Most people would have seen a 30 percent increase in pay as a pretty fantastic raise. I would have, too, if I hadn’t had that sizzling offer burning a hole in my pants pocket. I had no intention of staying at this point, but this game had rules and I had to play it out.
THIS MYSTERIOUS CONCEPT of going over the Wall quickly receded into the back of my mind. But one day in November 1992, it suddenly reappeared. Ed strode into my office, closed the door, and said “Get up. We’re going upstairs to a meeting of the Corporate Finance Executive Committee in the Morgan Stanley boardroom. There’s a deal that Jeff [Williams, Morgan Stanley’s head of telecom banking] and Paul [Taubman, its head of telecom and media mergers and acquisitions] want us to react to.”
I exhaled with irritation. Yeah, this over-the-Wall stuff had sounded intriguing at the time, but now that intrigue had been buried under a pile of paperwork. I had almost a dozen phone calls left to return that afternoon and he wanted me to go to some banker meeting?
“Huh? How long will this take?” I griped. “Where the hell is the boardroom and what the hell am I going to do in there?”
“I’ll do most of the talking,” said Ed. “Just come with me.”
Still muttering, I hopped on the elevator and walked into the boardroom, where I felt an instant jolt of electricity. Someone handed me a three-page outline, and I quickly scanned it. AT&T was about to purchase a big piece of McCaw Cellular, the country’s largest independent cell phone company. McCaw had received a lot of attention in recent months when it won a bidding war against BellSouth for Lin Broadcasting’s cellular assets. In my world, it was a seismic event, as if IBM bought a portion of Apple. No wonder these guys, some of the top bankers in the firm, looked as if they had ants crawling around inside their Brooks Brothers pants.
“Here’s the deal,” said one banker. “Tomorrow morning, AT&T is going to announce that it’s buying 33 percent of McCaw Cellular. AT&T is paying $42 a share for 47 million new shares of McCaw, a 57 percent premium over its trading price, and $49 per share for 38.5 million shares held by British Telecom. That makes the transaction worth about $3.7 billion. Ed and Dan, what do you think of this move?”
Whoa! Suddenly we were on the spot. Because Morgan Stanley had been AT&T’s lead banker for years and years and AT&T seemed to always have a deal pending, I had not been allowed to write reports on the company or rate its shares. According to federal securities regulations at the time, anything I wrote could be perceived as putting Morgan Stanley’s interests ahead of investors. That was because Morgan Stanley had a huge incentive to plug AT&T’s stock, since it received fees whenever a deal involving AT&T went through. Rating AT&T a Buy could be considered an attempt to convince shareholders to vote for the deal, which of course would benefit AT&T and, by extension, Morgan Stanley. So Morgan Stanley’s lawyers required Ed and me to stay mute.
This silence had become something of a problem for me, since not only was AT&T—the original blue-haired grandma stock—in the news virtually every day but its stock was held by just about every investor on the planet, and I wasn’t able to make a call or advise my clients on what to do with it. (The SEC would later choose to not enforce the rule requiring analysts to recuse themselves, facilitating a huge wave of banker-research conflicts of interest.) I didn’t feel particularly good about AT&T—influenced by my MCI days, I thought of the company as a huge, lumbering oaf that was going to lose its shirt to all of the new rivals out there—but I did intuitively like this deal. I wasn’t sure what to say.
Fortunately, Ed jumped in first. “I think it’s a brilliant deal,” he said. “McCaw is the largest independent cellular company in the U.S., cellular is a very rapidly growing business, and the ability to jointly provide long distance and cellular services ought to give AT&T an edge over MCI and Sprint [neither of which offered cellular].” Ed did point out that AT&T’s earnings would drop as a result of the acquisition, which would probably cause the stock to fall a bit initially, but said that overall the impact on future growth would be very positive.
Then it was my turn. “Anything to add to that, Dan?”
“What strikes me,” I said, “is that AT&T is declaring war on the Baby Bells. It’s acquiring a technology that could be used someday to connect directly to customers, potentially displacing the Baby Bells’ copper wires.” I said I thought most large investors would think it was good news for AT&T and bad news for the Baby Bells.
That was all the bankers needed to hear. I wondered why Ed and I were there; would they have scrapped the deal if we’d thought it was a terrible idea? I doubt it, given the buckets of banking fees they would earn if the deal went through. But the bank had a committee that required all parts of the organization to be consulted. The guy running the meeting asked if anyone around the table had any questions or concerns about Morgan Stanley’s involvement in this transaction. Was there anything that the press, other investment bankers, or my clients, the institutional money managers, might criticize us for? Was there anything in the deal’s structure or valuation that might harm our venerable investment banking reputation? No one said anything, so the committee voted to approve the deal.
We all got up to leave. And I found myself in possession of information that was going to make and lose many people billions of dollars in less than 24 hours. Owners of AT&T shares would likely lose a bit, as would owners of Baby Bell shares. Investors in other cellular companies would benefit, since the possibility rose of takeovers of other independent cellular companies. And obviously McCaw shares would surge when the news hit the next morning.
As I walked out of the room, I felt confused and a bit giddy. No one had told me why I’d been called over the Wall this time but not other times, or how I should handle the confidential information swirling around in my brain. None of the seemingly important managing directors in the room had said hello or introduced themselves. Although they had asked for our reaction, it wasn’t clear they had listened. We analysts still didn’t command a whole lot of respect.
So now here I was, with almost a dozen clients to call back and another hour of trading to go in the market. I felt like a newly minted secret agent who now had to return to my regular life. The telecom analyst at Fidelity had called earlier in the day. So had Tim Armour, the telecom analyst at Capital Group, and several other well-connected buy-siders. I had to call them back. I had already learned that prompt responses to clients were a must if you wanted to get their votes on that survey of institutional investors. Yet now I was in possession of information that could make my clients—and myself—rich, if I used or shared any of it.
Even though no one told me what to do, I knew that I couldn’t breathe a word about the announcement. If I said anything, I’d be passing on insider information and perhaps violating federal criminal laws. Luckily, I didn’t cover AT&T, given its perpetual “restricted” status, and I didn’t cover McCaw either. So it was unlikely that clients would be asking me about either one. But I still had to call them back. What if, somehow, rumors of the deal started to build? I’d be hit with a barrage of calls from money managers and buy-side analysts, as it was no secret that Morgan Stanley had done banking for both firms. They’d ask what I thought of the amount AT&T might be paying and how the shares of each would respond. I had no idea how to respond to these kinds of queries. I’d lived through the insider trading scandals of the late 1980s and remembered how those ended: with those bankers in handcuffs paraded in front of a band of photographers jostling each other for the best shot. I instinctively knew that if anyone asked me about a deal involving AT&T or McCaw, I’d have to play dumb. I got lucky; no one did. But my job had suddenly gotten a lot more complicated.
As the 1990s went on, the planets of the bankers and the analysts slowly began to orbit more closely around each other. While there had always been interactions, now the bankers, long the alpha dogs, were beginning to realize that research could wag its tail too. If used in the right way, those nerds in the back room might help them make big money.
My first strategy session with Morgan Stanley’s bankers happened long before my first over-the-Wall experience. Late in July of 1990, a group of bankers and analysts had gathered in Vermont for a few days of brainstorming at the bucolic Woodstock Inn. It was kind of funny to see all these hardass New Yorkers out of their element: most of them looked as if they’d hit the deck if a deer trotted out of the woods.
On the first day, we got together with the bankers who covered telecom. Ed and I sat on one side of the conference table, while the bankers, facing us like opponents in a chess game, sat on the other. Among them were Jeff Williams and Paul Taubman, Morgan Stanley’s main telecom bankers. Also sitting across from us was a man who worked in Morgan Stanley’s San Francisco office and was responsible for relationships with technology companies. His name was Frank Quattrone.
The mood was congenial—no one was bellyaching over our investment ratings—but still, the bankers needed our help ginning up deals that made sense for their corporate clients. After all, they got paid a percentage of the total value of the deal. We discussed each telecom company.
“Any holes in BellSouth’s portfolio?” the banker responsible for BellSouth asked, hopefully. “Do they need to make an acquisition? Will they need to sell stock or to refinance any soon-maturing bonds?”
Ed and I did our best to answer all their queries. I saw nothing wrong with this—after all, many of these companies were certainly going to do deals as the sector consolidated—and we weren’t suggesting anything we didn’t tell our investor clients. We were there for just a day, and then left so the bankers could go back to their side of the Chinese Wall, discussing secret deals that were already in progress.
Shortly after the retreat, Morgan Stanley split up its telecom and technology banking departments, in large part because of Frank Quattrone. Frank, a dapper, low-key guy from Philly with a Tom Selleck mustache, had joined Morgan Stanley in 1977 and quickly built up a reputation as a banking stud. Among his early initial public offering (IPO) successes were Cisco Systems and Silicon Graphics Inc. One of the first to lock in on the growing number of small technology companies using the public market to raise money, Frank was well-respected at Morgan Stanley, largely because he was bringing in so much in the way of fees.
But he was aware, even then, of the benefit of a positive analyst report. According to The Wall Street Journal, after handling an IPO for a company called Mips Computer Systems Inc., Frank allegedly pushed an analyst, Rick Ruvkun, to put out a positive report on the company in 1990. Ruvkun wrote a report, but rated the stock Hold, not Buy, showing that there were limits to Frank’s clout.1 Frank denied the account in the Journal.
In 1986, Frank moved to Silicon Valley to start Morgan Stanley’s California-based banking group devoted to technology. It was seen as a huge affront to Morgan Stanley telecom banker Jeff Williams, who believed he was in charge of both tech and telecom. But Frank was onto something. Where other people saw obscure technology and engineers who forgot to shower, Frank saw possibilities. He was fast becoming one of the most powerful forces within Morgan Stanley and in Silicon Valley as well.
BY THE BEGINNING OF 1993, after three and a half years on the job, life at Morgan was finally becoming comfortable. Coming to the Street had absolutely been the right move for me. I felt more confident about my performance. I occasionally left my attic on the weekends, and I’d started to get some attention on the Street for my calls. I even found myself enjoying some of the social side of the business—not the schmoozing per se, but the discussions with my clients over the future of this new industry.
The period was a real turning point for telecom, a time in which everything was possible and no one company had the obvious edge. Everything was open to debate, and debate we did, hour after hour, trying to decide the investment implications of this new world. Telecom had seemed like something of a backwater at first, but it was gaining momentum, thanks to the regulatory reforms that were creating competition and the increasing popularity of cell phones. I was thankful that I wasn’t in some dead or dying sector like steel or chemicals.
One blustery day in early January, the phone in my office rang. My assistant put through the call, which I thought at first came from a client. “Dan, we hear you’re doing great work,” Les Carter barked. Carter ran recruiting firm Carter Stone, one of the many firms recruiting Wall Street analysts.
“I’m sure you’re happy at Morgan,” Les said, “but Merrill Lynch is really interested in you. You’re the only one.” Les invited me to breakfast, and I accepted, more out of curiosity than anything. I’m the only one? The guy knew how to make a man feel good. Even if it was a bald-faced lie, which it was, I liked what I heard.
I hadn’t been looking for a change, but the call came at a good time. I had been ranked as a runner-up in the Institutional Investor survey in October 1991, which meant I was in the second tier, below the top three analysts, and then moved up to third place in the most recent poll, which had been published in October 1992. Robert Morris of Goldman Sachs was number one in both of those years, as he had been for the past eight years, and Jack Grubman was number two in both surveys.
Normally, this would have meant a big bump in my pay, but 1990 had been a terrible year for the investment banking business, with lots of analysts getting canned. I was cheap compared to the other analysts, so there wouldn’t have been much point in firing me even if I hadn’t made the I.I. list. Even so, in 1991, Morgan had doubled my compensation to $350,000, and my ego was getting healthier by the day. I wondered if it was time to break free from Ed.
But Merrill? If Morgan Stanley was the aristocrat of the Street, Merrill was the arriviste, at least when it came to banking. Morgan Stanley had no retail arm, whereas Merrill’s bread was buttered by the small investor, served by over 10,000 brokers in 500 offices throughout the world. Morgan Stanley stuck to its fee structure and prided itself on being choosy, while Merrill—eager to convert its highly successful retail brokerage into a world-class investment bank—offered aggressive discounts to win banking business. Cool and snooty versus aggressive and loud; pink pants versus pinky rings; country club versus Paddy’s Pub; the two firms couldn’t have been more different.
After a pleasant breakfast with Les, he told me that Merrill’s head of domestic research, Andy Melnick, would like to meet me on January 20. All the banks had secret clubs or restaurants where they did their wooing. Andy liked to do his recruiting at Fraunces Tavern, a colonial-style eighteenth-century restaurant near Wall Street where George Washington made his farewell address to his officers in 1783. It made perfect sense; Merrill, the firm with the nouveau reputation, tried to buy itself gravitas with meetings at a place like this. I guess they had a deal with the management, because we met for breakfast, even though Fraunces Tavern didn’t serve breakfast—not to regular folks, anyhow.
For us, they did serve breakfast, but apparently we didn’t merit heat. I could see my breath as I chatted with Andy and Jack Lavery, Merrill’s head of global research and Andy’s boss. There was one waiter, clearly brought on for these special meetings, who must have known more about Merrill’s pay structure than anyone else in the world. I should have hired him as a consultant when I was negotiating my salary.
“We are in the process of building the number one research department in the world,” Andy said, “and you are critical to our success. Our firm is completely focused on telecom, and to get a piece of the coming privatization wave, we must have the best possible U.S. telecom analyst.”
Jack and Andy mentioned that they had thoroughly checked me out with buy-siders and were convinced that I was moving up in the I.I. rankings, which they seemed to be very, very concerned about. They also talked up the power of their trading operation, which meant that an analyst’s calls would have a lot more impact than they would elsewhere.
I was impressed, and asked how they would feel about bringing over my associate, Rick Klugman. Rick was a young, eager, loyal guy whose shirttail was invariably hanging out of his pants. He was very bright and worked his tail off, and I hoped to get him a big raise. It didn’t seem to be a problem. Andy presented himself as the kind of guy who would mentor young analysts but otherwise stay out of the way. I found his “aw shucks” approach appealing, even if I didn’t totally buy it.
What I didn’t realize at the time was that Merrill was desperate to recruit an I.I.-rated analyst because the British government was about to choose several firms to lead the third and final phase of the $22.9 billion privatization of British Telecom, and had indicated that no bank without an I.I.-ranked analyst would be considered.
A few days later, I met Dan Tully, Merrill’s CEO and chairman, in his office, which was decorated in standard-issue Wall Street: lots of golf mementos and pictures of Tully with various presidents and CEOs. A jovial, smart, and charming guy, Tully and I hit it off right away. I was flattered that he was making time for me, which was of course the point. With his gift of gab and Irish charm, it was easy to see why he’d been so successful. He quickly homed in on my favorite topics—skiing and family—and we spent the entire time talking about our kids. He called me “Danny Boy,” to break the ice. Later, whenever we ran into each other, we’d race to be the first to call the other “Danny Boy!” I knew I was a bit insolent, but Tully was more the common man than any other executive I had ever met.
Having met the approval of Merrill’s CEO, I then met, on February 2, 1993, with Tom Davis, its head of investment banking, and Jerry Kenney, who was Jack Lavery’s and Andy’s boss and Merrill’s chief strategist. Again, the meeting was treated with as much secrecy as Nixon’s trip to China. It took place at the Essex House, an upper-crusty hotel on Central Park South. My instructions, which had a satisfying whiff of James Bond about them, were to ask at the front desk for the key to room 2112 or whatever it was. Merrill rented a suite there, and when I walked in the room, the two executives were already waiting for me.
I had had to sneak out of the office, telling Rick Klugman that I was going home for my luggage, as I was bound for Amsterdam that evening. Because we worked so closely together and talked so frequently, even when I was traveling, it was a real challenge to come up with a valid excuse for going AWOL. I had enjoyed the process so far, but I wasn’t at all sure I wanted to make the move. Things were going really well at Morgan Stanley, and the pay, of course, was dramatically higher than I could have imagined making just a few years earlier. But Merrill understood something that Morgan Stanley didn’t. The countries of the world, from Indonesia to Britain, were now in the process of privatizing, that is selling to the public, scores of nationally owned phone companies. If one bank could become known as the go-to place for these deals, there were literally billions of dollars to be raised and hundreds of millions in banking fees to be made. Morgan Stanley took privatization seriously on a case-by-case basis, but once I heard the Merrill guys’ pitch, I realized that they were a lot more ambitious.
“Look,” Jerry said, “we need to have the world’s premier telecom research, because fifteen countries or more are going to privatize their telecom companies over the next five years. We want you to be our global telecom leader, and we want you to be our main U.S. telecom analyst as well.”
It seemed as if Merrill was offering me the chance to build my own team, see the world (first class, of course), and participate in the economic restructuring of the post–Cold War era. It had been four years since the fall of the Berlin Wall, and capitalism was now the only game in town. As governments from Europe to Asia to Latin America privatized their largest companies, they could raise a huge amount of cash and inject capitalism into a large part of their economies. Telephone companies were perfect for privatization: they sold a necessity, demand was growing steadily in Europe and very rapidly in the developing world, and new services such as cellular were blossoming.
Then there was the money part. If Merrill was right about the market, the privatization fees would be so huge that the salary and bonus of an analyst was basically irrelevant, a point no one hesitated to make. The headhunter had told me that the job would pay in the high six figures, and I had in my head a sense that that probably meant about $800,000. It was an absurd amount of money, especially because I would be doing something I enjoyed so much.
All of this happened just before bonus checks were handed out on Wall Street. Bonus time on the Street was the most eagerly anticipated, tension-filled month of the year. The rumors began early and spread faster than the usual sex or political gossip. And, once you found out your “number,” it was time to move.
The end of February on Wall Street was the equivalent of summer in the Serengeti Plain, with the annual mass migration not of zebras and springboks, but of bankers, brokers, and analysts to their competitors who were willing to pay more. It was a time to plop new butts in all the suddenly empty chairs, disconnect and reconnect phone lines, empty and fill cabinets, and order new corporate credit cards. It was perfectly normal to walk in one morning and discover that the chemicals analyst you sat next to had evaporated into thin air. One day he was your neighbor; the next day he and his crew had decamped to Goldman, where they were already at work launching coverage. It wasn’t worth it to make great office buddies, because they didn’t last.
So the Tom and Jerry Show continued, climaxing with Jerry Kenney, the strategist and designated closer, making an offer that made my toes curl. “This is going to be your platform,” he said, mustering up all of the salesmanship he normally used on banking clients. “Merrill’s sales force will help you move to number one [on I.I.].” And, oh yes…how would you feel about $1.2 million per year, guaranteed for three years?
“Holy. Fucking. Shit.” I almost blurted aloud. Four years earlier, I was a cog in MCI’s wheel, making $70,000 a year. Now I would earn in one year what I once yearned for in a lifetime. And they also were offering me the chance to head the global research team leading the privatization charge and advising governments around the world. How could this be?
What I didn’t know at the time was that I hadn’t been the first choice for the job. Merrill had gone after a few better-known analysts, including Frank Governali of Credit Suisse First Boston (CSFB) and Joel Gross of Donaldson, Lufkin & Jenrette (DLJ), and had come up empty. Merrill had offered them a lot less money to begin with—apparently not enough to convince them to leave their safer perches and try to build a new platform. Merrill had upped the ante with every succeeding offer.
Even though I probably would have taken the lower offers they made to Frank and Joel, I got the benefit of Merrill’s panic. So I tried to paste on a poker face and told Tom and Jerry I’d let them know. I needed to go home to get my luggage (it wasn’t a complete lie) and then on to JFK to catch that plane to Amsterdam. Jerry knew that. “Tell you what,” he said, putting a cherry on top of the sundae, “after he drops me off at my apartment on Park Avenue, my driver will take you home to Scarsdale to get your stuff, and then to the airport.”
After talking it over with Paula, it became clear that going to Merrill was a no-brainer. I was getting a promotion to managing director and a huge salary increase, and I would have a bigger staff and more dollars to pay them. Equally important, Merrill had far more investor clients—and potential I.I. voters—because it served not just the largest money-management institutions, as Morgan Stanley did, but also many smaller ones. But I still had to play the game.
On February 9, exhausted from the one-day trip to Amsterdam, I walked into the office of Jay Cushman, head of Morgan Stanley’s domestic research, to get my bonus numbers. Jay and Jack Curley, the head of global research and Jay’s boss, greeted me with huge smiles.
“Congrats, Dan,” Jack said. “You had a great year and we’re going to bump you up from $350,000 to $475,000. You’re doing a great job, and this percentage increase is really good compared to the average for the division.”
Most people would have seen a 30 percent increase as a pretty fantastic raise. I would have too, if I hadn’t had that sizzling offer burning a hole in my pants pocket. I had no intention of staying at this point—I felt Merrill understood the importance of telecom in a way that Morgan didn’t—but this game had rules and I had to play it out.
“To be honest,” I said, “I’m quite disappointed.” This was the script everyone knew to use when you were contemplating making a move. Jay was silent. Jack repeated his line, that the increase was much better than the department average and that it was a reflection of the great work I was doing.
Although I was leaving, I couldn’t say anything to anyone until my bonus check cleared at the end of February. As soon as it did, I told Ed the whole story except for the amount Merrill was offering, which I didn’t want to leak out. Ed told me my decision made a lot of sense, but asked for a day or so to see if there was anything he could do. I was going to miss Ed, but I knew that this was the right move and that we’d stay friends for years to come.
A day later, Jay came into my office and closed the door. “We’ve talked with the bankers,” he said, “and the bankers really pay the bills. We want you to stay, and we’re thinking that next year we can pay you $750,000.” Clearly, this was a gangbusters offer in his eyes.
But then came the catch: “Of course, Dan, it’s dependent on the telecom bankers making their budget for 1993….”
That was all I needed to hear: I had no idea what the bankers’ budget was, or what their chances of reaching it were, and I certainly didn’t want my pay tied to how much money the firm received from the companies that I was assigning stock ratings to!
That evening, I flew to Kansas City and St. Louis for meetings with analysts and portfolio managers at American Century, Waddell & Reed, and Boatman’s Bancshares Inc. I called Andy Melnick at Merrill the next morning to tell him it was a go. After my meetings, I went to the airport and then spent much of the rest of the day grounded by a snowstorm, having Andy fax a contract to the airport’s business center so I could review it and then forward it to my lawyer.
On March 1, I told Jay I had decided to take the Merrill offer. I’d already taken all my important reports home with me, because when you leave, you’re outta there the second you give notice. Any files and professional material belong to Morgan, not you. There aren’t any good-bye parties on the Street. It’s just one big see-ya…and don’t let the door hit you in the ass on the way out.
Hold on, Jay said. “Bob Greenhill [Morgan Stanley’s president] wants to see you. Go to his office at 2:30 PM today.” Well, okay then. So at 2:30 on the nose, I went upstairs to the president’s office on the 32nd floor. I waited in his office for quite a while, until finally someone walked in. It wasn’t Bob Greenhill at all.
“Hi, I’m John Mack,” he said, shaking my hand. Mack headed Morgan Stanley’s fixed income department. He was a North Carolinian of Lebanese descent whose father had been a wholesale grocer. Unlike most of the big shots on the Street, Mack was deadly serious and not one for shooting the breeze. He got right to the point.
“Bob resigned today,” he said. He apologized for being late and for the crazy circumstances of him standing in for Greenhill. Mack was very charged up, having just found out a few hours ago that he was being promoted to president of the firm. He had a bunch of crises on his hands already, such as how to hold on to all those Greenie loyalists who might be offered lucrative deals by Smith Barney, where Greenhill had gone. He did focus on me, though, for about 10 minutes.
“I don’t know you, Dan,” he drawled, “but I’ve been told that you’re a very valued employee of the research department and telecom is very, very important to this firm. We would like you to stay. Have we mistreated you?”
“I really appreciate that, John,” I said. “I have been treated very well here. I don’t have specific complaints. Morgan Stanley is a great firm, the research department is tops, and I am making far more money than I ever dreamed.”
“So why do you want to leave?” he asked.
“I’m just really impressed with the seriousness with which Merrill is approaching the telecom sector, the amount of resources they are throwing at it is huge, and the staff I will be able to hire there is larger than I would dare ask for here.” In other words, I’m outta here.
Mack understood and wished me well. My mind was made up and he had plenty of other fish to fry. So I called Merrill’s Andy Melnick and told him my decision was final. He arranged to send over movers in the morning to pack up my personal files and books. Then he called Rick Klugman, my associate at Morgan Stanley, and asked him to come down to Merrill so he could make an offer to him in person.
As I walked out of the office, thankful that my experience had been so great but equally excited for what came next, Linda Runyon, a bright, ambitious new hire who covered the cellular industry, accosted me. “You promised you’d stay here,” she said angrily, her piercing eyes staring into mine. I had recruited Linda six months earlier and she made me promise to stay put. I looked at her and said, “Just stay by your phone.” She, too, ended up shivering at Fraunces Tavern one morning. She came to Merrill with a huge pay raise a few months later, rose to the number one I.I. spot in the wireless telecom category, and stayed there until her retirement in early 2005.
My move set off a wave of musical chairs throughout the entire telecom analyst community, mainly because the BT (British Telecom) deal was fast approaching and the British government had said they would hire only banks with I.I.-ranked telecom analysts. This musical chairs game was good for all of us because we all got major raises. There was a perception of scarcity out there, and we milked it for everything it was worth.
At Morgan Stanley, the executives scrambled to get a replacement for me. They went after Frank Governali at CSFB, a well-regarded analyst who had turned down the Merrill job because he didn’t want the responsibilities of building a global team, especially the intense overseas travel that would entail. Frank agreed to take the Morgan Stanley offer, with a rumored price tag of $900,000, just one month after they had offered me $750,000. To add insult to injury, this one was guaranteed for two or three years and had nothing to do with the bankers making their budget. It was a nuclear arms race, with every analyst getting superpower status. Frank actually accepted the Morgan Stanley offer, but CSFB then matched it, agreed to let him relocate to Portland, Maine, and set up a one-man office just for him. So Frank decided to stay at CSFB.
Now it was April 1 and Morgan Stanley was losing valuable time. Someone suggested recruiting Jack Grubman from PaineWebber, since he was now ranked second, but Ed Greenberg put the kibosh on the idea, saying there was no way that Jack’s style would fit at Morgan Stanley.
Panicking, Morgan Stanley hired Stephanie Comfort from Salomon Brothers, a young woman who had garnered enough votes to become an I.I. runner-up, behind two others and me. I’m not sure what she negotiated, but the rumors were around $800,000 per year. And her move opened up the Salomon position, which nine months later, in January 1994, ended up going to Jack Grubman. Jack scored a salary said to be the highest on the Street, rumored at more than $2 million per year. This made Jack, who had worked for PaineWebber, a retail brokerage with no significant banking business, suddenly part of a major investment-banking house. At the time, no one could have known what that would mean.
I had negotiated a one-week vacation between jobs, but vacation when you work on the Street is all relative. Merrill had dallied so long trying to get someone in this job that it no longer had any time to waste. Privatization was happening right now, and the big deal on the table was the competition to win a piece of British Telecom. The British government was preparing to sell off the last 22 percent of BT shares to the public.
The government would choose two banks, one British and one American, to lead the process, along with several “co-managers,” banks that would play a smaller and much less prestigious role. BT would pay a total of 3 percent of the value of the offering proceeds as its fee, most of which would go to the lead managers. With the offering expected to total close to $8 billion, the participating investment banks could collectively earn a total of $240 million. Merrill wanted to break into the top tier of investment banks, using British Telecom as a wedge to do so. It desperately wanted a piece of the action.
So my trip to St. Martin with Paula—the first time we’d gone away alone in years—was hardly relaxing. Several times a day, the hotel concierge brought me a stack of faxes from Mark Maybell, the head of telecom banking at Merrill, who was preparing Merrill’s presentation to the British government. Maybell wanted to include my views on BT shares. So I sat on the beach calculating subscriber-line growth rates and marking up draft slides while Paula read a book.
I did have time to read one book that week—I Can See You Naked, by Ron Hoff. It wasn’t pornography, but rather a book intended to help inexperienced public speakers conquer fears of large audiences. The main suggestion was to imagine everyone in the audience is naked, while you remain clothed. This, the author said, would stop your heart from racing and your voice from quavering. I figured I’d need the naked trick with my new global responsibilities.
On March 10, 1993, I walked into the glass-enclosed towers of the World Financial Center, where Merrill had its world headquarters, directly across from the two World Trade Center towers that would be destroyed eight years later. I didn’t feel the anxiety that I’d felt just four years earlier walking up Madison Avenue, but I wasn’t exactly calm either. The money was great, and it was nice to be able to cover AT&T and to be out from under Ed’s shadow. But the scope of the new job was much greater. Now I had global responsibilities and a global-level pay package too. I figured Merrill’s top management would be on me like fleas on a dirty dog.
Moreover, unlike Morgan Stanley, Merrill had a huge retail system, the largest in the world—the most customers, brokers, and money under management. Although my research would remain directed at the sophisticated institutional investor, there was no doubt that Average Joe also was going to hear about my calls. More than 10,000 Merrill brokers would pick up the phone as soon as I got off the squawk box and try to talk someone into making a trade.
Brokers needed action to make any money, since their compensation was based largely on transactions. Analyst recommendations were jumped on and embraced like a new lover. Unlike institutional clients, who made their own investment decisions and used my research as one of many inputs, these brokers and investors might actually take every word I wrote or said as the gospel. Now that was scary.
I had no time to dwell on it. It was time to see the world. About 10 days later, on a Sunday night, Mark Maybell and I flew to London so that I could meet Neil Barton, Merrill’s London-based European telecom analyst, and Merrill’s telecom bankers there before we all went over to see the key decision makers at Her Majesty’s Finance Ministry and try to make a good impression. Upon arrival, we quickly showered and suited up at 47 Park Street, a posh London hotel, while our drivers waited outside. I was fried, having skipped sleep in favor of going over every last shred of research and information just one more time.
Staffers at the Finance Ministry had made it clear that the U.S. telecom analyst would play a major part in its choice of a bank. The British government—and many others, I learned—believed that a bank’s U.S. analyst could create a positive halo effect by using his or her influence to get investors excited about BT’s shares. To judge influence, government bureaucrats used the I.I. survey as well as feedback about analysts they received from the largest buy-side institutions. They loved rankings because it gave them cover if things didn’t turn out as planned (“Hey, that American magazine said he was great.”).
But Merrill had a problem. It turned out that Neil Barton, Merrill’s telecom analyst in London, had given BT shares a “3,” or Neutral, rating. How, British Finance Ministry officials asked, could Merrill’s brokers convince investors to buy a stock rated neutral? It was as if an IBM computer salesperson had to tell his customers that IBM itself had rated its own computers only “average” while giving other computers better marks.
Call me naïve, but I actually thought it was admirable to pitch with a “3”-rated stock. To me, it proved Neil’s and, by extension, Merrill’s integrity. As a result, I thought, Neil’s research would be more trusted and thus more influential. Clearly, the British officials and my colleagues on the banking side didn’t see it this way. Nevertheless, no one asked me to push Neil to change his rating. As expected, we didn’t win a lead-manager spot for the BT offering—Goldman did. But we managed to land a co-manager spot, that unprestigious booby prize that generated very little work and equally little in the way of fees. It was a decent start, though.
The next morning (Tuesday), we boarded a chartered jet to Athens, where we had a “beauty contest,” or a pitch meeting, at 2:00 PM to win the right to handle the privatization of the Greek national phone company. As with every meeting of this sort, before getting there I studied each phone company’s history and growth rate. Then I modeled out the rate at which I thought competition would develop, based on that country’s unique regulatory rules. Then I’d make projections of the company’s future earnings and calculate a fair price for the stock.
As I reviewed my slides on the plane, I could already see that there was a pattern to this stuff: virtually all foreign telcos were monopolies facing only the beginnings of competition; all were fat pigs in terms of their inefficiency and gross waste, so had significant opportunities for improvement; and all were seeing a lot of increased demand, especially as cell phones came on the scene.
After our Athens pitch, we rushed back to the waiting private jet and returned to London, where I raced to catch an evening flight to Tel Aviv with another Merrill banker. The drill was the same there: meet as many people as I could who were involved in Bezeq, Israeli’s telecom company, which was considering selling stock. Merrill’s bankers had already spent many hours helping the government prepare. Now it was time to prove that we analysts knew a thing or two about the industry. I was wiped out—a four-hour overnight flight after the previous few days felt pretty brutal—but it was hard to complain, given what they were paying me. I spent a whirlwind two days in Israel, managing to have only a rushed dinner at Jerusalem’s King David Hotel with my sister and her husband, who lived in that historic city, before heading back to the airport.
While waiting for my flight back to the U.S., I tried to call home, but my AT&T credit card wouldn’t work. After several tries, an AT&T operator came on the line, asked me a few personal questions, and then informed me that the company’s fraud detection computers had cut off my calling card. Apparently, the computers deemed it impossible for anyone to have made calls from so many countries in such a short time, so the only conclusion was that someone had stolen my code and sold it to people all over the world. It had to be fraud! But it wasn’t. It was just life as a telecom analyst.
It was all pretty heady stuff: analysts were suddenly gaining the attention and respect of the top executives and the bankers, who for the first time saw us as the key to their winning massive deals. And we were being brought into high-level meetings with government officials, including finance-ministry and regulatory commissioners, who would then look us in the eye and ask us how they should set up their own regulatory system.
I absolutely loved this part of the job; suddenly, I was the policy wonk I’d always wanted to be. Yes, there were bureaucrats just like those in the Department of Education, and sometimes, it turned out, their intentions were more about lining their own pockets than helping their country. But they were motivated to sell as much stock as possible at the highest price possible—and so were the investment banks.
This type of whirlwind schedule became the norm for me for several years running. My head would hit the pillow on a runway in New York and I’d wake up in Asia, or Europe, or South America every week or two. In an era when the computer was beginning to make electronic communications an acceptable form of doing business, my job was still all about the face time. If you didn’t show up in person, you couldn’t understand a company’s basic reality, or the style of its top executives. And if those managers didn’t meet you in person, it was pretty unlikely that your bank was going to win any business. Wall Street, I learned, was as much about kissing the ring as it was about massaging the numbers.
With the really big deals, we needed to roll out the big guns. In Indonesia, for example, where we were competing to underwrite PT Indosat, the Indonesian international long distance company, Merrill’s president, David Komansky, flew in to say hello to the company’s executives and government ministers.
I had met Komansky for the first time a few weeks earlier while rehearsing our pitch back in New York. I liked him immediately. He was a hulking guy with a trader’s mentality who had come up the ranks as a broker, ultimately running the equity desk. Komansky was paid $4.5 million in 1993, but he seemed to revel in his humble roots as the son of a postal worker in the Bronx. Next to “Danny Boy” Tully, he was the best flesh-presser I had ever seen. Merrill was lucky to have both, as government decision makers everywhere just adore that human touch.
All the investment banks brought in their big guns for these privatization presentations. Tully showed up in Germany in the battle for Deutsche Telekom’s business, and Komansky and I flew to Madrid on one of Merrill’s three private jets for a Telefonica de España pitch. We lost both of them. Win Smith, descendant of the venerable Smith family of Merrill Lynch, Pierce, Fenner & Smith and a Merrill executive vice president, came along on a privately chartered jet to Lima, Peru (we won that one). On my flight back from Germany, I sat across the aisle from Jon Corzine, then Goldman Sachs’ co-CEO and future U.S. senator from New Jersey. He had just led Goldman’s presentation to the German government and, like me, had to rush back to the Frankfurt airport and push through the crowds at the security checkpoint in order to make the day’s last flight back to the States.
The funny thing about all of these meetings between senior bank executives and government officials was that the big guys never said anything of substance. Their job was to make small talk, jokes (nothing too culturally offensive), and then bring in the “experts” to show off the firm’s technical qualifications. I was a straight man to their comedy routine.
Over my next six years at Merrill, as capitalist fever spread throughout the world, I traveled to virtually every country with a publicly-traded telecom company or with the near-term prospect of a privatization. My travels took me all over Latin America (Brazil, Chile, Peru, and Mexico), Asia (Malaysia, Thailand, the Philippines, Singapore, Hong Kong, China, Japan, and Taiwan), Australia, New Zealand, Israel, and much of Europe (France, Spain, the Netherlands, Denmark, Sweden, Germany, Italy, Hungary, and Greece). Merrill became the number two global underwriter of telecom privatizations, behind Goldman.
It sounds exotic. But every trip was made in the shortest time possible—often just overnight, even if it meant traveling 24 hours each way for a two-hour pitch. After all, if I didn’t get back and keep my investment ideas and face in front of my institutional investor clients, I would have no chance of getting I.I. votes—which would send my career into a tailspin.
Here’s how a typical day would go: in order to get to Jakarta for a Monday morning meeting, I’d leave Saturday evening from JFK and fly to Amsterdam on Singapore Airlines. Staying on the same plane, I’d lay over for an hour in Amsterdam, where I could check my voice mail and call in any changes to reports my team had drafted. Then I’d fly to Singapore, arrive around 6:30 AM, connect to a one-hour flight to Jakarta, and arrive at about 8:30 AM Jakarta time. Elapsed time: 24 hours.
There was no time to relax on the plane, because I’d have a stack of articles about the country ready for perusing plus, if it was a banking trip, a three-inch-thick briefing book. Fortunately, Singapore Airlines was one of the first major airlines to install fully reclining seats in its first-class cabin, and that made a huge difference. I’d walk off the plane and be met by a driver, who would take me straight to the Park Hyatt or the Regent. I’d take what sometimes amounted to a $300 shower, since the room had been reserved from the night before.
After a change of clothes, I would rush to the first of many meetings that day. It was only as the day went on that things got brutal. Usually there were meetings stacked on meetings with the company executives from different departments—the marketing folks followed by the finance people, for example—and I had to stay alert and ask lots of questions.
Then came the hospitality portion of the visit: our hosts would insist on taking us out for a deluxe, booze-filled dinner showing off the culinary achievements of Indonesia. By this time, it was all I could do to keep my head from rolling off my neck, but it was time to be sociable. I didn’t drink at these events, even though just about everyone else did. I could never keep up with the locals, not to mention the bankers. So I just didn’t do it. Doubtless a lot of people thought I was a boring old teetotaler, but it was strictly for self-preservation.
The other problem I had was the food. I loved tasting every regional specialty, but let’s face it: I am a guy from Buffalo with minor lactose intolerance. Sure, Buffalo is the home of spicy chicken wings, but add some funky spicy rijsttafel and papadam to my fast-developing jet lag and I was in big trouble. I’d sit there, listening to the local Merrill banker flattering the company’s CEO and CFO, praying for the evening to end. “Please,” I prayed to the god of digestion, “hang in there, stomach!” Getting back to the hotel was often a race to the bathroom. It was an unanticipated downside of seeing the world.
But that wasn’t the end of my day, either. By the time we’d get back to the hotel, it was 10:00 or 11:00 PM, which meant the markets were open in New York. So after calling home, I’d check in on how the telecom stocks were trading, get my messages, and read all my faxes, articles, and any draft reports.
Then there were the clients. Just because I was halfway around the world didn’t mean I didn’t have to carry on with their care and feeding. I’d stay up until 2:00 AM reading, checking voice mails, and returning calls. Finally I’d get in bed, but every few minutes I’d hear the scratchy noise of faxes being shoved under the door. I wouldn’t be able to sleep much because of jet lag, so I’d regularly get up and check them, then check my voice mail again, and finally get up at 6:00 AM and start the whole process all over again. A long trip to Indonesia, believe it or not, would be two days.
Once, I had a few hours free, so I hoped on a flight to Bali and sat on the beach for an hour and then hired a driver to show me the religious shrines—just so I could say I had actually been to Bali and seen its treasures. Pathetic. I had to laugh: when they told me I’d be seeing the world, I didn’t realize that meant I’d be seeing it through car windows.
Singapore Airlines it ain’t. That’s what I was thinking as Rick Klugman and I boarded the decrepit 16-seat propeller plane from Atlanta, Georgia, to Jackson, Mississippi, one October afternoon in 1993. Because there were no direct flights from New York to Jackson, we’d flown to Atlanta first and laid over for two hours. All this in order to see some tiny long-distance reseller Rick was interested in. I didn’t quite see the appeal, but I trusted Rick and figured he knew what he was talking about. Plus I’d never been to Jackson. If my move to Merrill was about seeing the world, wasn’t a hotel room in Jackson as exotic as one in Jakarta?
The company was called LDDS, an acronym for Long Distance Discount Services, which pretty much summed up exactly what it did. It leased excess long-distance capacity from AT&T, MCI, Sprint, or WilTel, a Tulsa-based wholesaler that installed fiber-optic lines inside its oil pipelines to carry phone calls. LDDS then resold the long distance service under its own brand to small businesses and residential customers. There were hundreds of these Mom-and-Pop-type long distance resellers, and the sector was ripe for serious consolidation. Merging many of these companies would create economies of scale in everything from sales to billing to technology. So keeping abreast of the most successful of these was critical for those of us who covered telecom. Although Rick handled most of the largest resellers, I’d often go with him when visiting a new company.
Rick had first brought this company to my attention right after we started at Merrill. Investors were asking about this LDDS outfit, he said, and he had to figure out what the deal was. I got the picture, although I already felt we were overextended: resellers were hot, in part because Jack Grubman had been the first of the rated telecom analysts to initiate coverage, with very positive ratings. Now the rest of us were playing catch-up while Jack enjoyed the better access and attention from these executives that came from having been the first to the party.
Our taxi pulled up to a seedy, sorry-looking Holiday Inn in the middle of downtown Jackson that just happened to be across the street from the equally forlorn LDDS world headquarters. We could have stayed somewhere more deluxe, but the choices were limited and I, by this time, valued 15 minutes more of sleep a lot more than some ultracreamy shampoo in a hotel room farther away. As I got ready for bed, I thought about this peculiar Wall Street ritual: the company visit.
The first visit to a public company is a weird combination of brownnosing and shoe-leather detective work. It’s an analyst’s obligation to thoroughly kick the tires of a company, to determine whether or not to launch coverage of the stock and, if so, where the gray areas and potential weaknesses lie. After all, the only thing worse than missing out on a hot stock is leading your clients into a bad investment and actually losing their money.
There was another side to the company visit too: the attempt to make nice with the management and gain their respect, or at least their belief that I could influence their company’s stock price. If I was able to, they might be more forthcoming with information that would give my reports an extra edge, allow me to host meetings for them, or agree to speak at my conferences. Indirectly, there was the hope that they’d also do some of their banking with Merrill, which might reflect well on me.
Hence, the ideal scenario for analysts was to find undervalued stocks, recommend them to investors, watch the stocks rise by virtue of good earnings reports that the analyst, ideally, had predicted, humbly accept credit, intelligently talk strategy with company executives, and then let the bankers try to sell the company M&A (merger and acquisition) and financing services.
All of these things were on our minds the next morning, October 4, 1993, at 9:30, when we walked into the dingy headquarters of LDDS. It looked more like a two-bit actuary’s office than a national telecom company. But that was the essence of this company, a no-frills, cheapskate approach to telecom founded by Bernie Ebbers, a one-time gym teacher and milkman who got the name for his company from a waitress in a diner. As the legend goes, she wrote LDDS, for “Long Distance Discount Services” on a paper napkin as she served Bernie and his three buddies coffee. Never would a napkin receive such iconographic status, as LDDS went on to become MCI WorldCom, the most celebrated—and later, reviled—company in telecom history.
We were led into a conference room, where we were joined by the CFO at the time, Charles Cannada. Rick had prepared a list of questions, and we spent about 90 minutes discussing virtually every aspect of the business, from the cost of local access to the various sources of revenue. LDDS had already made some 50 acquisitions, all of which, it claimed, had been successfully assimilated into the company’s operations and generated lots of cost savings in the process. The strategy was classic “roll-up:” buy the little guys, squeeze the costs out, and plow the savings into more acquisitions. When we probed further on the acquisitions front, Cannada suggested that we wait to talk to Bernie, the CEO, since he made all the major M&A decisions for the company.
Finally, Bernie Ebbers walked into the room. He was tall and thin, with an easy, long-limbed jauntiness about him that projected a casual confidence. Rather than the classic business suit the rest of us wore to meetings, Bernie dressed in cowboy boots, slacks, and a narrow string tie. He was from western Canada originally, but had come down to Mississippi for college on a basketball scholarship and stuck around, becoming a gym teacher and then buying a motel business before giving the telecom sector a whirl. I couldn’t decide whether he had deliberately dressed down to demonstrate how informal and approachable he was or whether he had dressed up in his very best duds.
Bernie didn’t kiss our asses, probably because in the 10 months since Jack Grubman had launched coverage, the stock had shot up 63 percent. Jack had been the first to discover and tout the company to investors, and Bernie clearly appreciated it. LDDS had also just inked another acquisition—Advanced Telecommunications Corporation (ATC), a medium-sized Florida reseller whose CFO, a young man from near Albany, New York, named Scott Sullivan, would soon join the company as treasurer. A year later, in December of 1994, Scott was promoted to CFO, replacing Cannada. Bernie, Scott, and Jack would together create a partnership that would bring all of them riches and accolades for many years. Ultimately, however, that symbiosis would turn sour, creating a disaster not only for the three of them but for practically every investor and employee in the sector.
Bernie, Rick, and I had a pretty freewheeling conversation. We asked him whether there were more acquisitions to be made; yes, he assured us. We asked whether he’d have to sell out to a network company like Sprint or MCI at some point. He intentionally smiled at the selling question, but never in our wildest dreams did it occur to us that he’d end up actually trying to buy both of those much larger, established companies.
Bernie asked us questions, too; he seemed particularly interested in whether the Street preferred organic, or internal, growth to acquisition-fueled growth. He didn’t ask us about how institutional investors viewed telecom, but he did ask about the types of stocks that Merrill’s brokers liked. He clearly saw Merrill as a conduit to the individual investor.
Rick thought Bernie was a cool guy. He might be cool, I thought, but there was also definitely something a little off. I couldn’t get a handle on him. Was he a smooth-talking salesman or the real deal? He was so different from the other telecom execs, who to a man were buttoned up corporate straight men with long careers in the industry. But a former P.E. teacher? What could he possibly know about telecom—or P/E ratios, for that matter?
For lunch, Bernie and Charles took us across the street to the Jackson City Club, at the top of a local bank building. It was probably the best view in Jackson, but it wasn’t the Rainbow Room. We helped ourselves to the buffet lunch (I took it easy—southern fried food did me in almost as quickly as Indonesian) and kept talking. When we returned, Bernie invited me into his office while Charles took Rick back to the conference room. Clearly, Bernie wanted to have a private chat with me. As I sat in front of Bernie’s large, virtually empty desk, he looked me in the eye and pulled out a two-inch-thick loose-leaf binder. “Dan, you guys were asking a lot about additional acquisition opportunities,” he said. “Let me show you our list.” My eyes got big. Was he going to show me his planned deals? That would be absolutely proprietary information—info that, if I passed it along, could make my clients millions. Of course, having that information in advance, if he actually went ahead with the deals, would be the textbook definition of insider information. I just looked at him.
But it turned out that Bernie was only trying to show me that he’d done a lot of advance work. The notebook faced him, so I could see the page it was opened to but not exactly what was written on it, as it was upside down. And yes, when I say written, I mean written. The book was full of those green accountants’ spreadsheets, and the figures and notations were all handwritten. Geez, I thought. It was 1993, 14 years after I had first learned to model financial forecasts on a desktop computer, and this company’s CEO wasn’t even working with Excel spreadsheets? Either this was one sharp old-school dude or he ran one very backward company.
“For each potential acquisition,” Bernie explained, “I have a single sheet. Each sheet lists the synergies [cost savings] we think we can get in each of the first three years after we buy it. Each sheet also lists the impact on the first year’s earnings. If the impact is positive, we can do the deal anytime. If the impact lowers our earnings per share, we won’t do it.”
I was amazed, first at the utter simplicity of Bernie’s strategy, and second, at the fact that he, the CEO, was so involved in the small details of every potential acquisition. In my experience, those kinds of details were always left to the CFO, and the CEO’s job was more to guide overall strategy.
But Bernie cared about the little things. He was intimately involved in the cost-savings side of the equation as well, scrutinizing each salesperson’s weekly productivity, for example, and, as I later heard, monitoring the company’s expenses for coffee and other office supplies. As Dave McCourt, CEO of a startup telecom company called RCN and also, for a time, a board member at WorldCom, told me several years later: “Bernie manages very simply: he watches every cost item very closely and, to keep the sales force pumping, every month he fires the lowest-producing salespeople and gives bonuses to the highest producers. Believe it or not, it works extremely well.”
Certainly, the numbers in Bernie’s simple world were impressive: LDDS’s stock price had a price-to-earnings ratio that was much higher than many other companies’. That was because LDDS’s earnings were growing very fast and also because, thanks in part to Jack Grubman’s support, it had attracted the momentum crowd, investors who were willing to pay high prices for companies that grew earnings rapidly and consistently beat investor expectations. It had a higher earnings growth rate because it kept buying companies that would actually add to earnings per share in the first year, and it was beating expectations, in part because it intentionally lowballed the cost savings from each acquisition. It was a virtuous cycle, so long as there were more and more acquisitions to make.
Having tempted me with his Stone Age spreadsheets, Bernie closed the notebook, moved it off of his spotless desk, and put it back on the credenza. As Rick and I headed downstairs for our taxi, I heard the parting words I’d hear from many executives in the years to come: “Dan, I sure hope you make us a Buy!”
We didn’t. Rick initiated coverage of LDDS with an Accumulate rating, which was between a Buy and a Neutral. According to Merrill’s definitions, a stock rated Accumulate was predicted to rise between 10 and 20 percent over the next 12 months. The report set a target price of $26.50, representing 11 percent upside from LDDS’s current share price of $24. He also categorized it as “Speculative,” the worst of Merrill’s risk levels. Rick’s report was fair, I thought, but not googly-eyed with admiration. It acknowledged all of the good things going on at the company but also mentioned the risk that the growth-by-acquisition story could run out of juice. I agreed with Rick’s conclusions, but I hadn’t told him what to write. He reported to me, but he was entitled to draw his own conclusions.
Two months later, after the stock had reached Rick’s target price, he downgraded LDDS to Neutral. Using Merrill’s definitions, this meant that he was predicting the stock would fluctuate somewhere around 10 percent above or below its current price in the next 12 months. Bernie wasn’t happy. From that day forward we would have a very testy relationship. He clearly wanted a Buy rating from us, as it would bring in a whole new cadre of potential investors—Merrill’s huge individual investor base—which might, in turn, boost LDDS’s stock and enable it to be used to buy additional companies. Rick’s rating did the opposite, since retail brokers were not about to waste their breath pitching a Neutral-rated stock with “speculative” risk to their clients. Even Accumulate-rated stocks, also called Outperform or even Buy at some firms, did not interest many professional money managers. After all, they wanted a few great stocks to put into their narrow list of stocks to own. As such, even 10–20 percent upside sometimes didn’t look so enticing, especially if it carried high risks as LDDS did.
I think that Bernie was also insulted by the fact that I delegated the lead coverage role to Rick instead of taking it on myself. This signaled to him that I didn’t consider LDDS enough of a major company to merit my full attention. It was true: I never thought Bernie’s company would become a major player. Moreover, I had my hands full and it was Rick who knew the reseller market best and who had brought this company to my attention. Rick had earned the opportunity to cover this strange company with the weird—or was it cool?—CEO.
Even when I later took over coverage and upgraded the stock for a while, my relationship with Bernie remained strained. My employers got very little banking business and it was always a struggle to get Bernie to speak at my Global Telecom CEO Conferences. The analyst’s job, it turned out, was a lot more complicated—and personal—than simply writing reports and rating stocks.