Confessions of a Wall Street Analyst Part 4

The lightbulb clicked on. Had this trip been planned in advance, some of my Boston clients would have mentioned that MCI was coming to town. Knowing this, I would have called the a.n.a.lysts I worked with at Fidelity at 9:00 AM AM, right after the meeting, to see what had gone down. But no one had said a word. So a last-minute trip to Boston could mean only one thing: MCI was playing its patented hot/cold game from the old days! The company was probably seeing softness in its results and wanted to lower expectations before the holiday and postquarter "quiet period" set in, when the company would no longer be allowed to discuss numbers until its earnings were released.

I spent the rest of the day trying, without success, to confirm this, but I knew in my gut that the company was doing its thing and that no one else understood it-no one else, that is, other than a few "well-informed" money managers in Boston. This was all before SEC chairman Arthur Levitt's Regulation FD (Fair Disclosure), which outlawed the release of information to any investor group without making it available to all when it went into effect in 2000.

Connie Weaver didn't call me back until 2:00 PM PM. I was not happy, because I needed to understand what had changed in MCI's business before I could rework my forecast and target price for the stock. She told me MCI was seeing some weakness in sales to midsized corporations, likely due to price-cutting by AT&T, and she didn't fight back when I suggested I would need to lower my forecast. After talking to her, I knew my suspicions were right: the company was trying for a gentle landing with its bad news by telling the inst.i.tutional investors in Boston before any others.

It appeared the long-distance price wars were more intense than I had been predicting and it was time to reduce my rating. The next morning, I downgraded MCI shares two notches, from Buy to Neutral-meaning I now thought MCI's shares would hover within 10 percent of their current price over the next year. I also cut my rating on Sprint from Acc.u.mulate to Neutral, a.s.suming that the problems MCI was facing were industry-wide. As it turned out, my concerns were justified: two weeks later, Sprint announced fourth-quarter price pressures, and early in 1995, both Sprint and MCI announced disappointing fourth-quarter revenues and earnings.

The day after I issued my MCI downgrade, Matt Bowman, the Merrill banker, called to tell me that good old Doug Maine was not happy with my decision. "Dan has a right to his own opinion," Doug apparently said. "I respect that. But I am not happy with the tone tone of his report. And he should have given us of his report. And he should have given us notice notice in advance." in advance."

"Tone" and "notice." I had to laugh. I immediately understood what was going on: his complaint about my "tone" was simply another way of saying he disagreed with my decision to downgrade (believe me, I never got the tone complaint on an upgrade). And "notice" was just another way of asking for time to get a reb.u.t.tal ready. If I had informed Doug the day before that I was going to downgrade, two things might have happened. First, he might have called Matt Bowman, and perhaps MCI's CEO, Bert Roberts, would have called Merrill CEO Dan Tully, urging them to get me to reconsider.

Second, with "notice," Connie Weaver and MCI's investor relations department could launch a preemptive strike by calling important stockholders and countering my argument. What nonsense, I thought. They want to control what we a.n.a.lysts say, and they want the complaint registered via Merrill's bankers, hoping the message comes through: if you want our banking business, make sure your a.n.a.lyst is good to us.

I can't tell you how many times I would later hear the "tone and notice" complaint from corporate executives who didn't like what I had to say, but it was something of a novelty at the time. Anyway, I didn't pick a fight with Matt and he didn't with me. I just told him to please tell Doug I was sorry, but I didn't think I should notify anyone of my downgrade before it had been officially announced at Merrill's daily meeting for the 150 inst.i.tutional salespeople and thousands of retail stockbrokers who listened in via a loudspeaker system known as a "squawk box."

In March 1995, I hosted my annual telecom conference, as I had done the prior year and would do for the next seven years. Virtually every major telecom CEO would make an appearance, and over the years it became an event where one could expect some big deal to be announced or important news revealed. It was a great place for executives to interact with major investors, other executives who might be interested in a deal of some sort, and Merrill's a.n.a.lysts and bankers. Although MCI CEO Bert Roberts had raced back from a board meeting in London to speak at my conference the prior year, this year he was suddenly unavailable. MCI CFO Doug Maine was sent along as his replacement. The thing was, it was a CEO conference. We all suspected what was going on: this was retribution for my downgrade.

Jack's Knack Back on the international front, the pace of privatizations continued to pick up, and with it, the intensity of the compet.i.tion to underwrite them. By 1995, a few firms were emerging as the clear leaders. Goldman Sachs got the biggest piece of the pie, in part because it had Robert Morris, who for the nine years through mid-1994 had been the number-one-rated telecom a.n.a.lyst. Although Merrill was late to the party, its global brand and sheer size made it number two, winning the lead in such privatizations as France Telecom, Portugal Telecom, Indosat, and Telefonica del Peru.

Others, like Salomon Brothers and Morgan Stanley, found themselves fighting like hungry dogs over the smallest pieces of business. We know what was going on at Morgan-their U.S. telecom a.n.a.lyst was inexperienced and not highly ranked-but what about Solly? Salomon was the setting for Liar's Poker, Liar's Poker, Michael Lewis's book on Wall Street, and it was known as an aggressive trading firm with a weak banking franchise (this was before Salomon was acquired by Travelers' Smith Barney unit and then Citigroup). Salomon did, however, have Jack Grubman as its new telecom a.n.a.lyst. A year earlier he had moved from PaineWebber with great fanfare. Michael Lewis's book on Wall Street, and it was known as an aggressive trading firm with a weak banking franchise (this was before Salomon was acquired by Travelers' Smith Barney unit and then Citigroup). Salomon did, however, have Jack Grubman as its new telecom a.n.a.lyst. A year earlier he had moved from PaineWebber with great fanfare.

By this point, a bank's research a.n.a.lyst was beginning to be one of the most important factors determining which investment banks companies and countries chose to handle their deals. Our research still mattered, but our reputation-ostensibly coming from that research-mattered a lot more. And Jack Grubman, because he had been out front on some of the new, growing companies and because of his aggressive self-promotion, now mattered the most of all. Jack's contract to move from PaineWebber to Salomon was probably near $2 million per year for three years, easily making him the highest paid a.n.a.lyst on the Street at the time. It made sense, if such pay packages could ever make sense, because the telecom industry was fast becoming the deal center of the world and Jack was the most prominent a.n.a.lyst to move at that time.

By October 1994, Jack would displace Robert Morris to become the top-ranked U.S. telecommunications a.n.a.lyst in the I.I. I.I. poll. This should have given him a huge edge with foreign government officials choosing underwriters, but it didn't, mainly because of his personality. Jack came across as pompous, constantly telling management what to do and how to run their companies. He was loud, self-centered, and every sentence he started seemed to begin with "I." But foreign civil servants didn't really go for the use of the first person. They were bureaucrats, and they preferred the calm, steady, and more respectful (okay, a little bit staid) voices of Robert Morris and me. poll. This should have given him a huge edge with foreign government officials choosing underwriters, but it didn't, mainly because of his personality. Jack came across as pompous, constantly telling management what to do and how to run their companies. He was loud, self-centered, and every sentence he started seemed to begin with "I." But foreign civil servants didn't really go for the use of the first person. They were bureaucrats, and they preferred the calm, steady, and more respectful (okay, a little bit staid) voices of Robert Morris and me.

Although Jack and I had the same job, just about everything about the way we did our jobs was different. Mark Landler, a reporter for The New York Times, The New York Times, would later write a story calling us the "Siskel and Ebert of Telecom Investing," and his description was spot-on. "Mr. Grubman, 43," he wrote, "is the swashbuckler, who boasts about his close ties to the chief executives of the big telephone companies and whose research reports sometimes read more like polemics than dispa.s.sionate studies. Mr. Reingold, 42, is the Wall Street wonk, who cultivates a network of contacts in Washington to gauge the direction of legislation, and who showers his clients with a stream of briefings and updates." would later write a story calling us the "Siskel and Ebert of Telecom Investing," and his description was spot-on. "Mr. Grubman, 43," he wrote, "is the swashbuckler, who boasts about his close ties to the chief executives of the big telephone companies and whose research reports sometimes read more like polemics than dispa.s.sionate studies. Mr. Reingold, 42, is the Wall Street wonk, who cultivates a network of contacts in Washington to gauge the direction of legislation, and who showers his clients with a stream of briefings and updates."4 When it came to privatization, wonk seemed to be working out better than swashbuckler. Yet Jack's failure to win foreign deals was not for lack of trying. Like me, he practically lived on a plane for years. I ran into him all over the globe, crossing paths in Australia, Germany, and Peru. In fact, in Peru, I saw Jack on the steps of the Finance Ministry, where our respective pitch teams of bankers and a.n.a.lysts were being chased by paparazzi, eager for a shot of those helping to put together Telefonica del Peru's upcoming IPO. I guess the arrival of modern capitalism in the form of a bunch of American Wall Streeters was bigger news in Peru than the latest Shining Path terror attack.

Making matters worse for Jack was the fact that when he was recruited, he had promised his Salomon bosses that he'd help them snare big investment-banking deals. Soon after Jack arrived at Salomon, a former Salomon a.n.a.lyst later told me, Jack had boasted at an internal departmental a.n.a.lyst meeting that he would help bring in $40$50 million in banking fees in the next year, a huge score at that time. So far, it wasn't happening, although he was being paid, in part, for that claim.

To its credit, Salomon was quick to realize that Jack didn't play well overseas and that they needed to find a better use for their costly new hire. Jack knew it too. The solution was closer to home, in a new emerging category of telecom companies: the local startups such as MFS and Teleport, which offered local phone service in compet.i.tion with the Baby Bells, and later, long-distance broadband companies, such as Qwest and Global Crossing, which would compete with AT&T, MCI, Sprint, and WorldCom. The startup local carriers offered lower prices than the Baby Bells because their technology was newer and more efficient, and because their workforces were nonunion.

Jack was one of the very first a.n.a.lysts to see the potential in these emerging telecom startups, and here his brash personality was a perfect fit. Start-ups are run by risk-taking entrepreneurs, people who don't take no for an answer and people who like to move fast. Before Jack arrived, Salomon had already sponsored the IPO for MFS, one of the two first local telephone startups in the U.S. Jack quickly adopted MFS and its CEO, Jim Crowe. Jack became the patron saint of the local startups, drooling over every one he could get in to see, and recommending almost every one that hired Salomon to underwrite its stock or bonds. His became the loudest voice heralding a new, hungry, and aggressive type of telecom company. And the louder he talked, the quicker his bosses at Salomon forgot about the failures overseas. This group of startup local phone companies would later become a new category in the I.I. I.I. rankings, and Jack owned it: from 1999 through 2001, he was rated number one. rankings, and Jack owned it: from 1999 through 2001, he was rated number one.

I, too, believed that many local startups would do well. * * But my colleagues in Merrill's investment banking department were at a major disadvantage: by the time the local carriers began going public and raising money a few months later, I had already decided to upgrade their biggest compet.i.tors, the Baby Bells. Most local startup executives hated the Baby Bells and distrusted anyone who felt positively about them. Plus, Jack was far more vocal in his bullishness on the local startups, seeing virtually unlimited upside, and he was conveniently bearish on the Baby Bells, which, incidentally, were cash rich and thus didn't need to raise money like the startups did. That endeared him even more to the local startup managements. But my colleagues in Merrill's investment banking department were at a major disadvantage: by the time the local carriers began going public and raising money a few months later, I had already decided to upgrade their biggest compet.i.tors, the Baby Bells. Most local startup executives hated the Baby Bells and distrusted anyone who felt positively about them. Plus, Jack was far more vocal in his bullishness on the local startups, seeing virtually unlimited upside, and he was conveniently bearish on the Baby Bells, which, incidentally, were cash rich and thus didn't need to raise money like the startups did. That endeared him even more to the local startup managements.

But that wasn't Merrill's and my only disadvantage. One day in April 1995, Frontier, a midsized phone company based in Rochester, New York, announced that it was buying ALC, a long distance reseller based in Birmingham, Michigan. The announcement came just after the market closed at 4:00 PM PM, and clients began calling right away to see what I thought of the deal. I didn't cover either stock at the time, but I was paying attention to the growing consolidation in the industry and thought the price was a fair one. I put in a few calls to larger clients, to give them my views and see what they thought.

At about 4:45 that afternoon, a buy-side fund manager called me, ostensibly to see what I thought of the deal. I detected a strange note in her voice, and wondered if she'd had a rough day or made some poor picks. I had launched into my spiel about how I believed that it would be better for the industry to reduce the number of players when she suddenly cut me off.

"You won't believe this, Dan," she blurted. "Jack called me at a quarter to four and told me this was going to happen."

How could he have known? Had he heard a rumor or been tipped off by someone within one of the companies? Or had Salomon's bankers put the deal together and brought Jack over the Wall, as Ed and I had been with AT&T and McCaw? It turned out Salomon was, in fact, the banker advising ALC. If what she'd said was true, Jack might have been an insider and leaked material inside information before the deal broke. In legal terms, that could make her a "tippee" and him a "tipper." She could easily have bought or sold the stocks based on advance knowledge-the clear definition of insider trading. The obvious move would have been to buy ALC shares and sell whatever Frontier shares she held in her fund, since the acquirer's stock often falls upon announcement of an acquisition. Indeed, the next day, Frontier's shares fell 13 percent and ALC's rose 9 percent, shifting aggregate market values by a total of $3 billion. I was so shocked-and furious-that I was speechless for a few seconds.

"You're kidding me," I shouted.

"I'm serious, Dan," she responded. "It makes me really uncomfortable."

"Why would he do that? What did you do with the information?"

"Nothing," she whispered. "I know I can't use stuff like that."

I hung up the phone and just sat there for a second. How could Jack so blatantly disregard the law? Why would he take such a crazy risk? Anybody who was willing to leak inside information was not going to last long in this business.

What I thought about most, however, was how unfair a game this was. This guy was my rival; how was I supposed to compete with someone who was trying to win favor from clients by pa.s.sing on inside information? The leak hurt my inst.i.tutional clients, too, not to mention individual investors, who weren't privy to this kind of information.

Or maybe it hadn't been a leak. Maybe she misunderstood what was said in the earlier phone call. Maybe he had called after the market had closed. I really hoped so.

Afternoon Tryst For now, Jack's added edge wasn't hurting my career. Sometime in May 1995, Connie, my executive a.s.sistant, walked into my office with a worried look on her face.

"John Mack is on the line for you," she said.

Connie knew that Mack was the head of Morgan Stanley, and she'd been an executive a.s.sistant long enough to know that if the head of another firm called, something big was definitely up. I had promised Connie when I hired her two years earlier that I planned to work for ten more years and that she'd be with me until the end. She probably didn't believe me, but we had shaken on it.

"Hi, Dan," John said in his North Carolina drawl, sounding as casual as if we'd spoken the day before for 60 minutes, not two years earlier for only six. "I'd like to have dinner with you. How's next Monday evening?" It was becoming pretty prestigious to be an a.n.a.lyst all of a sudden, and to have the head of a rival firm call was still a very, very big deal. I knew it was a recruiting call-there was no possible alternative explanation-and wondered what had happened at Morgan. Was Stephanie Comfort a flop? Was Ed Greenberg behind this? And how did they get Mack to make such a call, one I'm sure he saw as a level of groveling that was beneath him?

"Sure, John," I said. "How can I say no to an invitation from John Mack? But I want you to know I am very happy here at Merrill and am not seeking a change at all." (It was the ritual language used by all targets of a headhunting. Plus, it was true).

"That's fine, Dan," John responded. "Let's just get together and we'll worry about the rest later. You live in Westchester, right? Meet me Monday evening at seven at the Cobble Creek Cafe in Purchase."

I have a terrible habit of smirking when something good is happening, and Connie knew this, so she came in and hung around for a few minutes to see if she could detect any odd facial expressions. She knew that I wasn't going to put anything on the calendar, but if I did schedule any secret meetings over the next few weeks, she would know: either I'd arrive late to the office (which I never did unless I had an appointment that she always knew about), leave early (which I rarely did except to get to one of the kids' softball or basketball games), or go out for lunch (I always ate at my desk except for client or company meetings).

John and I arrived at Cobble Creek Cafe at the same time and walked in together. It's a nice place with decent food and a countrified setting. And on a Monday night it was pretty quiet and the bar area was empty, so John asked the owner, whom I surmised he knew from numerous other meetings like this one, if we could have the bar area to ourselves with the door closed off from the main dining room.

I was pretty sure that I wasn't going to leave Merrill. I was still ranked number three by I.I. I.I. and to win the and to win the I.I. I.I. sweepstakes, I reasoned, I needed the huge client base and public exposure that Merrill's combined inst.i.tutional and retail distribution systems offered. But I had learned that it was always best to listen-especially when John Mack was talking. sweepstakes, I reasoned, I needed the huge client base and public exposure that Merrill's combined inst.i.tutional and retail distribution systems offered. But I had learned that it was always best to listen-especially when John Mack was talking.

The first impression I'd had of Mack was that he was a laid-back, southern gentleman. This was anything but true. His accent was somehow soothing, but on this night, Mack was all business, skipping the small talk about the kids and the families. He apologized for whatever had gone wrong back in 1993 and said he and the entire telecom banking team wanted me to come back. He a.s.sured me that things were different now that he had handpicked the new global head of research, Mayree Clark, a woman from Oklahoma who had done terrific things in Morgan Stanley's real estate division. He also told me he was very focused on Jeff Williams, Morgan Stanley's head telecom banker, since John was not satisfied with his group's production and wanted it fixed.

The funny thing was that Jeff and Mayree were married, creating a very delicate situation. Mayree would be my boss, but her husband was the main telecom banker. Would I have independence, or would Mayree pressure me to come to bullish conclusions on companies Jeff was cultivating as investment banking clients?

I kept these thoughts to myself, figuring that there was no reason to give John the sense that I was a negative or high-maintenance guy. But we were pretty much out of things to talk about. I didn't golf at the time, which was John's pa.s.sion, and John didn't seem to care about pro football, let alone the angst-ridden history of my team, the Buffalo Bills. The conversation slowly sputtered to a halt, but not before John asked me to have breakfast two days later with Mayree and a guy named Neil, who headed Morgan's equity sales and trading department.

The breakfast was set for the Mark Hotel, a small, exclusive place on the Upper East Side that was a lot more Morgan Stanley than Merrill in style. To my surprise, John Mack showed up at the breakfast as well, I guess to underscore the meeting's importance. I couldn't imagine that the head of a firm as large, complex, and global as Morgan Stanley was spending this much time recruiting one individual for the research department that actually lost money year in and year out. But he was.

Mayree, an all-business type known for being a tough cost-cutter, was quite nice and enthusiastic. Neil was a bit gruff and more focused on his watch than on our conversation. But that's what all traders and salespeople are like, especially early in the morning before the markets open. Traders and salespeople abhorred breakfast meetings because they took them away from their desks and phones during the peak productivity part of the work-day. Neil had been ordered to be here, of course. He probably didn't know much about the telecom industry. He probably also had no use for research a.n.a.lysts except that a.n.a.lysts made the noises-upgrades, downgrades, earnings estimate changes, strategic commentary-that his salespeople and traders used to generate stock trades. Mayree described the changes she was making in the research department and Neil highlighted some recent successful IPOs that Morgan Stanley had underwritten. They seemed to be out to impress John more than me, but I was flattered anyway.

Before the breakfast ended, Mayree suggested a meeting with Jeff, her husband. She said she would get a suite at the Righa Royal Hotel at Fifty-fourth and Seventh for 3:00 PM PM the next Monday, and leave the key at the front desk under her name. It's hard to explain how strange it was walking into a hotel lobby at three in the afternoon, going to the reservation desk, and asking for a key left by a Ms. Clark. I'm sure the lady at the front desk thought this was an afternoon tryst. I guess it was, in a way: I was considering cheating on Merrill with my old flame, Morgan, after all. the next Monday, and leave the key at the front desk under her name. It's hard to explain how strange it was walking into a hotel lobby at three in the afternoon, going to the reservation desk, and asking for a key left by a Ms. Clark. I'm sure the lady at the front desk thought this was an afternoon tryst. I guess it was, in a way: I was considering cheating on Merrill with my old flame, Morgan, after all.

Jeff was waiting in the suite, and he basically parroted John's line. Then Jeff left and Mayree showed up. She was ready to talk turkey. She offered me a three-year guaranteed deal at a total pay package substantially above what I was making at Merrill, including stock options and bonus. I was amazed. These numbers were mind-boggling. Even Morgan Stanley, the firm with "Mack the Knife" at the helm that was so resistant to paying a.n.a.lysts well two years earlier, had finally joined the stampede to hire the best a.n.a.lysts in the hope of landing big investment-banking and underwriting fees.

I managed to keep the telltale smirk under control and asked Mayree if I could think about it for a week or so while Paula and I took the girls on a quick trip to Pennsylvania's Amish country. She agreed, but also asked me to meet with Joe Perella, who had joined Morgan as chairman of investment banking, before I left. Joe was a legendary 1980s mergers-and-acquisitions banker who, with Bruce Wa.s.serstein, had built First Boston into an M&A powerhouse. They then bolted to start their own firm, Wa.s.serstein Perella, known to Wall Streeters as Wa.s.serella. Wa.s.serella. I couldn't resist; I had heard his name a zillion times over the years and knew he was supposed to be the most persuasive salesman on the Street. I couldn't resist; I had heard his name a zillion times over the years and knew he was supposed to be the most persuasive salesman on the Street.

So the next day, I walked into Le Bernadin, Manhattan's top French seafood restaurant and a place where people went to be seen. Joe, a lanky, bearded, hyperactive sort, arrived a little late. Clearly something big was going down. He was frenetic, saying he needed to make a phone call. This was in the days when it was still a big deal to use a cell phone in a restaurant, but Joe didn't care. He pulled a huge clunky one from his equally clunky briefcase and dialed in, walking away for a moment so I wouldn't hear what he was saying. Then his battery started to run out, so he continued his call from the pay phone in the back by the men's room.

I had brought my briefcase, so I had plenty to read while waiting (and I also needed the time to decipher the French menu). Joe finally came back and we ordered. But we had barely made it through the pleasantries when he suddenly noticed Edgar Bronfman, Jr., heir and CEO of Seagram's, and his gorgeous Venezuelan wife sitting a few tables away. Joe bounded across the room to say hi and left me staring into my bouillabaisse.

I didn't really care that Joe was rude. He was, after all, a big swinging d.i.c.k on Wall Street and I was actually getting a meal at Le Bernadin and a great view of how an M&A legend operates-they never sit down. We did eventually talk a bit. He was very excited about some of the changes he was trying to make to Morgan's investment banking department, and he repeated the mantra that telecom was an absolute top priority. Then, just as a throwaway line, he gave me some of the most important and useful advice I've ever received.

"Be sure to get really good legal a.s.sistance when negotiating your contract, whomever you end up with. If you want, I can give you my lawyer's number and I'll ask him to take your call." Sure, I said. Why not?

Mayree had an offer letter written up and overnighted to our motel in the Amish country. I wasn't sure what to do. Merrill had been great to me over the past two years. Everything they had promised-staffing levels, bonuses for staff, a top-notch executive a.s.sistant, no burden from retail, no banker interference-had come true. I needed to inform them of the offer and give them a chance to respond. It sounds crude and it was. But on Wall Street, everything that can be quantified is.

And these dudes can move at the speed of light when they need to. After a quick trip to London, I immediately informed Andy Melnick, Merrill's head of domestic research, and Jeff Peek, head of global research, of the Morgan Stanley offer. Within four hours, they had approval to match it and said a new offer letter would be ready the next day. I know this must sound insane to people who work in companies that make real stuff, people who work for decades without a decent raise. But for an investment bank, a million here or there was a rounding error.

My next call was to Joe Perella's lawyer. I guess Perella a.s.sumed that I would use his lawyer to negotiate with Morgan, but the first thing I wanted the lawyer to do was to look at Merrill's letter. The lawyer reviewed Merrill's draft, which was very similar to the agreement I had been operating under at Merrill for the past two years.

"Dan," he said, "this is not a contract or a guarantee. It basically says they will pay you a certain base and a certain bonus but only if Merrill employs you at bonus time. But you'll get nothing if Merrill decides, for whatever reason, to fire you. You have no guarantee whatsoever."

I almost fell out of my chair. I thought I had a sure thing, and here was an expert lawyer telling me I didn't. Which meant, I realized, turning red, that both offer letters I had-the one from Merrill and the one from Morgan-were not worth the paper they were printed on. I've never felt like such a sucker in my life. Were all of us Wall Street employees with multiyear guarantees this stupid or was it just me? Had my Merrill bosses been laughing at my naivete for the past two years?

I hurriedly asked the lawyer to send me his suggested changes, and I then sent them to Andy, who sent them on to the Merrill lawyers. After a few back-and-forths, all of my requests were granted. Merrill and Andy were suddenly willing to truly guarantee my pay with only one exception: if I broke a securities law or regulation. Now, like many of the chief executives whose stocks I covered, my pay was set, regardless of how well-or how poorly-I performed in the future. It was also set no matter what the investment bankers thought of my research opinions or me.

Thank you, Joe Perella and Morgan Stanley.

With the Merrill contract set, I had to decide what to do about the Morgan offer. Mayree was calling at home every other evening, asking me where I stood. Paula, as always, was my sounding board. And as always, she gave me the best advice of all. She reminded me that the momentum seemed to be going in the right direction at Merrill. Why mess with a winning formula? And why go back to where you started? They'd always remember you as that wet-behind-the-ears MCI guy who came to the Street not sure what a P/E ratio was.

That settled it. I turned Morgan Stanley down. It was amazing, ridiculous, actually: thanks to a few meals out of the office, I had the same job and the same responsibility-but at substantially higher pay and with a lot more job security.

My Major Opinion Change: Upgrading the Bells, Downgrading AT&T By this time, I'd been at Merrill for two years. I'd been fairly consistent in my stock opinions since the day I'd arrived. I was negative on the Baby Bells, such as BellSouth, SBC, and Bell Atlantic, because I thought the regulators were doing things that constrained their earnings, and that deals like AT&T buying McCaw were aimed at bypa.s.sing what was called the local loop-the last bit of wire to the household-which was controlled by the Bells.

Everyone, from my coworkers to my clients, expected this to remain my position. And everyone liked it when an a.n.a.lyst had a clear and consistent position. "Oh, you know Dan. He hates the Baby Bells and loves the long distance companies." But around the middle of 1995, a series of events led me to change my views and begin recommending that my clients buy the Baby Bells instead.

It all started in mid-June with the pa.s.sing of a bill by the Senate, the Telecommunications and Deregulation Act of 1995, that I believed would make it much easier for the Bells to get into the business of providing long distance services. Republicans were in charge of both houses of Congress for the first time in many years, and they were a lot more receptive to the Bell companies than the Democrats had been.

It suddenly seemed obvious to me that congressional sentiment was changing in favor of giving the Baby Bells more freedom. A motley but powerful alliance of many Republicans and a few Democrats came together to support this legislation, including Democrat John Dingell, one of the House's most powerful members and a longtime supporter of the Baby Bells.

I did some investigating of the political environment, talking to congressional staffers, lobbyists, and attorneys I knew on the Hill from my D.C. days, and they backed me up: it seemed as if Congress was going to finally pa.s.s legislation that allowed the local phone companies to provide long distance services and encouraged the long distance companies to provide local service. It was called "cross-entry."

This was a big deal. Similar bills had been debated in every single congressional session on the topic since the breakup of AT&T in 1983, but those bills had died in committee as the industry's powerful interests collided and neutralized each other. Even though the Republicans were behind the legislation, it had come to be identified with Al Gore, who was at the time discussing something he called the "information superhighway," that is, the Internet. So although the Democrats didn't really support the bill, it was known as Al Gore's initiative, making it virtually impossible for President Clinton to veto it.

In early June, I asked Megan Kulick and Mark Kastan, who had been hired to replace Rick Klugman when he left for Grubman's former spot as PaineWebber's senior telecom a.n.a.lyst, to run a complex series of financial models a.s.suming the Baby Bells started to offer long distance services under various time frames. Mark had been a client of mine as a buy-side a.n.a.lyst at the Bank of New York and J&W Seligman, a mutual fund manager, for almost 10 years and I was thrilled to have talked him into coming to work with me. He was a smart, somewhat sarcastic, ambitious guy who had the seasoned perspectives of a professional investor and added a new perspective to our team. We worked on the models for six solid weeks. I made up my mind in early July 1995, after I had visited buy-side clients in six European countries and was taking a quick vacation with Paula in Scotland. I left a voice mail for Mark and Megan telling them to swing into action. Then I contemplated the consequences of my opinion shift.

None of my compet.i.tors at other firms seemed to be focused on what was happening in Congress. So if I went ahead with a position change, upgrading the Baby Bells and downgrading the long distance companies, I'd be the first one out there to plant a flag. I'd surely get a lot of attention, and hopefully, I'd make my clients some good money. There was only one problem: if I was wrong and this legislation didn't pa.s.s, I was going to look like a complete idiot. For my entire career, I had been cautious on the seven Bells. If I changed my mind, it was going to make waves. It would be the biggest call I'd ever made.

Further, my report would certainly upset AT&T, because I was now backing its biggest threats, the Baby Bells. Merrill did a decent amount of banking business with AT&T, but I didn't care; I now had a guaranteed contract. I had already downgraded MCI and Sprint to Neutral in late 1994 because of my concerns about long-distance price wars. The Baby Bells, of course, would be thrilled. Doubtless they'd think they'd finally managed to convince me of the folly of my earlier ways. Certainly my clients would be perplexed, and those who owned AT&T shares would not be happy at all. It would be their decision, of course, whether to listen to me or blow me off.

The argument itself was pretty simple-the legislative tide was shifting in favor of the Bells and away from AT&T and other long distance companies. This simplicity would make it very appealing to both Merrill brokers and sophisticated money managers. Yes, there were a variety of factors, such as the growth of new services like Caller ID, voice mail, and cellular phones, and of course, some loosening of the regulatory rules. But in essence, I was betting it all-perhaps even my career-on those Senate and House bills actually becoming law, and on key sentences in those bills not being lobbied into oblivion at the last minute by the long distance companies.

On July 18, 1995, I was the first speaker on Merrill's morning call. "For the first time in my career, I am turning bullish on the Bell companies," I announced. Unlike my first time on the call back in 1989 when I launched coverage of the telecom sector, this time I felt energized and confident. I might be making a huge mistake, but at least my point of view was well thought out and well reasoned. And no one in the banking department made a peep.

Immediately after the call, I dashed back to the office and hopped on the phone. I tried to call as many clients as I possibly could, starting with the largest and most important, like Fidelity. If they didn't answer, I'd leave a message. "Look," I said, "I wanted to make you aware that I've reversed my position. I'm downgrading AT&T to Neutral and upgrading all the Bells." My clients reacted in very different ways; some were intrigued, others listened quietly, and a few disagreed vehemently. Quite a few seemed surprised that I'd made the change at all.

And suddenly, I found myself in the spotlight. In September, Barron's, Barron's, the required Sat.u.r.day morning reading of every portfolio manager, ran a six-page interview with me, including several large photos taken at my home. the required Sat.u.r.day morning reading of every portfolio manager, ran a six-page interview with me, including several large photos taken at my home. Wall $treet Week with Louis Rukeyser Wall $treet Week with Louis Rukeyser called, too, asking me to be a guest on their December 15, 1995, show. At the time, the show, despite being among the most boring half hours ever to run on television, boasted the largest audience of any financial show on TV. Appearing on it was considered the financial world's equivalent of doing guest commentary on called, too, asking me to be a guest on their December 15, 1995, show. At the time, the show, despite being among the most boring half hours ever to run on television, boasted the largest audience of any financial show on TV. Appearing on it was considered the financial world's equivalent of doing guest commentary on Monday Night Football. Monday Night Football. The show was targeted more toward the individual investor than my inst.i.tutional clients. But I knew I had to do it, partly because Merrill had spent a lot of time lobbying the Rukeyser folks to invite its a.n.a.lysts on the show, and partly because I knew my mom and dad in Florida would get a huge thrill out of seeing me on TV. The show was targeted more toward the individual investor than my inst.i.tutional clients. But I knew I had to do it, partly because Merrill had spent a lot of time lobbying the Rukeyser folks to invite its a.n.a.lysts on the show, and partly because I knew my mom and dad in Florida would get a huge thrill out of seeing me on TV.

It was a long seven months of nervous waiting, but my call was right. The legislation finally became law the following February, when President Bill Clinton signed the Telecom Act of 1996. Bob Allen, AT&T's CEO, ordered busloads of AT&T employees to protest in Washington as a last-ditch attempt to kill or change the bill, but it pa.s.sed unchanged. And fortunately, the market seemed to agree with me: the Bells rose on average 32 percent from my July upgrade until the end of the year, beating the pants off the S&P 500 Index's 10.3 percent rise.

Once again, Jack attacked with a viewpoint that was squarely in opposition to mine. For him, long distance was a complex business that the Baby Bells couldn't learn quickly (I said it was simple); he said long distance companies like AT&T would take more from the local market than the Bells would in the long distance market (I said the reverse). And in a perfect parallel with his own approach to Wall Street, he argued that marketing skills mattered the most, far more than the physical connections to customers that I thought were key. Again, we were the yin and the yang of our industry.

The Power of the Poll Even before my opinion change, my status on the Street had been changing. I was about to displace Jack as the top-ranked telecommunications a.n.a.lyst, according to the survey in Inst.i.tutional Investor Inst.i.tutional Investor magazine that ruled our professional lives. To understand the magazine that ruled our professional lives. To understand the I.I. I.I. rankings is to understand what really made a Wall Street a.n.a.lyst in the 1990s. Here's how this whole insane-or was it inane?-process worked. rankings is to understand what really made a Wall Street a.n.a.lyst in the 1990s. Here's how this whole insane-or was it inane?-process worked.

It all started with a twenty-eight-year-old named Gil Kaplan, a former American Stock Exchange economist trader who founded Inst.i.tutional Investor Inst.i.tutional Investor in 1967, targeting big money managers. In the summer of 1972, Kaplan walked into the office of his editor, Peter Landau, and said, "We've got to do a story about the best a.n.a.lysts on Wall Street." The inspiration for just how to do that came that evening, when Landau and a colleague, Wayne Welch, were having drinks and watching baseball's All-Star Game. Since the story was slated for the October issue, the pair decided to give it a football theme, call it the "All-America Research Team," and put Wall Street a.n.a.lysts in football uniforms. "We laughed and laughed," Landau said. "Little did we know it would become this huge thing on Wall Street." The in 1967, targeting big money managers. In the summer of 1972, Kaplan walked into the office of his editor, Peter Landau, and said, "We've got to do a story about the best a.n.a.lysts on Wall Street." The inspiration for just how to do that came that evening, when Landau and a colleague, Wayne Welch, were having drinks and watching baseball's All-Star Game. Since the story was slated for the October issue, the pair decided to give it a football theme, call it the "All-America Research Team," and put Wall Street a.n.a.lysts in football uniforms. "We laughed and laughed," Landau said. "Little did we know it would become this huge thing on Wall Street." The I.I. I.I. rankings were born. rankings were born.5 For people like Martha Stewart, springtime is planting season. For a.n.a.lysts, it was I.I. I.I. voting season. Every spring, voting season. Every spring, Inst.i.tutional Investor Inst.i.tutional Investor would send out thousands of surveys to portfolio managers, directors of research, and chief investment officers of the world's largest pension funds, hedge funds, and mutual funds, asking them to rank the a.n.a.lysts in each industry sector based on any criteria they saw fit. would send out thousands of surveys to portfolio managers, directors of research, and chief investment officers of the world's largest pension funds, hedge funds, and mutual funds, asking them to rank the a.n.a.lysts in each industry sector based on any criteria they saw fit. I.I. I.I. then weighted the number of votes for each a.n.a.lyst according to the size of the inst.i.tution, which was based on the amount of money under management. then weighted the number of votes for each a.n.a.lyst according to the size of the inst.i.tution, which was based on the amount of money under management.

Starting in 1972, the October issue of the magazine featured profiles, complete with pictures, of 20 or more stone-faced middle-aged guys, and eventually a few women, in suits (fortunately, there weren't centerfolds). No muscle-bound, in-their-prime 21-year-old quarterbacks to be found here; instead we learned about the top a.n.a.lysts in the pharmaceuticals sector or the steel industry.

Here, finally, was a way to measure the performance of individual a.n.a.lysts. The banks loved it. The All-America Research Team became a huge hit for Inst.i.tutional Investor. Inst.i.tutional Investor. Gil Kaplan had a moneymaking franchise on his hands. Gil Kaplan had a moneymaking franchise on his hands.

By the time I got to Wall Street, the rankings had become the most accepted way to value an a.n.a.lyst's contribution. How accurate our stock picks were didn't matter so much. What did matter was whom the buy-side a.n.a.lysts and portfolio managers voted for in the poll. And so our jobs became as much about responding to the needs of every potential voter as they were about actually doing research and accurately picking stocks.

It had taken me a while to get the hang of this I.I. I.I. thing. After all, I had once believed that if I could sit in my attic and pound out good a.n.a.lysis, I would be doing the best job I could. But by the time I was at Merrill, I was covering all of my bases. There were approximately 400 inst.i.tutional money-management firms that voted, and each had at least one or two a.n.a.lysts focusing on telecom stocks. Each of these buy-side a.n.a.lysts, plus many portfolio managers at these firms, was a potential voter. It was my job, like a local pol doling out attention and sometimes favors, to make them like my work, like me, and, most of all, to like me enough to scribble my name onto that thing. After all, I had once believed that if I could sit in my attic and pound out good a.n.a.lysis, I would be doing the best job I could. But by the time I was at Merrill, I was covering all of my bases. There were approximately 400 inst.i.tutional money-management firms that voted, and each had at least one or two a.n.a.lysts focusing on telecom stocks. Each of these buy-side a.n.a.lysts, plus many portfolio managers at these firms, was a potential voter. It was my job, like a local pol doling out attention and sometimes favors, to make them like my work, like me, and, most of all, to like me enough to scribble my name onto that I.I. I.I. survey sheet. survey sheet.

This meant making sure I was always responsive to any question a client had about the industry, even if it meant returning phone calls from Indonesia at 4:00 AM AM. I'd do my best to take the initiative by calling clients whenever there was news or any new developments that could have an impact on their telecom portfolios.

Each client had a different set of priorities, which meant that if you wanted to do well, you had to figure out what made each one tick. Some voted for the name they knew best, meaning it was helpful to be quoted regularly in The Wall Street Journal. The Wall Street Journal. Others voted for the most influential a.n.a.lyst, the nicest guy, or the most responsive one; some clients actually kept a record of how many times each a.n.a.lyst called in a given quarter. And a few even voted for those whose stock picks had worked out best. It was a complicated psychological study, and it required every bit of emotional intelligence and organizational skill I possessed to remember that Bill at Ja.n.u.s loved to talk about skiing or that Patty at Capital Group had gotten burned buying AT&T a few years ago and was looking for a way to feel better about it. Others voted for the most influential a.n.a.lyst, the nicest guy, or the most responsive one; some clients actually kept a record of how many times each a.n.a.lyst called in a given quarter. And a few even voted for those whose stock picks had worked out best. It was a complicated psychological study, and it required every bit of emotional intelligence and organizational skill I possessed to remember that Bill at Ja.n.u.s loved to talk about skiing or that Patty at Capital Group had gotten burned buying AT&T a few years ago and was looking for a way to feel better about it.

There was really no end to the amount of work you could put into this aspect of the job, especially if you were a paranoid sort like me. I could always make just one more call, and that's what I tried to do to stay ahead. I was the hard worker after all, not the intuitive genius.

Just as for a candidate for county sheriff, face time played a big part in the care and feeding of clients. Every Sunday night, I'd sit down and go through my Rolodex to determine who I should contact that week. I organized my clients by geography. "Boston" meant Fidelity, Putnam, State Street Research, State Street Bank, Wellington, and MFS, among others. It was customary for a.n.a.lysts to go to Boston twice a year, so I ramped it up to three times once I learned from some of that extra survey information that I.I. I.I. was happy to provide-for a fee-that I was ranked second to Jack Grubman by Boston voters. was happy to provide-for a fee-that I was ranked second to Jack Grubman by Boston voters.

In a typical year, I'd hit Boston three times, Chicago twice, and 27 other cities, ranging from Minneapolis to Montgomery to Portland, Oregon, to Philadelphia, once, with a day or half day in each city. I traveled to Europe at least once a year, visiting mutual funds, pension funds, and trust companies in London, Edinburgh, Amsterdam, Rotterdam, Paris, Stockholm, Frankfurt, Milan, and sometimes Dublin and Madrid, often hitting two cities per day.

Each day would begin with a breakfast meeting and go on late into the evening, with clients stacked one after another, usually one per hour. I'd give my shtick on the industry and the reasons for my recommendations, try to tailor something special for each client, and then answer any questions they might have on the industry, on stocks, on deals, or on anything.

With some folks, the call was almost totally social. We knew and liked each other, and if they wanted to talk about skiing or music or politics or the weather, that was fine by me. It added spice to an otherwise highly repet.i.tive life. With others, it was all business from the moment I walked into their office. All of these buy-side a.n.a.lysts and money managers received our research, but they got everyone else's research too. So it was this personal touch combined with my investment ideas that I hoped would win me votes.

I also invited clients to special events, meetings with company executives, and anything else that I thought might interest them. I regularly hosted lunches with telecom executives at the St. Regis Hotel for about 20 carefully selected clients who might truly appreciate getting to know the CEO of Verizon, say, or were particularly interested in the viewpoints of the chairman of the Federal Communications Commission.

For five years running, I organized ski trips for buy-side clients to Vail, Telluride, Park City, s...o...b..rd, and Whistler. Everyone had to pay their own way-this wasn't a freebie from Merrill-but it was a great opportunity not only to have fun but also to debate the key issues facing telecom investors.

I came to really like this part of my job, although it was exhausting. I had to be "on" all the time. Every move I made, every quote in the paper, every bad joke, could end up as a reason to vote for me or against me. It sounds absurd, and it was. Yet ultimately this ranking made a huge difference to both my career and my firm.

So in late 1995, shortly after I had upgraded the Bells and downgraded AT&T, I was traveling when I got the word that it finally happened. I'd snagged the number-one rating in wireline services, achieving the goal I'd set when I came to Merrill. Of course, this also meant I'd unseated Jack. I was proud as h.e.l.l, thrilled for my team because I thought I would likely be able to get them bigger raises now, and at the same time, scared: having made it meant that all of my compet.i.tors, especially Jack, would be gunning harder for me the next time. This was no time to coast.

My making it to number one coincided with Merrill's becoming the number one research department, with the highest number of ranked a.n.a.lysts of all the Wall Street firms. On December 8 of that year, Merrill held a special lunch, inviting each a.n.a.lyst who was ranked as a runner-up or higher.

The lunch was held in Merrill's executive dining room, and 12 or so tables were set up, each one pairing a few a.n.a.lysts with a senior executive or two. I was seated with "Danny Boy" Tully, proving, I guess, that the firm actually did hold telecom in high regard. Eventually, Tully and a few other Merrill executives made speeches that thanked and congratulated us. Getting ranked in I.I., I.I., they said, was good for everyone. It made it easier for the retail brokers to attract clients, helped the traders and inst.i.tutional sales people generate more commissions, and, lest we forget, it helped the bankers attract investment banking business from corporate executives. they said, was good for everyone. It made it easier for the retail brokers to attract clients, helped the traders and inst.i.tutional sales people generate more commissions, and, lest we forget, it helped the bankers attract investment banking business from corporate executives.

"Just to Make Things Interesting"

As the Telecom Act headed toward President Clinton's desk, every a.n.a.lyst meeting or company visit took on added importance. A huge merger wave seemed poised to wash over the telecom industry, and we were ravenous for clues as to who was going to swallow whom. Although LDDS was still certainly a "second tier" long distance company, it had clearly emerged as the most interesting-not to mention the biggest-of that group in the past year.

This was mostly because of its high-flying stock and the fact that LDDS had made two major acquisitions: IDB WorldCom, bought out of near-bankruptcy after the follies of its executives, and WilTel, the national fiber-optic long distance network, which it bought for $2.5 billion in a Salomon-advised deal. It had also picked up its new name, LDDS WorldCom, meant to better evoke the company's global ambitions.

On January 31, 1996, I attended an a.n.a.lyst meeting hosted by LDDS WorldCom at the New York Hilton. The meeting was uneventful and I learned little, at least not until I was leaving the hotel. As I was walking to the escalators, Jack Grubman came up alongside me and we ended up walking out together.

"Hey," he grunted, ever the tough guy. "How ya doin'?"

"Fine, Jack, you?" was my minimalist response.

"Good," Jack answered. "So I guess we're on opposite sides of this Baby Bell versus long distance argument, huh?" he said.