Confessions of a Wall Street Analyst (30 page)

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 en
thusiasm 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.

The $1.5 Million Mistake

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.

The Dupe: Jack’s AT&T Upgrade

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.