The contract was ready for signing. All I had to do was put pen to paper and I’d have a nifty $1.5 million bonus that I hadn’t even expected, in addition to having doubled my pay. It was truly surreal. The most surreal thing of all was the fact that the bank would never even miss it. A mere $1.5 million? For CSFB, it was a blip, nothing more, nothing less.
IN THE FALL OF 1999, Institutional Investor magazine published its annual ranking of the All-America Research Team, along with a cover story looking at the trends in the research business and the changing role of the research analyst. For the third year in a row, I was the second-ranked telecom analyst, behind Jack Grubman. I wasn’t surprised at all: he was not only the best-known analyst in telecom but also the best-known analyst on all of Wall Street. Some hated him, some loved him, but everyone listened to what he had to say.
And if you really listened to what he said, it was pretty amazing. I.I. interviewed Jack as part of its cover story, and he was proud to speak out, a man at the top of his game. He made no apologies for his aggressive actions in favor of the companies he liked, as well as his role in helping Salomon Smith Barney’s bankers land some of the biggest deals on the planet.
“Though some money managers grouse that they can never get him on the phone because he’s so busy helping out on deals, many more rave about the connections he’s made with top telecom company executives from all that deal making,” the magazine wrote.
Jack’s response was bold, even for him. “‘The role of the sell-side has changed so dramatically. You try to do your best to stay objective, but it’s becoming an increasingly difficult challenge,’ says Grubman, stressing that disclosure of potential conflicts to clients is essential. ‘They know when I have an ax to grind—I tell them. There are known conflicts and potential land mines. But anyone who steps on one, it’s really shame on them.’”1
Earlier that year, Jack even announced proudly to a rival banker that “when it comes to Bernie and me, there’s no Chinese Wall.” He also sent a blast voice mail to upward of 1,000 buy-side analysts and money managers mocking a competitor at PaineWebber who had predicted that WorldCom would end up acquiring Nextel, a wireless company, despite the fact that negotiations had recently been broken off. “I was there and I didn’t see [the PaineWebber analyst] there across the table,” he bragged. “Believe me, these companies are not getting back together. This deal is dead!”
Jack was simply rubbing all of our noses in the fact that he was on the inside of these negotiations and the rest of us weren’t—so how could any of us predict the future better than him? The New York Times published a short article summarizing the voice mail and, once again, I figured Arthur Levitt’s SEC would now be propelled into action, even if it hadn’t before.2
This was typical Jack: brash, arrogant, reckless, and—literally—daring. He was daring the authorities to catch him. Jack seemed to feel he could tell the world that he knew what he was doing was dangerous and possibly wrong, but somehow he felt he was so clever that he could fly above the fray. Shame on them?
On September 8, 1999, about 200 Wall Street investors and analysts who covered the telecom sector arrived at the Kansas City Hyatt for an all-day meeting with the management of Sprint, the $80 billion telecommunications giant. The meeting had kicked off the evening before in the hotel’s ballroom with a dinner and a keynote speech by Sprint’s longtime CEO, Bill Esrey.
I managed to get a seat next to Bill. Also seated at the table were eight other analysts. Some were from the sell-side like me, and others were buy-siders from money management firms and large pension funds. As we dined on filet mignon and poached salmon and sipped red wine, it was business as usual for me: find out what was going on at Sprint and then turn that edge into value for my clients.
We had about 30 minutes before Bill Esrey was scheduled to speak to the entire room, so we jumped right into it, each of us eager to sneak in a few questions that might tease out a little information about how the numbers were looking and what strategic moves Bill might be contemplating. Virtually all of Sprint’s competitors had been caught up in the epidemic of M&A activity. So when the conversation turned toward possible mergers or acquisitions on Sprint’s part, we all leaned forward in our chairs. Would it be better, I asked, for Sprint to partner with a Baby Bell such as Verizon or BellSouth, or to merge with a foreign-owned company, such as Deutsche Telekom? Bill gave the expected pluses and minuses of each, seeming to lean away from both moves. As often was the case with Bill, who seemed to hate analyst meetings, he was just vague enough to give us nothing to go on.
Finally, I threw out the question none of us expected a serious response to: might Sprint consider merging with another long-distance company, like AT&T or MCI WorldCom? It was a very unlikely scenario, since it would certainly set off alarm bells in the world of antitrust, and since Bill himself had often slammed WorldCom as a poorly managed company. So I was surprised to hear him suddenly launch into a discussion of the pros and cons of a WorldCom–Sprint merger. He remained firmly in the theoretical, but it seemed—to my ears at least—that the pros outweighed the cons. Bill said the cost-savings would be huge. When probed, he said he didn’t think the government should oppose such a merger on antitrust grounds. Uncharacteristically, he didn’t even criticize Bernie Ebbers and the rest of WorldCom’s management. It was odd to hear the usually reticent Bill Esrey entertaining such an idea at all. He wouldn’t really consider such a move, would he?
We all wanted to press him further on this, but just then our private time was over and it was time for Esrey’s speech to the entire group. He bounded up on stage with the energy of a fit ranch hand, his bald head reflecting the bright lights. With a slight lisp, he delivered an upbeat outlook for the company, projecting that revenues would grow 20 percent per year for the next three years, propelled mostly by Sprint’s wireless PCS unit. He said nothing about any possible deals.
When the speech was over, my tablemates and I went out into the lobby for a break. Suddenly, the cell phone of one of the buy-side analysts rang insistently. It was a banker friend, calling from Germany, he said, who had heard a very specific rumor of a coming Sprint–WorldCom merger that would give Sprint 0.94 shares of WorldCom, or about $70 for each Sprint share, more than 50 percent above its current price. If true, it would be enormous, the biggest deal ever. My blood began to pump, fueled by a combination of fear, anger, and excitement. How could someone in Germany already know something that had not yet been announced? I strained to hear more.
As we left the ballroom and descended the steps to the hotel lobby, we saw Jack Grubman coming through the front entrance of the hotel with two telecom analysts from two of the world’s largest mutual fund groups. Shoulders hunched in his oversized, double-breasted suit, he projected the cocky confidence of a man who knew billions hung on his every word. Jack and the two buy-siders had gone out to eat, intentionally missing Bill Esrey’s speech and, of course, the chance to pick Esrey’s brain at dinner. How could they afford to skip out on these opportunities, which, after all, were the analyst’s bread and butter? To skip the dinner and the interaction with Esrey and Sprint’s top executives meant they must have felt pretty confident about their own abilities to predict the future. Or perhaps they simply felt that their powers of prognostication would gain far more from two hours with Jack Grubman.
Agitated, adrenaline on overload, my buy-sider friend spotted Grubman and homed in like a heat-seeking missile. “I’m going to ask Jack,” he said. “Since this involves WorldCom, if it’s real, he’ll know for sure.” He assumed that Salomon would be doing the banking and, therefore, that Jack might have gone over the Wall. About 30 minutes later, I ran into the investor at the hotel bar. “Dan, Jack says those numbers are exactly right: 0.94 WorldCom shares for each Sprint share.”
The specificity of the rumor—and Jack’s confirmation of it—staggered me. Nothing had been announced. How could Jack know the exact ratio of the deal? Had a Salomon banker or someone from WorldCom tipped him off? Had he been over the Wall and decided to share what he’d heard?
Suddenly, I had two big problems. First, I had a Neutral rating on Sprint’s stock. If the rumor was true, I would look pretty bad, since Sprint’s shares would trade way up once the deal was announced; $70 was a huge premium to Sprint’s current $46 stock price. Should I upgrade my Sprint rating based on what I had heard? It was only 9:00 PM and I had all night to write it up, get it approved by Merrill Lynch’s compliance department, and announce it to Merrill’s brokers the next morning. I would look brilliant if the deal was ultimately announced.
But there was a second, much bigger problem with that. If Jack’s confirmation was based on inside information, now I, too, was in possession of it. If I upgraded the shares, I could be using that inside information illegally. On the other hand, people traded on rumors all the time. Maybe Jack and these guys were simply dealing in gossip, which to my knowledge wasn’t illegal. But this seemed like too big a leak in too big a deal. Surely, it was going to be the one that would finally get someone busted. I left my Neutral rating in place and decided to take my lumps if the merger actually happened. Better to be wrong than in stripes.
It took sixteen days for The Wall Street Journal to sniff out the rumor. On September 24, The Journal printed a story speculating that WorldCom and Sprint executives were discussing a merger, causing Sprint shares to jump almost $4 or 8 percent that day. But the two stocks had already moved and some investors had already profited: in the sixteen days before the Journal’s “scoop,” Sprint shares had risen by a total of $5.4 billion, or $6 3/16 per share; and WorldCom shares had dropped by $1.9 billion, or 93 cents per share. And the market value of Sprint PCS, also likely to be acquired in the transaction, rose $6.4 billion, or $6.75 per share during the same 16-day period.
Together, that added up to a total of $13.7 billion of shareholder value that had changed hands, with some investors winning thanks to their inside information and others losing thanks to their lack of it. If you or your mutual fund sold shares of Sprint during that time, the buyer of your shares may have been armed with an unfair edge. Alternatively, you or your fund manager may have bought shares of WorldCom without realizing what the seller may have known—that WorldCom shares would likely fall once the deal was announced. You’d been cheated without knowing it. After the article appeared, another twelve days passed before the deal was officially announced—at, yes, exactly the ratio that the investor had heard and Jack Grubman had confirmed. It was clearly old news for some big players.
It was indeed the biggest deal ever announced in the history of Wall Street, and not only did Jack Grubman know about it beforehand but, it appeared, so did at least one of the world’s largest money management firms. It had happened again. But this time, the leaker had given four weeks’ notice, rather than the three days’ when Global Crossing bought Frontier or the 15-minute heads-up given when Frontier bought ALC.
Of course, it was impossible to know where the original leak had come from. It was equally impossible to know whether Jack had obtained this confidential information while over the Wall—that is, while he and Salomon Smith Barney were advising WorldCom in the negotiations with Sprint. Perhaps he was merely passing on a rumor that someone else had passed to him. But if he had been over the Wall, it was a suicidal move, I thought, given that there had already been an internal investigation at Salomon over his compliance issues. I had also heard whispers that the SEC had been preparing a big file on him. With The Wall Street Journal’s critical pieces about him in 1997 and the one about Level 3 a few months earlier highlighting the conflicts of interest between his research recommendations and his banking maneuvers, I felt certain that his every move was being tracked.
A few months earlier, I’d received a call from a Forbes reporter who wanted to write a story on how some analysts might be using advance information to their advantage as well as promising bullish research on a company’s stock in exchange for that company’s investment banking business. I gave him some ideas to pursue and names of people to call, stressing that I wanted to remain off the record. I hadn’t heard back from him by this time, but with all these questions percolating, I figured it was only a matter of time until Jack got what was coming to him. I told Paula, for what felt like the tenth time, “Well, he’s finally tripped the wire. If he’s breaking the law, it’s just a matter of days now.”
In the meantime, my relatively skeptical reports and opinions apparently weren’t playing well in the executive suites of Merrill Lynch. As Salomon continued to win the lion’s share of telecom deals, David Komansky, Merrill’s CEO, couldn’t help but notice. Merrill had, earlier that year, hired Henry Blodget from Oppenheimer & Co. as its Internet analyst after his outrageous call that Amazon.com would go to $400 a share came true and anointed him the hottest name in Internet stocks. Although Merrill still lagged several other banks, the banking that had begun to flow Merrill’s way as a result of his hiring made it all the more obvious that this wasn’t happening in my sector.
As more and more companies went public, there were more and more companies to cover. While our telecom team had expanded to six people to meet the demand, there were certain companies, like Level 3 and other dot-com types, that just weren’t going to be covered by me—partly because I didn’t have the time, partly because I thought they were overinflated blobs of nothingness and not necessarily telecom companies. This frustrated Merrill’s bankers and executives, of course.
Although I didn’t hear this story until years later, in the middle of 1999, David Komansky had a meeting with Tom Davis, who ran Merrill’s investment bank and reported directly to him. Komansky apparently complained about Merrill’s low market share in telecom investment banking deals and asked what exactly was causing it to lag so far behind SSB’s. I don’t know if the words “Why can’t Dan be more like Jack?” were ever uttered, but that apparently was the strong implication. Salomon was cleaning up in the telecom sector, and Merrill wasn’t. David Komansky, naturally, wanted to rectify the situation.
I was beginning to feel increasingly out of step with the Merrill team—and with the evolving role of the analyst, if what that meant was that I had to be like Jack. But I was hardly about to quit. I still viewed my job as the best in the world. It was lots of fun, intellectually challenging, and brought personal dividends from press quotes, mentions on CNBC, and the appreciation of my team and clients. My job was also outrageously well-paid, and I had a contract that in 1998 had been extended through 2000 with a fixed sum regardless of how much telecom banking work Merrill did, or whether I made it onto the I.I. list, or how my stock picks turned out.
I still loved the essence of the job: my team, debates with clients, and the adrenaline rush during breaking news events. Since I’d started at Merrill, I’d hoped to take early retirement at 50, and now, at 46, I still had a way to go at a time when the once-rational market had reached heights that none of us could ever have imagined. By September 1999, the Dow Jones industrial average and the NASDAQ index had more than tripled from the end of 1992.
A few months before the Sprint meeting, back in June of 1999, Andy Melnick, Merrill’s director of research, came to me with a proposal to hire Tim Weller, one of Donaldson Lufkin & Jenrette’s telecom analysts, to work side by side with me. The idea was simple: he could cover some of the newer stocks that I wasn’t interested in covering or didn’t have time to cover. I had met Weller a few times at analyst meetings over the past year or so and thought he was extremely bright and funny.
I also had a fond memory of Tim from three years earlier, when Jack Grubman sent out the report bashing Merrill’s and my integrity and claiming that MFS was so much better than Teleport. Tim backed me up. His report said: “Our friend Jack Grubman has pointed out a few reasons why he feels MFS is a better company than Teleport. Since Jack has a fondness for hyperbole, we offer a few counterpoints to keep him honest.”
With a PhD in electrical engineering from the University of Illinois, where he studied with Mark Andreessen, the inventor of the Web browser and a co-founder of Netscape, Tim was one of the very few people on my side of the Street who could claim to understand the Internet. Perhaps for that reason, he was much more positively disposed toward the smaller dot-com telecom companies than I was.
One thing Tim wasn’t, however, was I.I.-ranked. The I.I.-ranking had always been the yardstick by which all of us were measured, on the assumption that without a high I.I. rating investors wouldn’t follow our advice and thus companies wouldn’t hire our firms for big deals. Merrill’s consideration of Tim made me wonder if this equation was beginning to change, favoring analysts who could convince investors to buy new-economy stocks, regardless of their ranking on some silly old-economy survey.
Although I found the idea of another telecom analyst—particularly one who didn’t report to me—a bit threatening, on the face of it Andy Melnick’s idea made sense, and I thought it might work out fine. If he covered some of these stocks that I had refused to or that fell outside of my traditional coverage, that would lighten my team’s workload. It also meant Tim—not I—would have to deal with the crazy valuations the market had put on some of these Internet-related startups. And, of course, he would have to deal with the deal-crazed bankers trying to ramp up Merrill’s share of technology and telecom deals.
So Tim came to our offices to meet with Andy and me, and everything was going smoothly until we started talking about stock coverage. Tim said he wanted Level 3 and Qwest as well as the Internet-type companies that I hadn’t been covering anyhow, some of which I hadn’t even heard of. They all made sense to me except for Qwest. “I’d love to get Joe Nacchio off my back, but it’s a core company for me,” I said. “Qwest is buying US West; it’s a Bell company far more than it is a dot-com or Internet company.”
I went home and started to think that maybe there was something sinister going on here. Most distressing to me was the possibility that Merrill wanted to transfer responsibility for some of the stocks I covered to an analyst who might be more bullish. It sure began to smell funny. The more I thought about it, the more I worried. Why would they bring in someone of Tim’s caliber if they intended for me to stay? Was a palace coup in the works, an ambush meant to ultimately push me out the door?
Of course, they would still have to pay my salary and bonus through the end of 2000, but next to the potential banking fees, that would be a pittance for Merrill. It was a very neat way around the problems I was causing: simply bring on a bull who didn’t have any of my issues or concerns and give him coverage of the hot, deal-making companies such as Level 3.
But I felt a lot better when Rosemary Berkery, Andy’s co–global research director, came to me a few weeks later and asked if a new, extended contract would make it easier for me. I said it was a possibility, but only if my coverage list was protected. Otherwise, I pointed out, investor clients and salespeople would see it as a signal that my responsibilities were being reduced, which in turn, would hurt my ability to compete for attention and votes.
So a few days later she came back to me with a new three-year contract that took me through Spring 2002. It explicitly stated that Qwest could be taken away from me if Merrill hired a new senior-level analyst. It was a switch from my prior contract, which had said that Merrill couldn’t reduce my responsibilities unless it was willing to pay out my contract in full and send me on my merry way—not an entirely unappealing scenario.
I upped the ante a bit, asking Rosemary, a serious, hard-nosed professional who later became Merrill’s general counsel, to make it a four-year deal, one that would take me to my Spring 2003 early retirement target date. She said yes—if I would agree to an exception that allowed Merrill to hire an analyst “with responsibility for companies engaged in Internet applications plus Qwest, Level 3 and up to two other companies engaged in or entering into similar businesses.” This meant Merrill could take away the new economy’s hot highfliers, even Global Crossing, but they couldn’t take any of my core companies, such as AT&T, WorldCom, or the Baby Bells, and that satisfied me.
Yet it was all for naught. It turned out that Tim Weller wasn’t quite as interested in the job as he’d said he was. In August of 1999, he accepted the CFO job at a red-hot Internet startup called Akamai Technologies. When it went public at the end of October, Weller was suddenly worth over $300 million on paper, making whatever he’d been negotiating for at Merrill a joke, at least until Akamai’s stock later collapsed. On the other hand, if he had come to Merrill and taken over coverage of Qwest shares, it would have worked out a lot better, certainly for me and possibly for both of us: within two years, Qwest would become my most disastrous stock pick.
Still, the whole saga kept me on edge for a while. I knew Merrill couldn’t and wouldn’t fire me, as it would be a public relations nightmare to do so without any poor performance or wrongdoing on my part. The press had already been publishing pieces about the growing conflicts between analysts and bankers, and I knew several journalists who would love a story like this one. Plus Merrill would have to pay me. But I couldn’t stop worrying. What did all this mean?
A ringing telephone quickly put an end to my anxiety. On the line was Al Jackson, global head of equity research at Credit Suisse First Boston. I didn’t know Al, but I did know that CSFB was a long-established investment bank that had hit hard times a few years earlier. It was now experiencing an amazing revival, thanks in large part to my old colleague Frank Quattrone.
CSFB had recruited Frank in 1998 from Deutsche Bank and now controlled the lion’s share of the technology and dot-com IPO business in Silicon Valley. But CSFB had lost its well-regarded telecom analyst, Frank Governali, to Goldman Sachs earlier that year and had apparently struck out with everyone they’d tried to hire. They hadn’t even thought of contacting me, since they believed I was very satisfied at Merrill. But nobody knew the real story.
The call followed that beautiful script, and I was pretty jazzed to hear it.
“Dan, I’m sure you’re happy and Merrill is taking care of you,” Al said, “but I figured I’d go for a long shot and see if you wanted to talk. We are thinking big numbers.”
I played it cool. I told Al that I was very loyal to Merrill, but that, like any good analyst, my mind was always open to new information. He told me what kind of money they were thinking about, which, it turned out, was close to where I already was. I told him so. “Tell you what, Dan,” he said, with disappointment in his voice. “Let me talk it over with some folks here and I might get back to you.” I figured that was the end of it, since they surely thought that Merrill would match anything CSFB offered.
To my surprise, Al called back a few days later and said he had gotten approval to talk to me about “much higher levels.” He invited me to have dinner with him, Chuck Ward, the co-head of the investment bank, and Brady Dougan, who was then the global head of the securities division and today runs CSFB. It turned out that CSFB had been courting a few other analysts who they thought might be ready to move, but had ended up only accelerating their spiraling pay packages. One was Blake Bath, who went back to Lehman and managed to double or triple his salary and bonus. This call, Al said, had been a shot in the dark. “We know Merrill will never let you go,” he said.
So one evening in mid-September, I slipped into the CSFB building, the art deco former Met Life building at Twenty-fifth and Madison, and headed up to the executive floor, where a private dining room had been reserved. Al, Chuck, and Brady greeted me warmly. Al Jackson was a thin, kind, unassuming guy who had once been an analyst and had survived as research director through multiple management changeovers. Chuck Ward was a very serious, all-business type who from the first meeting was focused entirely on one thing: profits. He was a banker’s banker. Brady Dougan had been a derivatives trader, and he still carried that mentality, working 14-hour days and not bothering to smile (it wasted time and energy). Brady’s tie was always askew, as if his body had been struggling to stay in its suit all day and was on the verge of giving up.
The pitch was the same pitch I’d heard in the past—we love telecom, we want to make it a huge part of our franchise, blah blah blah—but there was a twist: these guys actually had something to leverage. They wanted to play off of their incredible momentum in the technology business, momentum that had bounced into their lives with the arrival of the inimitable Frank Quattrone and his team from Deutsche Bank. Frank Quattrone’s organization handled everything from investment banking to brokerage for wealthy individuals to, yes, research, and had vaulted CSFB to the top of the league tables in the technology sector.
I had heard from other sources that Frank and his group had a “piece of the action”—that is, the group’s compensation was an explicit percentage of the profits his group generated. Fifty percent was the rumor, but it turned out to be 33 percent of any revenues the group brought in over $150 million. In 1999, Frank’s group brought in $600 million, which meant Frank ended up with $150 million to divvy up between himself and his staff. Between 1998 and 2000, according to the National Association of Securities Dealers, Frank would personally rake in over $200 million.3 At the time, I didn’t know what the numbers were, however.
The dinner went well, and was followed by a 7:00 AM breakfast a week or so later at the Soho Grand Hotel, a great place to meet because Wall Streeters never went there, particularly not at 7:00 AM. My general sense was positive. I thought they were extremely serious about supporting me and bringing my team over with big raises as well, which was a critical part of any deal. I figured I was in a no-lose situation: with the new contract at Merrill, I was well protected from banker pressure, and if I got an offer from CSFB, I’d take it to Merrill and see what happened.
About midway through the breakfast, Brady Dougan pulled out a one-page set of sample contract terms. It offered two choices: one, a fixed contract like the one I had at Merrill but with a raise of about 60 percent, and another with some very unusual incentives. The men had hinted at something similar to Frank’s deal, and it turned out that they were willing to give me a percentage of any new telecom deal fees that CSFB landed in the sector.
I was stunned. I was an analyst, not a banker, yet they were proposing that I be paid on commission, just like a banker was. I would get a piece of whatever deals I brought in or indeed of any telecom deal at all, which seemed to create an obvious incentive to make my recommendations more bullish than they would otherwise be. If that happened, I’d be putting my financial interests first, ahead of my clients’. Was this the way others were being paid?
I was taken aback, but decided that, as in all negotiations, there are times when it is simply better to listen than to talk. The breakfast ended with Al Jackson promising to get me a draft of the full contract within the next few days and me agreeing to meet more CSFB executives the following Friday.
So on October 15, I told my executive assistant, Connie, and my team I would be working from home and spent a whole day upstairs in CSFB’s private dining room while the head salesmen, traders, and others came upstairs to meet me. I really liked everyone, and their we-try-harder enthusiasm appealed to me a lot. The next Monday afternoon, I returned one last time for a meeting with Ernesto Cruz, then head of U.S. equity capital markets, which is the department that gets the IPOs done by running the road shows, and pricing and allocating the shares. We talked about the conference I’d been running at Merrill, which was of great interest to CSFB. Ernesto asked me how much I spent on the conference. When I told him $1 million, he laughed. “Frank spends over $2 million on his,” he said, referring to Frank Quattrone’s over-the-top technology-investor conference held each November at the swanky Phoenician Resort in Scottsdale, Arizona.
Frank’s conference, which he had successfully moved from Morgan Stanley to Deutsche Bank and then to CSFB, was the most exclusive of all investor get-togethers, an absolutely sizzling ticket. In November of that year, Robin Williams would show up and perform for free—just because he was an investor in one of Frank’s client’s funds and wanted to get in the door! Wow, I thought. I could throw one hell of a party with $2 million.
Finally, Allen Wheat, CSFB’s CEO, came in. Allen seemed to be a lot of fun, a motorcycle-riding New Mexico native who was extremely approachable and seemed sophisticated. He was very different from the street-smart David Komansky. He gave me the standard talk about how important telecom was and then mentioned how he liked to hire the best and let them do their job without interference. Now that was music to my ears. At first, I thought he meant he didn’t allow anyone to interfere with research analysts’ opinions. But it turned out he wasn’t talking about research. He was talking about giving his bankers and traders the freedom to make money any way they wanted to, as he did with Frank Quattrone and others.
While I was trying to figure out what to do, I was surprised, and I guess a little bit flattered, to receive a call from Frank. I hadn’t spoken to him since we were both at Morgan Stanley, but certainly life had changed for both of us, particularly him. Frank had become arguably the most influential banker in the entire world by now, the Jack Grubman of banking. Frank had more money and more power than just about any employee of an investment bank, and as a result, people were awed by him.
None of that came up on the call, however. Frank made nice, acknowledging our common heritage at Morgan Stanley and telling me how much progress CSFB had made in the previous few years. He said that the technology group was anxious to work closely with the telecom group. It was a natural fit, he said, because the big telcos were such huge users of technology and telecom equipment. The tech companies he handled, such as Lucent, Cisco, and numerous Web startups, would love to have better information flow about the telecom service companies and certainly would want their investment banker to be able to make introductions. On my end, I figured that I could gain from this cross-fertilization as well, by its making me better prepared to predict how new technologies, particularly the Internet, would impact my companies going forward.
He sounded incredibly open and friendly, and I had never had any sort of run-ins with him in the past. But I couldn’t help but wonder whether he might somehow try to influence my research. This worried me a lot. I remembered that Wall Street Journal piece back in 1992, when both of us were at Morgan Stanley, describing his attempts to influence a research analyst’s opinion. I found it hard to imagine he’d be more hands-off now.
While I was mulling this over, a FedEx package arrived at my home. Inside was the draft contract Al had promised at our last breakfast. Instead of a fixed salary and bonus, CSFB was offering me a piece of the action: 2.5 percent of any telecom fees earned by CSFB above $150 million per year. As long as a telecom company anywhere in the world paid CSFB a fee after that point, I would collect my piece. I didn’t even have to cover the company myself: if CSFB underwrote a bond offering for Korea Telecom, advised France Telecom on an acquisition, or managed the IPO of an Internet service provider, I would personally reap 2.5 percent of the fees earned.
Given the current rate of IPOs and deals that the bank was bringing in, this had the potential to be one amazingly lucrative offer. A doubling of CSFB’s telecom investment banking business to $300 million in the next year, for example, which was entirely possible, would mean an extra $3.75 million in my pocket. There were also payments for an I.I. ranking of number one, two, or three and additional incentives if CSFB ranked in the top five spots in three different league tables: telecom M&A, telecom stock underwriting, and telecom junk-bond underwriting. At our last breakfast, I had suggested some sort of bonus tied to the performance of my stock recommendations. Oddly, that was the one incentive that didn’t show up in this letter. Clearly the big money was coming from the banking.
No one was home when I opened the letter, but I somehow felt guilty. I half expected someone to jump out from a closet and start wagging his finger at me. If there ever was a way to codify a conflict of interest, this letter sure was it. I wondered if I should even bother dancing with these guys. Was Merrill’s subtle disappointment with me going to look like paradise in retrospect if these guys at CSFB were so focused on paying me like a banker? On the other hand, the financial upside might be dramatic. Was this the temptation that would send me to the other side?
I wanted to see Paula’s unbiased reaction to these enormous numbers. Careful to keep a straight face, I gave her the offer letter. After reading the relevant paragraphs, it took her about five seconds to make up her mind. “This looks like a huge conflict of interest. No way you can take it,” she said, as clear-minded and matter-of-fact as always.
Brady, Al, and I met again on November 5, this time at the Mark hotel, where I had met with John Mack back when he was trying to lure me back to Morgan Stanley. I couldn’t help but look furtively around for him or anyone else who might recognize me. I told them my lawyer (always blame the lawyer) had advised me to request that four items be added to the contract.
The first was that I wanted my team and me to report to Al. I did not want to report to Frank Quattrone. I was sure that having a banker as a boss would create more pressure than ever to be bullish on the stocks I covered. Brady said “fine.” Al smiled. He was clearly relieved that telecom stocks would remain under his watch. Upon Frank’s arrival a year earlier, the analysts covering technology stocks had moved under his direct control. Whatever faint line still existed between those analysts and the bankers seemed to have disappeared into the sand. I had no intention of that happening to me.
The second item related to my team. I wanted to bring over six of them at roughly the same percentage pay increase as I was getting. Al said no problem. He was impressed that I had been able to assemble and keep such a highly qualified team. He said he could give each a two-year contract, but I wanted four years to match mine. Brady said they had never gone past three years and wouldn’t do it now. They had finally said no to something. I protested, but in the end, we compromised. All six received three-year guarantees.
The third item was more of a stretch. I requested a guaranteed minimum budget for my staff in terms of both headcount and aggregate compensation. This was extremely important because it would enable me to protect my team even if hard times hit CSFB. Brady had no problem with the concept.
The final item I held for last because it was the most important and I didn’t want to bring it up until everyone thought the deal was done. It was that incentivized bonus scheme. “I’m good to go on virtually everything,” I started. “Except my wife and I had a long talk. She’s just not comfortable with the banking incentives and I agree. So I’d like to go back to the fixed deal, but, given how the incentives have gone up, can we increase the annual fixed amounts by 25 percent to equalize the two offers?”
I expected some kind of reaction, at least surprise that I would reject something that could make me so much dough. I was rejecting a contract that would have paid me as much as 40 percent more than the fixed contract would over the four years. But the CSFB guys were true pragmatists. They didn’t care what I did as long as I decided to come with them. Fine, they said. What ever works for you is fine. And the 25 percent? That’s fine too. I’d learned a few negotiating tricks along the way, I guess.
At the end, I had what amounted to a doubling of my pay package from Merrill and roughly the same for the members of my team. It was truly crazy. My contract had no upside opportunity for banking, for making number one on I.I., or even for picking stocks well. Likewise there was no downside risk even if the bankers—or their corporate clients—were not happy with my investment opinions. Even if my I.I. ranking fell or if I fell off the list entirely, I would still be guaranteed the same amount.
Yet there was no way I was going to start slacking off. I wanted to go out on top and beat the Grubster, as my team members liked to call him. It was going to take a lot of work, since he ruled the roost in virtually every constituency, from executives to buy-siders, from journalists to bankers. I figured the world would have to wise up at some point.
I was 90 percent sure I was going to move, but the decision wasn’t final. I still had to find out how Merrill would react. So on the night of November 16, after my lawyer had signed off on the final contract changes, I left Andy Melnick a voice mail saying I needed to speak with him as soon as possible the next morning, which was a Wednesday. By the tone of the call, I knew he would know what I was calling about.
At this point in the bull market, research directors like Andy were fielding these gun-to-the-head stickups about every week or so. Did they want to keep this analyst? Was it worth doubling his or her comp to do so? The amount of money being spent on salary, bonus, stock options, and the like was simply staggering. The only thing more staggering was the amount of money coming in from the bankers’ deals.
In 1999, for example, Merrill would earn $2.6 billion in profits, up a mind-boggling 69 percent from the year before. Its revenues from investment banking alone were $3.6 billion, while Goldman Sachs’s banking revenues were $4.4 billion and Morgan Stanley’s $4.5 billion. Credit Suisse First Boston, fueled by Frank Quattrone’s technology IPOs, brought in $1.9 billion in fees. It was truly raining money.
That evening, after leaving Andy that voice mail, I couldn’t help thinking how nice it would be to get away from Merrill’s massive retail system and to get back to a firm that serves professional investors only. For the past six and a half years, I had avoided direct contact whenever possible with Merrill’s brokers and their clients, mostly out of necessity. Dealing with retail, or the brokers who interact with individual investors, takes far too much time, distracts you from doing research, and siphons off time that otherwise might be used to serve institutional clients and win I.I. votes.
I had come to realize that dealing with retail was a loser’s game. If brokers bought a stock and it went up nicely, we never heard from them. If it went down, on the other hand, we got nasty voice mails and e-mails screaming about our bad picks. But the main problem with retail, which wasn’t specific to Merrill but was true of every brokerage firm with a large focus on individual investors, was that it dumbed down everything we did. Merrill’s retail system, for example, had the ability to convert a report of 20 to 40 pages into a paragraph or two of Madison Avenue–style slogans, combined with some words about my “top” ranking as an analyst. The brokers would then push this simplified information through to their clients.
The other problem was that some brokers paid no attention to the risk level we assigned our stocks or to the need to diversify risk. They didn’t look at our picks in connection with Merrill’s investment strategists, whose job it was to recommend to investors whether they should be overweighted or underweighted in the sector, or whether investors should hold a certain percentage of their portfolio in stocks versus bonds versus cash. Caveats, alternative scenarios, and other details that my institutional clients read and took the time to understand never made it to the regular folks.
The brokers were enormously varied in their experience and smarts, and the most sophisticated ones ended up, unsurprisingly, with the individual clients with the highest net worth. Taxi drivers and teachers with a relatively small amount of savings were more likely to get the youngest, least experienced new residents of broker-land. And those brokers were the ones who seemed to blindly follow analyst picks most often.
So the idea of returning to a bank that served only institutional investors was really very appealing, especially when combined with the pressures I was feeling. I had had nearly seven good years at Merrill, but I was a realist: I was clearly wearing out my welcome with the bankers there, and a move to CSFB would give me a fresh start that I hoped would carry me through the three and a half more years I wanted to stay in the business. I was sad that my time at Merrill Lynch had to end this way, but I was mostly relieved that CSFB’s door had opened at exactly the right time.
The next morning, Andy’s secretary asked me to come down to his office. Rosemary Berkery, who ran the research department with Andy, was there too. “Look,” I said, “I have been very happy here, and I appreciate everything you two have done for me. But I have this offer from CSFB and I feel obligated to give you a heads-up.” Andy asked what it was, and I ticked off the numbers for each of the four years.
Both of them looked startled, giving each other quick glances, but neither of them asked me what was wrong or what they could do to make things better here, as usually happens. Instead, they said they’d have to get back to me. That part was typical, since they needed approval from David Komansky, the CEO, to match an offer of this sort. As I exited Andy’s office, I couldn’t help wondering whether Andy and Rosemary were high-fiving each other as the door closed behind me.
The next morning, they called me in at around 9:30 and got right down to business. Rosemary led the discussion. “We think you’re doing a great job,” she said, “and we’ve made a commitment to you and we thought you had made a commitment to us.” Translation: We’re not matching. “I appreciate that,” I said. “You guys have been very good to me. I know these numbers are crazy. Let me think it over and I’ll get back to you later today.” Translation: I’m outta here.
I have to admit I was surprised and a bit disappointed, more for my ego than for anything. Another side of me—the side that was a shareholder in this company—actually felt a little relieved. I guess there are limits to this game of chicken, I thought. It was over. So I went back to my office, called Al Jackson, and told him we had a deal. This meant that he could immediately start calling my team, as I wasn’t allowed under my Merrill contract to solicit them myself. Ehud Gelblum, a 30-year-old PhD in engineering who’d been working with me for just a year and half, was the most aggressive one of the bunch, and he knocked on my door. He knew something was up, having heard the buzz that traveled at lightning speed the second someone went into Andy’s office. “Don’t worry,” I said. “It’s good. Just hang in there.”
I walked out the doors of the World Financial Center for the last time and went home, waiting for my team members to get the call to come to a meeting with Al at 7:00 PM, where they were offered pre-negotiated contracts. They were excited, but also worried and confused by the quick turn of events, so I was up until about 3:00 that morning, talking through the details with each of them. I explained that they wouldn’t report to anyone on the banking side, that I would protect them, and that everything would be fine. Probably the toughest sell was Connie Marotta, my executive assistant, who had spent virtually her entire career at Merrill. But by the next morning, all of them had signed contracts and shown up for work at their new home, CSFB.
We spent that Friday and the entire weekend setting up our systems, working with CSFB’s computer people, and meeting with its conference planners to try to transfer our conference, which was already scheduled for March, to CSFB. Three of us even spent Saturday afternoon visiting hotels and other conference venues, reviewing their facilities and available dates.
My departure must have set off a bit of a panic inside Merrill. I heard that within 24 hours of my leaving, several people, including my friend Linda Runyon Mutschler, the number one wireless analyst, had their pay packages instantly doubled. And despite my entire team’s reputation for playing it straight, Merrill made a huge effort over that weekend to convince both Mark Kastan and Ehud to return. Ehud actually turned down an offer from Merrill that was twice what CSFB was offering. He told me he was worried Merrill’s bankers would push him to recommend everything in sight. “I don’t want to be a whore. It’s just not worth it,” he said.
Mark felt the same way. He had had some serious run-ins with the bankers as well, some of which he didn’t even know about.
“Any Idea What the Hell They Were Talking About?”
Earlier that year, Merrill banker Tom Middleton had asked me to come to his office for a meeting. I walked in to see Rob Kramer, a young, rising-star banker in Middleton’s group who was assigned to a variety of telecom startups.
I immediately flashed back to a conflict I’d had with Rob about a year earlier. Ehud and I had gone with him to visit Digital Island, a San Francisco company planning an IPO that claimed to have a brilliant, proprietary technology for efficiently routing Internet traffic around the globe. At least that’s about all I understood after a four-hour pizza and Chinese take-out dinner with Digital’s top executives in their conference room.
It was late, the pizza was digesting, and I was exhausted, so maybe that’s why I had no clue what they were talking about. We’d had a rough day, starting in New York, then flying to San Francisco for a meeting with Global Center, a Web-hosting company in Palo Alto, then with Covad, a DSL startup in San Francisco, followed by a meeting at PacTel (now SBC)’s DSL operations center in Walnut Creek before reaching Digital Island at about 7:00 PM. Or perhaps it was because I just wasn’t equipped to understand the Internet. I kept scratching my head trying to “get it”—and also to stay awake.
As we walked out of the building, I said to Ehud, “Any idea what the hell they were talking about?”
“Nope.”
“Ehud,” I said, “you’re a fucking PhD in electrical engineering. If you can’t explain this thing to me over the next half hour, then there is no way we can put our names behind their IPO.”
Merrill banker Rob Kramer was walking a step behind and started to panic.
“You guys, this company is awesome,” he said. “Investors will eat it up. Get with it. This company is going to revolutionize the Internet and you can take credit for bringing it to [the attention of] investors.”
“Rob, I sat in there for four hours with a PhD in electrical engineering sitting next to me. I still have no idea if this thing is a sham or for real. I’m certainly not the guy who can credibly explain it to our sales force and brokers, or to investors. Shit, I can’t even understand half the words they used in there. And, for some reason, I’m not even sure they did either.”
The next morning, as our plane touched down at JFK, we all jumped on our cells to check messages. Rob had news: it turned out that Merrill could not underwrite this IPO even if it wanted to. This was because Merrill’s private equity fund, a fund for managing directors and other executives that I had invested in as well, had recently invested in Digital Island. Since we had only recently invested, were we to be the underwriter, it would look like we had invested in order to get the IPO business and/or to hype the stock when it went public.
Everyone agreed, for a change, that this was a real conflict of interest. I was relieved. Eventually Digital Island did get its IPO done, in June of 1999, underwritten by Bear Stearns, at $10 a share. It was, to my surprise, a huge hit. It quickly rose to as high as $148 in December 1999. But then, like so many other dot-com startups, it crashed. (By 2001, it had found its savior, Cable & Wireless, which bought Digital Island for just $3.40 per share.)
Returning from my flashback, I heard Merrill banker Rob Kramer immediately begin to slam my colleague Mark Kastan’s lack of influence in the markets and lack of respect among the top executives of the startup local carriers that he covered. “He just doesn’t get it,” Rob fumed, again saying how the Internet was changing the world and Mark was the last to realize it.
I understood that what he was really saying was that he didn’t like Mark’s measured research in comparison with Jack Grubman’s orgasmic enthusiasm for the startup local carriers. Tom and Rob told me that they’d like my help in either convincing Mark to be more bullish or finding someone to replace him. I told them that Mark was doing a great job. Just like me, Mark couldn’t be expected to “win” when Jack, it seemed, was using over-the-Wall information to gain influence. I said that I would not allow any change in Mark’s coverage.
But now I was leaving, and suddenly Merrill realized that having no analyst was a lot worse than having one that didn’t listen to the banking side. Mark received streams of phone calls all weekend from Rob, Tom, Andy Melnick, and even John L. “Launny” Steffens, Merrill’s vice-chairman, a board member, and the second-highest-ranked executive at the firm. They all exhorted him to stay at Merrill. And Andy kept one-upping CSFB’s offers. Mark never wanted to stay but did a marvelous job of negotiating that weekend, parlaying the competition into an even better offer from CSFB.
The irony was amazing: Merrill was desperate to rid itself of me and CSFB was equally desperate to hire me. And both were in heat for Mark and Ehud. In the meantime, the PR people at both firms worked to convince the outside world that Merrill fought hard to keep all of us. Merrill didn’t want anyone to think it was pushing out the second-ranked telecom analyst, since that could make welcome fodder for an ugly article about banking pressures on analysts. CSFB, on the other hand, wanted to notch up another victory for this up-and-coming bank. Investment Dealers’ Digest, a trade rag read by Wall Streeters, even reported on December 20, 1999, that, in the words of a “source familiar with the move,” “‘Merrill fought hard to keep Reingold….They tried to but couldn’t keep him.’”4 Yeah, right.
Several days after starting at CSFB, I was looking over my contract when I saw a number that stopped me cold. It looked as if CSFB had made a mathematical mistake. We had agreed to a deal that would compensate me for the unvested Merrill Lynch stock and options I had left behind. Amazingly, there was a $1.5 million error—in my favor!
The contract was ready for signing. All I had to do was put pen to paper and I’d have a nifty $1.5 million bonus that I hadn’t even expected, in addition to having doubled my pay. It was truly surreal. The most surreal thing of all was the fact that the bank would never even miss it. A mere $1.5 million? For CSFB, it was a blip, nothing more, nothing less. But I couldn’t keep it. I told Paula the story, and she agreed that I had to give it back.
So that evening, I left CSFB’s Brady Dougan a voice mail. “I want to let you know there is an error in the final contract. The make-whole award is $1.5 million too high by my calculation,” I said. I figured Brady would forward my message to the right people and then send me a quick response, saying something like “Thanks, Dan. You are an honorable man and you are already making CSFB proud.” But there was no response. A few days later, a new contract arrived, exactly $1.5 million lighter.
I never heard a word about it, not from Al or Brady or anyone. On Wall Street, honesty doesn’t raise an eyebrow, even when it involves over a million dollars. I guess it should surprise no one that dishonesty goes unnoticed as well. There really is no right and wrong on Wall Street, I thought to myself. Just money.
And because money never takes a vacation, there was no time to grab a sandwich with my new colleagues or figure out where the men’s room was. The next Friday, the day after Thanksgiving, The Wall Street Journal printed an article saying that AT&T was considering selling a 10–15 percent stake in its wireless unit to the public.5 It would be a $10 billion IPO. If true, it would be a juicy plum of a deal, the largest IPO in U.S. history, generating over $300 million in underwriting fees. The scuttlebutt was that AT&T would choose three banks to co-lead the deal, and each of the three could make something on the order of $65 million. It was a monster, all right.
I hadn’t been over the Wall, so I read about it in the paper like everyone else. My first reaction was that, like the wireless and cable tracking stock I had championed a year earlier, it might lead to a higher AT&T stock price. I figured AT&T was hoping to profit from investors’ seemingly insatiable appetite for new companies with high growth potential. Sure AT&T was still considered a stodgy stock at best, but its cellular business was very hot, and all signs pointed to a very successful IPO. I thought it was a good move, and it certainly would be good for my Buy rating on the company. In fact, the stock jumped 8 percent on the Journal story alone.
I thought CSFB had a very good shot at winning the third underwriting slot in the deal. Mike Armstrong, AT&T’s CEO, had done much of his banking with Goldman since he’d been at DirecTV, and Merrill was probably a shoo-in thanks to Linda Runyon Mutschler’s number-one wireless ranking in the I.I. magazine poll. But a banker at CSFB used to work with Dan Somers, AT&T’s CFO, and apparently had a great relationship with him. And Cindy Motz, CSFB’s wireless analyst, had risen very quickly to number three in the I.I. poll and might challenge Linda in another year or two. I figured AT&T would be impressed with that. I, of course, had been bullish on AT&T and, fortunately, its shares were up almost 11 percent after adjusting for stock splits since my upgrade about a year ago.
The other possible contender was Salomon Smith Barney, but in this case Jack Grubman actually hurt its chances. His Neutral rating and acerbic remarks about AT&T and Mike Armstrong had totally alienated AT&T management. It didn’t matter financially to me, of course, whether we won it or not, but I certainly hoped we would.
And then, on November 29, some news crossed the wire that made me sick. Jack had suddenly upgraded AT&T to a Strong Buy—this after dissing the stock for four straight years. There was no particularly great news that justified an upgrade, no major change in strategy, no nothing—except, of course, for a chance to get in on the biggest IPO of all time. I don’t know why I even bothered feeling shock or surprise by this time—it was getting old—but I was aghast. Everyone knew how aggressively negative he’d been on the stock. He’d been extremely critical of the company’s cable telephony strategy, seeing it as too expensive and too late, and likely to be a huge waste of money. But now, in his new report, he suddenly claimed that the strategy was going to work like a charm.
I wasn’t the only one to react cynically to the news. Many clients forwarded Jack’s report to me with snarky comments such as “Check this out. You’re not gonna believe it” or “I smell a deal coming.” The move seemed so patently obvious that surely it would never work. He had stooped to a new low, it seemed, in order to horn in on this gargantuan banking deal. Surely, the folks at AT&T would understand that too. They weren’t stupid.
My reasoning was reinforced a week later when The Journal published a story in its “Heard on the Street” column by Randall Smith and Leslie Cauley titled, “Will Upgrade of AT&T Stock Help Salomon Smith Barney?”
“As AT&T gears up for another blockbuster IPO,” it read, “…the betting on Wall Street is that one of the firms with a role in the underwriting will be…you guessed it—Salomon.” The article continued: “People familiar with the matter say Sanford I. Weill, co-CEO of Salomon’s parent, Citigroup, and an AT&T board member, nudged Mr. Grubman to give AT&T a fresh hearing. One person who knows AT&T says its chairman, C. Michael Armstrong, has regularly asked Mr. Weill to urge Mr. Grubman to revisit the merits of AT&T’s cable strategy. ‘Anyone who knows me knows that I call them as I see them,’ Mr. Grubman said. ‘No one tells me what to do.’”6 If The Wall Street Journal was casting aspersions, I thought to myself, no company with any self-respect—certainly not conservative, image-conscious AT&T—could fall for such an obvious ploy.
In the meantime, I had a lot of work to do getting ready to launch coverage at CSFB. I didn’t intend any dramatic ratings changes, but I still had to write new reports and explain my reasoning on every stock I covered. My team and I were excited to be at a firm serving institutional clients only. In contrast to life at Merrill, we no longer needed to simplify our writing or presentations for consumption by thousands of retail investors. And we no longer had to worry that every word we wrote or spoke might be misunderstood. In a lot of ways, I felt as if I had been released from retail jail.
That’s because CSFB had no retail brokers, other than some salespeople who served very high net worth individuals who were generally quite sophisticated businesspeople and corporate executives. CSFB’s institutional sales force, about 150 strong throughout the world at the time, comprised MBAs and others with substantial experience in the markets. The only challenge was that I had to convert my recommendations to CSFB’s unique rating scheme. While Merrill’s scheme of intermediate versus long-term ratings and various risk and dividend ratings was confusing in its endless categories and criteria, CSFB’s had terminology that didn’t match up well with that used by the rest of the Street.
Though it was a multilevel system like Merrill’s and each level (1, 2, 3, etc.) represented the same percentage upside or downside, CSFB’s top rating, Strong Buy, was what Merrill called a Buy. Its second rating was Buy, which is what Merrill called Accumulate and Salomon Smith Barney called Outperform. Despite the confusing semantic differences, these rating systems were virtually identical. A “1” suggested the analyst felt very strongly that this stock was going to do very well, outperform the market by a substantial amount, and had upside over the next year of 20 percent or more. Similarly, regardless of whether it was called Accumulate, Outperform, or Buy, a “2” meant the analyst thought the stock would outperform the market by a small amount and had upside in the 10–20 percent range. But those who weren’t clients often confused our Buy, or “2,” rating with other firms’ Buy, which for them was their top rating.
CSFB also had only four choices for ratings, where the others had five. In the case of a “4”-or “5”-rated stock, CSFB used Sell, but the rest of the Street had a quirky nomenclature, clearly intended to soften the blow to investment banking clients and, in some cases, to buy-siders who got angry when a big stock holding of theirs was slammed by an analyst. So, if an analyst thought there was 10–20 percent downside in a given stock over the next 12 months, the appropriate rating was Reduce at Merrill, Underperform at SSB, and Sell at CSFB. And if the analyst thought there was more than 20 percent downside over that same time period, the stock would be rated “5” and labeled Avoid at Merrill, Sell at SSB, and, again, Sell at CSFB.
“I’ve Never Had a Conversation Like This.”
Toward the end of December, we made our formal pitch to AT&T in front of its treasurer and its new CFO, Chuck Noski. Chuck, another Hughes Electronics transplant, had just signed on that month. He was truly a wild card: he hadn’t been in the telecom industry. He didn’t know many of the telecom bankers nor did he know any of the twenty or so Wall Street analysts who followed AT&T. He certainly didn’t know much about Jack’s “special” approach to the analyst’s role, though I supposed he knew Jack could move stocks far more powerfully than the rest of us.
It was a bit of a problem for CSFB, since its bankers had had the closest relationship with Chuck Noski’s predecessor, Dan Somers, whom AT&T’s CEO, Mike Armstrong, had just sent out to Denver to run its cable business. We met with Chuck and his team two days before Christmas to display our wares, much as a traveling salesman would sell pots and pans. Only what we were essentially selling was the ability to sell.
Most of the pitch meetings I’ve ever been in have been the same, and this one was no different. The bankers proffered their services, and CSFB wireless analyst Cindy Motz and I talked about our research. AT&T executives asked us questions, such as how could they best reach retail investors if they went with CSFB, which didn’t have retail brokers or customers, what was the right price for the shares, and what aspects of the company should be emphasized during the road show. I thought the CSFB team handled the meeting well, and we waited expectantly for the news.
Sometime around the end of January, I got word from Chuck Ward, the head of CSFB’s investment bank, that made me realize—yet again—how naïve I still was. He called me up to his office, where he told me he had talked with Chuck Noski and that it looked as if AT&T had decided to go with three bankers. He said that one of them was going to be Salomon, which meant that not one of them was going to be us, since Goldman and Merrill were shoo-ins. We were screwed—and Jack had been rewarded for what seemed the most sinister move I’d seen in my 11 years as a research analyst. In addition to my own personal anger and frustration, I was embarrassed for AT&T, since everyone, and I mean everyone, saw right through this one.
Furious, I told Chuck that I was going to call Chuck Noski and tell him how outrageous I thought this was. He smirked and said, “Good luck. I guess we’ve got nothing to lose.” I don’t know whether I thought I could actually make a difference, but there was nothing that could stop me at that point. All I could think was that Jack’s model was now the only working model for an analyst. There had to be something I could do about it.
I had met Chuck Noski for the first time during the pitch meetings. Short in stature and quiet in demeanor, he seemed very smart and very analytical. I figured he could use an education in Grubman’s World, a world a lot like Wayne’s World: you had to live in it in order to believe it. I hoped I could show him how bad it would look for AT&T to pick Salomon. And if I could change his mind, I would also be showing Chuck Ward that I could make a difference for CSFB.
So I put in a call to Chuck Noski. He called back a day later, just as I was boarding a plane from Portland, Oregon, to Whistler, the Canadian resort where I was going to spend a few days skiing with clients after four grueling days of meetings up and down the West Coast. I had 10 minutes before the plane took off, so I didn’t waste any time once Chuck confirmed to me what I feared was true—that AT&T was getting ready to announce it had hired Goldman, Merrill, and Salomon as lead underwriters.
“Chuck, I want to apologize at the outset of this conversation,” I started. “My plane is taking off in less than 10 minutes and I need to quickly convey some things to you about my competitor at Salomon. I may not come across as politely or professionally as I normally would like to.”
“Go ahead, Dan, I’m a good listener,” Chuck replied.
“Grubman’s research is a sham,” I blurted, every bit of self-control I had evaporating. “He sells his Buy ratings for investment banking business. In effect, he’s a whore and everyone knows it. If you guys hire Salomon, you will be perceived as naïve dupes, and shareholders will lose respect for AT&T management.”
I tried to tell Chuck that by rewarding this behavior, he was simply encouraging more and more research analysts to emulate Jack’s approach, and that that wouldn’t benefit anyone. I was more emotional, and more personal, than I’d ever been with a company executive. He heard me out, but he was clearly taken aback, particularly by the fact that I would dare to call my competitor a whore and him a dupe.
“I’ve never had a conversation like this, Dan,” he said.
“This is really a different industry,” I said. “Grubman’s behavior is really outrageous.”
Finally, Chuck told me that he’d discuss our conversation with Michael Armstrong.
“I have taken notes and I’ve heard you,” he said politely but firmly.
Well, I guess he had heard me, but he certainly didn’t listen to me. CSFB would end up being a co-manager with about six other firms, the booby prize after losing out on the world’s biggest IPO ever. CSFB’s take was $15 million instead of the $63 million that Salomon, Goldman, and Merrill each took home. Jack had delivered a $48 million bonus to his firm with a few strokes of the keyboard.
As I walked across the tarmac toward the waiting twin prop, I was truly disgusted—with Wall Street, with the analyst community for imitating people like Jack, with the press for celebrating him, and with corporate America in general for its willingness to deal with the devil.
The fact that Sandy Weill, the co-CEO of Citigroup, which owned SSB, sat on AT&T’s board, while Armstrong sat on Citigroup’s board, troubled me a lot too. Critics of these “interlocking directorships” considered them to be a corporate governance no-no because of the temptation for mutual backscratching, and suddenly I could see why. There was one other explanation for the move, although it was the most pathetic one: perhaps Mike Armstrong simply thought Jack’s November upgrade was a great piece of honest research extolling the virtues of his cable telephony strategy. If so, Armstrong was the only one on earth who believed that Jack’s upgrade was authentic.
That evening, I returned a call to Rebecca Blumenstein of The Wall Street Journal, who was preparing a story about the intense battle between SSB and CSFB for the third and last lead underwriting spot. She wanted to know what was going on and whether I knew if a final decision had been made. I played somewhat dumb—not so dumb as to make her think I wasn’t a player but enough so that I could deny that I knew the final decision. In any case, she wrote a fairly accurate article that said CSFB had fought hard but lost, and that given my recent arrival at CSFB and the firm’s historical excellent investment banking relationship with AT&T, this was somewhat embarrassing for me.7
It was embarrassing for me, but it was even more embarrassing for my profession and for Mike Armstrong and Chuck Noski. I was also, I suppose, a bit embarrassed about my outburst. Chuck Ward later told me that he had called Dan Somers, AT&T’s former CFO, to follow up, and that Dan had told him I had “made enemies of friends.” Nice way to start off on the right foot with a new job, I thought ruefully. Chuck Ward never asked for my help again. I guess I had devised one very effective way to get bankers off an analyst’s back.
A few years later, in November 2002, Chuck Noski announced his resignation from AT&T. We had maintained a decent professional relationship despite its awkward beginnings, so I called to congratulate him. After a bit of pleasant chitchat, his tone turned serious. He told me that he regretted not listening to me about the IPO. I’m sure he did; the whole thing unleashed a storm of controversy that would later envelop Jack, Sandy Weill, and Mike Armstrong, among others. But at the time, all we knew was that Jack’s way was the winning way.