Confessions of a Wall Street Analyst (16 page)

Crowe didn’t much feel like talking about the deal. He was onto something new and important. Yet I was so obsessed with understanding the high price WorldCom had paid that I missed it entirely. He called it “IP,” or Internet protocol, the new technology by which Internet information would flow through the world’s communications networks. Crowe’s notion was that the Internet was going to change the world, and that MFS and WorldCom would transmit much of the world’s Internet traffic. Just prior to WorldCom’s offer, MFS had quietly acquired a small, relatively unknown company called UUNet (pronounced “you you net”) for $2 billion. UUNet was the country’s largest “Internet service provider” and was growing like wildfire.

I was mystified. Although telecommunications and the Internet would later become as linked as Siamese twins, I didn’t quite see the connection between the two. I made a mental note to someday figure out exactly what he was talking about. Most people credit Mary Meeker with first educating Wall Street about the Internet. I sat next to Mary Meeker at Morgan Stanley for several years, but she hadn’t yet discovered it when I departed for Merrill Lynch in early 1993. So, for me, Jim Crowe was the person who first alerted me to the Internet’s potential impact on the telecom industry. But at the time, I was more concerned with surviving the next deal announcement and fending off Jack’s attacks than I was with the largest technological shift of the past several decades.

Suffocation

As my eighth year on Wall Street began, I reflected on the complexities and pressures of my job, which seemed to be mounting every day. Originally, most of the incentive to perform came from me. I’d achieved my goal of be
coming the top-ranked analyst, but the stresses were building from just about everywhere else.

There were the bankers wanting bullish opinions on their client companies and the institutional investors wanting the price of their stock holdings to go up. There were the hedge funds, many of which bet against certain stocks, hoping for negative calls from analysts. There were the in-house traders and retail brokers pushing for coverage of volatile small stocks and for calls that made stocks rise or fall and therefore generated lots of commission-generating trades.

And then there were the pressures from the company executives themselves. A CEO or CFO wants positive commentary from well-known opinion leaders. As I had learned years earlier from Bert Roberts at MCI, positive reports can help to build customer confidence and thus help sales efforts. The resulting higher stock price can also help to fend off unwanted takeover attempts, preserving management’s job security and boosting employee morale. But that wasn’t supposed to be part of my job.

I had been lucky so far. I had never felt that my views, even when unpopular, had been impugned or threatened. Back in 1994, when I refused MCI’s CFO Doug Maine’s request to testify against the expensing of stock options, I never heard about it again. And, in November of that year, when he complained about the tone of my downgrade of MCI shares, he didn’t do anything other than ask that in the future I give him advance notice of a pending opinion change, something I had no intention of doing. The worst thing that had happened was that MCI’s CEO, Bert Roberts, canceled his appearance as a keynote speaker at my annual conference. And that wasn’t so terrible after all.

But such freedom wouldn’t last much longer, as a lighthearted interchange I had with a speaker at one of my annual conferences foretold. In March 1995, I had asked Bernie Ebbers, CEO of what was then still called LDDS, to speak at Merrill Lynch’s Fourth Global Telecom CEO Conference—an annual gathering I organized at Manhattan’s posh St. Regis Hotel. His was one of the fastest-growing telecom companies, and I was pleased to have him on the podium with me, even though we were not recommending his stock at the time.

Bernie was the second speaker of the morning, and I introduced him with the typical kissup: “Bernie’s done absolutely amazing things. He started the company as a very, very small reseller, and through the process of acquisition and internal growth has moved the company to be…half the size of
Sprint. Bernie, we’re all very anxious to hear about your next steps and the future of LDDS and your perspective on the industry and how the merger’s going.”

The applause was enthusiastic as Bernie, boots and all, swaggered his way to the podium.

“Thank you, Dan. Can I not use this stool here?”

Yeah, yeah, yeah. This was the requisite dig at my height. He was tall; I was short. Some people laughed. I guess it could have been worse.

Bernie next made what seemed like another joke, though it was always tough to tell with him. Before beginning his speech, he coyly alluded to an acquisition he had agreed to over breakfast that morning. Figuring that if it had been done that morning, it must have been at the St. Regis, possibly with Merrill’s bankers brokering the deal, I interjected with a smile:

“So did Merrill Lynch arrange that deal?” I asked jokingly.

“No,” snapped Bernie. “We have to have a better rating before Merrill Lynch would do the investment banking.”

A lot of nervous laughter followed. Mark Kastan, who still rated Bernie’s company Neutral, chimed in, “I guess you’ll be waiting a long time!” I laughed, too, but hollowly. Bernie wasn’t one to mince words. He simply said aloud what others thought to themselves.

I
F THERE WAS ONE WATERSHED YEAR
for the telecom business—and the analyst—it was definitely 1997. The M&A frenzy was at full throttle. The IPO wave was also gaining momentum, as numerous telecom upstarts and technology startups began to raise capital in the public markets. And the bull market was now in its third year, having totally ignored Alan Greenspan’s “irrational exuberance” speech of December 5, 1996. Investment bankers trampled each other in pursuit of fees. Companies sought to maximize their stock prices, both to enrich their executives and also to build a currency with which to buy other companies. More and more investors, individual and institutional, dove into the market headfirst.

To keep the party going, all eyes looked to the Wall Street analyst. The media salivated over us and glorified our market influence and stardom, even when hinting at analyst conflicts of interest. “More important, at many firms, is how much investment banking business an analyst brings in…. Also important at some firms is the trading volume the firm does in the stocks an analyst covers,”
The Wall Street Journal
had noted as early as June 1994.
²

And, in an early 1997
Journal
article entitled, “For Salomon, Grubman Is the Big Rainmaker,” a reporter wrote: “This dual role [of analyst and banker] obviously is fraught with complications and potential conflicts.” William McLucas, the SEC’s enforcement chief at the time, was quoted in the article, saying, “There are no hard and fast federal laws that say you can do this and you can’t do this.”
³
Without realizing it, McLucas had suggested not only that the SEC, ostensibly protecting the integrity of our financial markets, was aware of the conflicts but also seemed to knowingly look the other way.

Those same newspapers and magazines consistently relied on analysts when discussing stocks. Those stories spread quickly as the new breed of online day traders lunged at every bit of news and spread it across the Internet. The advent of CNBC, the business cable network created by NBC in affiliation with Dow Jones, also boosted the visibility of many analysts.

CNBC, launched in 1989, was originally supposed to be a niche play, but as the bull market grew and the public developed a love affair with stocks, the cable channel’s viewership also grew. Whenever a company issued an earnings report or announced a merger, a top-rated analyst would be on-air within the hour, eagerly giving his or her opinion on what it all meant.

This new exposure only cemented the preeminence of the analyst. In the 1980s, powerful traders and investment bankers came to be known as BSDs—Big Swinging Dicks. Now, by the mid-1990s, the BSDs were the analysts—the nerds with the power of the pen and the pager and the ability to make and lose fortunes with a change in opinion or tone. Institutions, whether they actually took our advice or not, hounded us for insights and advance notice of coming events; and bankers and CEOs, of course, still cared passionately about what we had to say. It was easy to feel like a rock star—that is, if you stuck to your own world and didn’t actually try to hang out with any real ones.

Sure, it was fun to issue a report that actually moved the markets or to be involved in the back room of a multibillion-dollar deal. But what was less fun was this slow sense of suffocation as the pressure grew from all the various players in the business to conform, to help the bankers, to not rock the boat, to favor companies that might offer up a top underwriting or merger-advisory slot. Sometimes, it took the form of subtle needling; other times, it was more direct and intense. For some of the people in my world, intimidation was simply part of doing business. It was natural, I suppose, in a world that was entirely transactional: If you do x, I’ll do y. If you don’t, you’re
screwed unless you have enough power to resist the arm-twisting. I’d mostly managed to avoid this stuff—until now.

My Failed Quest for Qwest

It was January 6, 1997, my first day back after a two-week vacation with my family in Andalucía, Spain. Had I known what was coming, I probably would have tried to hide out on those Spanish beaches. I had been invited to attend a Merrill breakfast meeting with executives from the Anschutz Corporation, the private investment vehicle of billionaire Phil Anschutz, who had made a fortune in oil and railroads and had owned Southern Pacific Railroad. Brilliantly, Anschutz realized that Southern Pacific’s rights of way along its railroad tracks were needed by long distance companies seeking to build fiber across the U.S. When he sold off his railroad interests, he cleverly retained the rights of way and started his own long distance company, SP Telecom, which he was about to rename Qwest Communications.

Now Phil wanted to cash in by selling a piece of Qwest to the public. Merrill, like every other investment bank on the Street, was drooling over the potential fees involved. I expected the meeting to be the usual meet-and-greet with little or no substance: lots of smiles, animated discussions of golf courses, and, at the end, a bunch of warm handshakes, as both sides committed to work toward a stronger relationship.

Both sides had a major interest in such a “relationship.” For the firm, of course, the goal was to earn a percentage of any of the client’s financial transactions, even beyond the coming IPO. For the company, there were multiple objectives. One was to have as many friends on Wall Street as possible, so that it could raise capital smoothly and quickly through a variety of underwriters. In addition, a good relationship with a good bank might mean an early warning when an attractive company went on the block. And Merrill was a huge user of telecommunications, so companies were constantly trying to sell telecom services to Merrill, hinting that it might lead to investment banking assignments. Last but certainly not least, the bank’s analyst could help the company achieve a higher stock price.

Qwest did not yet have publicly traded shares, so I hadn’t written any reports or issued any opinions, though I had mentioned it in some of my reports. As a new long distance company with no dependence on the antiquated technologies or costly unions that saddled AT&T and the others,
Qwest’s cost to provide long distance capacity looked dramatically lower than that of both the Bells and the other long distance companies. It was the JetBlue of the telecom world. I also thought that a Baby Bell might buy Qwest at some point. Yet I had doubts, too: I continued to worry about excess capacity and price wars in the long distance industry. So my feeling about Qwest was positive, but not roof-on-fire enthusiastic.

But that was not going to work for the folks at the Anschutz Corporation, although I didn’t know that as I ushered Joe Nacchio, Qwest’s new CEO, and a man named Cy Harvey into a private dining room on the 33rd floor of Merrill’s world headquarters. Phil Anschutz, also Qwest’s chairman, didn’t show. The view from Merrill’s top floor was stupendous, overlooking huge yachts docking, the Ellis Island ferry shuttling tourists to their grandparents’ first memories of America, and the beautiful Miss Liberty. Though thirteen floors higher, it was essentially the same view I had from my office, and a pretty inspiring way to start the day.

I always felt uncomfortable in this type of meeting, mostly because I was never good at the kind of mutual backslapping and schmoozing that went along with this part of the job. At the time, I didn’t play much golf and didn’t hunt pheasant, which seemed to be a favorite activity of CEOs and bankers. I didn’t have a whole lot of interest in trudging through a muddy field, trying to kill some animal happily nibbling some grass or a bird enjoying a morning whirl. To these gun-toting tough guys, I was a nerd. And that was, I realized, a perfectly acceptable role for an analyst to play, a lot easier to pull off than walking around in camouflage and faking it. It worked great with almost everyone I interacted with, but not so well in these deliberately shallow meetings.

Attending the meeting from Merrill was Tom Middleton, Merrill’s head of telecom banking, Mark Vander Ploeg, the Merrill banker assigned to work with the Anschutz Corporation, Mark Kastan, and me. Because Qwest had the potential to become a major profit center for Merrill, Herb Allison, Merrill’s president, was there, too, playing the role of senior statesman. A bald, brainy, serious man who chose his words carefully, I hadn’t interacted with Herb much, but we were all happy to see him. His presence would likely demonstrate to Cy and Joe how committed Merrill was to serving Qwest.

Joe Nacchio was the most convincing and combative executive I had ever met. Joe and I had tangled before, when he was president of consumer long-distance services at AT&T. He was opinionated, extremely aggressive,
sometimes quite funny, and even charming when he wanted to be. By force of—or perhaps, despite—his abrasive personality, Joe had managed to climb his way up the ladder at AT&T, where he had spent his entire career before Phil Anschutz hired him away just weeks earlier. With his long years of experience at AT&T, Joe seemed a great fit, and his hiring seemed to create the perfect time to sell a portion of Qwest to the public in an IPO.