. Salz of Ambac was asked at trial about the risk factor disclosure in the Class V Funding III offering memo. Asked if he read it, he replied: “Yes. It’s boilerplate language. . . . it was standard language.”

In other words, Ambac felt comfortable to ignore it because it the language was commonly appearing in documents. Furthermore, Ambac’s legal counsel even marked up the offering document and made comments on the offering memorandum.

Ambac lost $300 million on this deal. Mr. Stoker was acquitted by a jury of the civil charges against him.

What is so troubling about all of this is that the investors in these C.D.O.’s were the most sophisticated investors with considerable money — $100 million or more — under management. Class V Funding III’s buyers included not only Ambac but also the Koch brothers and a number of hedge funds.

These were not the “stupid” sophisticated investors that Michael Lewis depicted in his book “The Big Short.” These were investors who should have known that this disclosure should have prompted further inquiry. In particular, these investors knew that for them to take a long position on the C.D.O. there had to be someone on the short side.

So why did these investors make these investments if they did not do their due diligence or even pay real attention to the disclosure? From the testimony given at the Class V Funding III trial, it appears that these investors made macroeconomic bets on housing, following the herd, which thought housing would go up. In this regard, arguments that the securities were too complex to understand don’t bear out.

This is a problem. Sophisticated investors are supposed to read the documents. We all know that retail investors don’t often take the time to read disclosure, but the securities laws are based on the idea that information is filtered into the markets through disclosure to sophisticated investors who then set the real price of the security.

This is a form of the efficient market hypothesis. If sophisticated investors can’t be bothered to read the documents and act on them, then we have a real gap in the entire disclosure regime and asset pricing generally.

Unfortunately, this is what the evidence from the C.D.O. market before the financial crisis shows. And because of this, the idea that requiring still more, better or clearer disclosure is likely to be unfruitful in many cases.

I have no great solution to this. Until we better understand how sophisticated investors process and read disclosure, regulators should be wary of trying to solve the problem by simply requiring more disclosure.

This post has been revised to reflect the following correction:

Correction: November 2, 2012

An earlier version of this article misstated the name of the financial products that were in part blamed for the financial crisis. They are collateralized debt obligations, not credit-default obligations.

Deal Professor: Why MetroPCS Is Truly in Play

Mary Altaffer/Associated PressA MetroPCS store in Manhattan.

There are three fundamental things to know about the deal between MetroPCS and T-Mobile USA.

First, this is really just an acquisition of MetroPCS by Deutsche Telekom. After the transaction is completed, Deutsche Telekom, the German telecommunications behemoth, will own 74 percent of the combined company, which will be renamed T-Mobile. MetroPCS’s public shareholders will own the rest.

Second, though Deutsche Telekom is acquiring MetroPCS, this is also a way for Deutsche Telekom to undertake a reverse initial public offering for T-Mobile. Deutsche Telekom may be acquiring control of the combined MetroPCS and T-Mobile, but it wants to exit this business eventually. If the transaction goes through, expect Deutsche Telekom to sell those shares to the public over time.

Third, because this is really an acquisition, it puts MetroPCS, one of the few national mobile carriers, very much in play.

The deal structure is not that of a typical merger where a buyer simply acquires the target. It is instead a recapitalization. A recapitalization is a fancy term that means the rejiggering of a company’s capital structure.

The restructuring part is Deutsche Telekom’s contribution of the T-Mobile business to MetroPCS in exchange for 74 percent of the share capital of the combined business. And because this is categorized as a recapitalization, the contribution of the shares is tax free to Deutsche Telekom.

Stephan Savoia/Associated PressT-Mobile’s deal to buy MetroPCS turns up the pressure on Sprint Nextel.

The net effect is that Deutsche Telekom is acquiring control of MetroPCS.

But don’t expect Deutsche Telekom to hold on to the shares for long. As Rene Obermann, the company’s chief executive, acknowledged on an investor call, this is also a way for Deutsche Telekom to gain liquidity for its T-Mobile interest. Mr. Obermann called the transaction a “turbo I.P.O.” By doing it this way, Deutsche Telekom saves on I.P.O. costs, and also has an asset that is more easy to sell since it has greater scale.

There are also some bells and whistles on the transaction. There is a $1.5 billion dividend to MetroPCS shareholders to give them an incentive to vote for the share issuance to T-Mobile. There is also a 2-for-1 reverse stock split of MetroPCS shares. The parties didn’t disclose why, but the reverse stock split is likely to push the MetroPCS stock price back above $10 after the large dividend and keep up appearances. The stock split also has the convenience of ensuring that MetroPCS has enough authorized shares to issue to Deutsche Telekom.

MetroPCS will also restructure its debt, and Deutsche Telekom has committed to lending the new entity as much as $6 billion more in financing on top of the $15 billion the combined entity will owe Deutsche Telekom.

But it is the structure of the transaction that puts MetroPCS up for sale.

Under Delaware law, the deal is viewed as a sale because Deutsche Telekom is obtaining majority control of MetroPCS. This puts the MetroPCS board into “Revlon-land” (referring to a 1985 Delaware decision in a takeover battle over Revlon), requiring the board to obtain the highest price reasonably available for the sale of the company.

This is an open invitation for another bidder to come in and pay a higher amount, something the MetroPCS board must accept if it a clearly superior offer.

Deutsche Telekom’s main fear here is likely to be a move by Sprint. Earlier this year, MetroPCS had previously thought it had a deal with Sprint, but the Sprint board pulled out at the last minute.

MetroPCS is reported to be — surprise! — not unhappy that this new deal may spur Sprint to come to the table. And because Revlon duties apply, MetroPCS’s board is now bound to take the highest price reasonably available. If MetroPCS takes this offer, it must pay a $150 million termination fee to Deutsche Telekom.

Notably, Deutsche Telekom tried to deal with this issue by putting a “force the vote” provision in the transaction agreement. MetroPCS cannot terminate this deal even if a competing bid is made unless the company holds its shareholder vote and shareholders vote no. Before then, only Deutsche Telekom can terminate the deal even if MetroPCS’s board recommends a competing bid. And Deutsche Telekom will have five business days to match any competing bid before MetroPCS’s board can even make such recommendation change.

This will not deter a Sprint bid, but it will make it harder to complete and give Deutsche Telekom more time to respond to any competing bid.

Ultimately, the structure of the transaction was likely driven by the fact that Deutsche Telekom wanted liquidity but MetroPCS could not pay the cash necessary to acquire T-Mobile. The contribution is therefore a stepping stone to such liquidity, but Deutshe Telekom is now forced to accept this risk of a competing bid.

The next move is up to Sprint.

Either way, the real winners may be Deutsche Telekom’s lawyers and investment bankers. Their fees are likely to come out of the $3 billion in cash that AT&T paid to Deutsche Telekom in connection with AT&T’s thwarted attempt to purchase T-Mobile. And if this transaction also fails, these lawyers and bankers are also likely to be paid some part of their fees, leaving them teed up to take a run at a third transaction.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.