Confessions of a Wall Street Analyst (9 page)

“I don’t know you, Dan,” he drawled, “but I’ve been told that you’re a very valued employee of the research department and telecom is very, very important to this firm. We would like you to stay. Have we mistreated you?”

“I really appreciate that, John,” I said. “I have been treated very well here. I don’t have specific complaints. Morgan Stanley is a great firm, the re
search department is tops, and I am making far more money than I ever dreamed.”

“So why do you want to leave?” he asked.

“I’m just really impressed with the seriousness with which Merrill is approaching the telecom sector, the amount of resources they are throwing at it is huge, and the staff I will be able to hire there is larger than I would dare ask for here.” In other words, I’m outta here.

Mack understood and wished me well. My mind was made up and he had plenty of other fish to fry. So I called Merrill’s Andy Melnick and told him my decision was final. He arranged to send over movers in the morning to pack up my personal files and books. Then he called Rick Klugman, my associate at Morgan Stanley, and asked him to come down to Merrill so he could make an offer to him in person.

As I walked out of the office, thankful that my experience had been so great but equally excited for what came next, Linda Runyon, a bright, ambitious new hire who covered the cellular industry, accosted me. “You promised you’d stay here,” she said angrily, her piercing eyes staring into mine. I had recruited Linda six months earlier and she made me promise to stay put. I looked at her and said, “Just stay by your phone.” She, too, ended up shivering at Fraunces Tavern one morning. She came to Merrill with a huge pay raise a few months later, rose to the number one
I.I.
spot in the wireless telecom category, and stayed there until her retirement in early 2005.

My move set off a wave of musical chairs throughout the entire telecom analyst community, mainly because the BT (British Telecom) deal was fast approaching and the British government had said they would hire only banks with
I.I.
-ranked telecom analysts. This musical chairs game was good for all of us because we all got major raises. There was a perception of scarcity out there, and we milked it for everything it was worth.

At Morgan Stanley, the executives scrambled to get a replacement for me. They went after Frank Governali at CSFB, a well-regarded analyst who had turned down the Merrill job because he didn’t want the responsibilities of building a global team, especially the intense overseas travel that would entail. Frank agreed to take the Morgan Stanley offer, with a rumored price tag of $900,000, just one month after they had offered me $750,000. To add insult to injury, this one was guaranteed for two or three years and had nothing to do with the bankers making their budget. It was a nuclear arms race, with every analyst getting superpower status. Frank actually accepted the Morgan Stanley offer, but CSFB then matched it, agreed to let him relocate
to Portland, Maine, and set up a one-man office just for him. So Frank decided to stay at CSFB.

Now it was April 1 and Morgan Stanley was losing valuable time. Someone suggested recruiting Jack Grubman from PaineWebber, since he was now ranked second, but Ed Greenberg put the kibosh on the idea, saying there was no way that Jack’s style would fit at Morgan Stanley.

Panicking, Morgan Stanley hired Stephanie Comfort from Salomon Brothers, a young woman who had garnered enough votes to become an
I.I.
runner-up, behind two others and me. I’m not sure what she negotiated, but the rumors were around $800,000 per year. And her move opened up the Salomon position, which nine months later, in January 1994, ended up going to Jack Grubman. Jack scored a salary said to be the highest on the Street, rumored at more than $2 million per year. This made Jack, who had worked for PaineWebber, a retail brokerage with no significant banking business, suddenly part of a major investment-banking house. At the time, no one could have known what that would mean.

Privatization Pandemonium

I had negotiated a one-week vacation between jobs, but vacation when you work on the Street is all relative. Merrill had dallied so long trying to get someone in this job that it no longer had any time to waste. Privatization was happening right now, and the big deal on the table was the competition to win a piece of British Telecom. The British government was preparing to sell off the last 22 percent of BT shares to the public.

The government would choose two banks, one British and one American, to lead the process, along with several “co-managers,” banks that would play a smaller and much less prestigious role. BT would pay a total of 3 percent of the value of the offering proceeds as its fee, most of which would go to the lead managers. With the offering expected to total close to $8 billion, the participating investment banks could collectively earn a total of $240 million. Merrill wanted to break into the top tier of investment banks, using British Telecom as a wedge to do so. It desperately wanted a piece of the action.

So my trip to St. Martin with Paula—the first time we’d gone away alone in years—was hardly relaxing. Several times a day, the hotel concierge brought me a stack of faxes from Mark Maybell, the head of telecom banking at Merrill, who was preparing Merrill’s presentation to the British gov
ernment. Maybell wanted to include my views on BT shares. So I sat on the beach calculating subscriber-line growth rates and marking up draft slides while Paula read a book.

I did have time to read one book that week—
I Can See You Naked,
by Ron Hoff. It wasn’t pornography, but rather a book intended to help inexperienced public speakers conquer fears of large audiences. The main suggestion was to imagine everyone in the audience is naked, while you remain clothed. This, the author said, would stop your heart from racing and your voice from quavering. I figured I’d need the naked trick with my new global responsibilities.

On March 10, 1993, I walked into the glass-enclosed towers of the World Financial Center, where Merrill had its world headquarters, directly across from the two World Trade Center towers that would be destroyed eight years later. I didn’t feel the anxiety that I’d felt just four years earlier walking up Madison Avenue, but I wasn’t exactly calm either. The money was great, and it was nice to be able to cover AT&T and to be out from under Ed’s shadow. But the scope of the new job was much greater. Now I had global responsibilities and a global-level pay package too. I figured Merrill’s top management would be on me like fleas on a dirty dog.

Moreover, unlike Morgan Stanley, Merrill had a huge retail system, the largest in the world—the most customers, brokers, and money under management. Although my research would remain directed at the sophisticated institutional investor, there was no doubt that Average Joe also was going to hear about my calls. More than 10,000 Merrill brokers would pick up the phone as soon as I got off the squawk box and try to talk someone into making a trade.

Brokers needed action to make any money, since their compensation was based largely on transactions. Analyst recommendations were jumped on and embraced like a new lover. Unlike institutional clients, who made their own investment decisions and used my research as one of many inputs, these brokers and investors might actually take every word I wrote or said as the gospel. Now that was scary.

I had no time to dwell on it. It was time to see the world. About 10 days later, on a Sunday night, Mark Maybell and I flew to London so that I could meet Neil Barton, Merrill’s London-based European telecom analyst, and Merrill’s telecom bankers there before we all went over to see the key decision makers at Her Majesty’s Finance Ministry and try to make a good impression. Upon arrival, we quickly showered and suited up at 47 Park Street,
a posh London hotel, while our drivers waited outside. I was fried, having skipped sleep in favor of going over every last shred of research and information just one more time.

Staffers at the Finance Ministry had made it clear that the U.S. telecom analyst would play a major part in its choice of a bank. The British government—and many others, I learned—believed that a bank’s U.S. analyst could create a positive halo effect by using his or her influence to get investors excited about BT’s shares. To judge influence, government bureaucrats used the
I.I.
survey as well as feedback about analysts they received from the largest buy-side institutions. They loved rankings because it gave them cover if things didn’t turn out as planned (“Hey, that American magazine
said
he was great.”).

But Merrill had a problem. It turned out that Neil Barton, Merrill’s telecom analyst in London, had given BT shares a “3,” or Neutral, rating. How, British Finance Ministry officials asked, could Merrill’s brokers convince investors to buy a stock rated neutral? It was as if an IBM computer salesperson had to tell his customers that IBM itself had rated its own computers only “average” while giving other computers better marks.

Call me naïve, but I actually thought it was admirable to pitch with a “3”-rated stock. To me, it proved Neil’s and, by extension, Merrill’s integrity. As a result, I thought, Neil’s research would be more trusted and thus more influential. Clearly, the British officials and my colleagues on the banking side didn’t see it this way. Nevertheless, no one asked me to push Neil to change his rating. As expected, we didn’t win a lead-manager spot for the BT offering—Goldman did. But we managed to land a co-manager spot, that unprestigious booby prize that generated very little work and equally little in the way of fees. It was a decent start, though.

The next morning (Tuesday), we boarded a chartered jet to Athens, where we had a “beauty contest,” or a pitch meeting, at 2:00
PM
to win the right to handle the privatization of the Greek national phone company. As with every meeting of this sort, before getting there I studied each phone company’s history and growth rate. Then I modeled out the rate at which I thought competition would develop, based on that country’s unique regulatory rules. Then I’d make projections of the company’s future earnings and calculate a fair price for the stock.

As I reviewed my slides on the plane, I could already see that there was a pattern to this stuff: virtually all foreign telcos were monopolies facing only the beginnings of competition; all were fat pigs in terms of their inefficiency
and gross waste, so had significant opportunities for improvement; and all were seeing a lot of increased demand, especially as cell phones came on the scene.

After our Athens pitch, we rushed back to the waiting private jet and returned to London, where I raced to catch an evening flight to Tel Aviv with another Merrill banker. The drill was the same there: meet as many people as I could who were involved in Bezeq, Israeli’s telecom company, which was considering selling stock. Merrill’s bankers had already spent many hours helping the government prepare. Now it was time to prove that we analysts knew a thing or two about the industry. I was wiped out—a four-hour overnight flight after the previous few days felt pretty brutal—but it was hard to complain, given what they were paying me. I spent a whirlwind two days in Israel, managing to have only a rushed dinner at Jerusalem’s King David Hotel with my sister and her husband, who lived in that historic city, before heading back to the airport.

While waiting for my flight back to the U.S., I tried to call home, but my AT&T credit card wouldn’t work. After several tries, an AT&T operator came on the line, asked me a few personal questions, and then informed me that the company’s fraud detection computers had cut off my calling card. Apparently, the computers deemed it impossible for anyone to have made calls from so many countries in such a short time, so the only conclusion was that someone had stolen my code and sold it to people all over the world. It had to be fraud! But it wasn’t. It was just life as a telecom analyst.

It was all pretty heady stuff: analysts were suddenly gaining the attention and respect of the top executives and the bankers, who for the first time saw us as the key to their winning massive deals. And we were being brought into high-level meetings with government officials, including finance-ministry and regulatory commissioners, who would then look us in the eye and ask us how they should set up their own regulatory system.

I absolutely loved this part of the job; suddenly, I was the policy wonk I’d always wanted to be. Yes, there were bureaucrats just like those in the Department of Education, and sometimes, it turned out, their intentions were more about lining their own pockets than helping their country. But they were motivated to sell as much stock as possible at the highest price possible—and so were the investment banks.

The Perils of Papadam

This type of whirlwind schedule became the norm for me for several years running. My head would hit the pillow on a runway in New York and I’d wake up in Asia, or Europe, or South America every week or two. In an era when the computer was beginning to make electronic communications an acceptable form of doing business, my job was still all about the face time. If you didn’t show up in person, you couldn’t understand a company’s basic reality, or the style of its top executives. And if those managers didn’t meet you in person, it was pretty unlikely that your bank was going to win any business. Wall Street, I learned, was as much about kissing the ring as it was about massaging the numbers.

With the really big deals, we needed to roll out the big guns. In Indonesia, for example, where we were competing to underwrite PT Indosat, the Indonesian international long distance company, Merrill’s president, David Komansky, flew in to say hello to the company’s executives and government ministers.

I had met Komansky for the first time a few weeks earlier while rehearsing our pitch back in New York. I liked him immediately. He was a hulking guy with a trader’s mentality who had come up the ranks as a broker, ultimately running the equity desk. Komansky was paid $4.5 million in 1993, but he seemed to revel in his humble roots as the son of a postal worker in the Bronx. Next to “Danny Boy” Tully, he was the best flesh-presser I had ever seen. Merrill was lucky to have both, as government decision makers everywhere just adore that human touch.