Confessions of a Wall Street Analyst Part 5

"Certainly looks like it," I acknowledged. d.a.m.n straight we were. He had just issued a 115-page report arguing virtually the exact opposite of the opinion I had issued six months earlier. Any a.n.a.lyst (read: me) who thought the Baby Bells were going anywhere, he wrote, was "starry eyed," "bull-headed," and "nuts."

"Well, you know, Dan," Jack blurted suddenly, "if you hadn't reversed [your opinion], I probably would have-just to make things interesting."

I looked around to see if anyone else had heard this. Here was a top-ranked telecom a.n.a.lyst, one with a huge following among both inst.i.tutions and individuals, telling me-his chief rival-that he would have changed his opinion "to make things interesting"? I thought I heard the music from The Twilight Zone The Twilight Zone playing in my ears. He'd had a completely straight face. Was he joking, or did he actually mean that? I didn't know what to say, so I said nothing. Fortunately, we had reached the Hilton's exit and we parted ways. playing in my ears. He'd had a completely straight face. Was he joking, or did he actually mean that? I didn't know what to say, so I said nothing. Fortunately, we had reached the Hilton's exit and we parted ways.

As I jumped into a cab to head downtown to my office, I pondered the role of an a.n.a.lyst. Wasn't I supposed to recommend stocks that my a.n.a.lysis suggests will go up and not recommend those that it suggests will go down? So what job was Jack doing? Would he change his opinion for the sake of its entertainment value?

"Now I get it," I said to myself. "Jack's in the entertainment business and I'm in the stock-picking business." He didn't have it all wrong, actually. The way we conveyed our opinions was important, as I'd learned, and we both spent a lot of our time entertaining people and trying to make them like us. But even to joke about this stuff was, in my mind, the ant.i.thesis of funny. We were just so different.

That difference in itself was entertaining, it turned out. The clients and companies we worked with were well aware of our evident mutual dislike, and eventually, Mark Landler, a reporter from The New York Times, The New York Times, decided it deserved a story. decided it deserved a story.

The result, "The Siskel and Ebert of Telecom Investing," appeared on the front page of the Times Times' Sunday business section on February 4, 1996, complete with "Picks and Pans from Jack and Dan" and photos. I refused to pose with Jack, a fact Landler made a point of mentioning in the story. I suppose the piece was good publicity for both of us, although neither of us could resist a few digs at the other.6 I said Jack was "intuitive and gut-oriented." When pressed on how Jack and I were different, I deadpanned "Before making conclusions, I try to do the work."

Jack's response was both funny and true: "I bet you that in college, Dan was prepared for every test, while I was cramming at the last minute," he said.

The story went on to discuss why Jack favored the long distance companies like AT&T and MCI and why I liked the Bells. Then Jack said something that, in retrospect, sounds pretty prescient, though in an odd way. Alluding to his view-an absurd one in my opinion-that the Bells would never meet my forecasts unless they violated the legal requirements of the Telecom Act, he boldly a.s.serted, "If you believe Dan on the ability of the Bells to collude and conspire, the CEOs of these companies will all be sharing a cell at Leavenworth in five years." He sure was right about CEOs going to jail, but wrong about which ones.

* Telecom users, especially large corporations, would be able to significantly lower their communications expenses if they could use a local provider other than a Baby Bell. Even more important, long distance companies such as AT&T and MCI wanted to connect directly to customers via these new companies, thereby bypa.s.sing the more expensive monopoly networks of the Baby Bells. Telecom users, especially large corporations, would be able to significantly lower their communications expenses if they could use a local provider other than a Baby Bell. Even more important, long distance companies such as AT&T and MCI wanted to connect directly to customers via these new companies, thereby bypa.s.sing the more expensive monopoly networks of the Baby Bells.

4. INTIMIDATION INTIMIDATION.

19961997

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.

M&A Mania.

MY RIVALRY with Jack Grubman had existed since my MCI days, but my reversal on the Baby Bells had taken it to a whole new level. Now, as 1996 dawned, it would ratchet up a few more notches as we came down on the opposite side of almost every new strategic move announced in our industry. We spent this year locked in combat, going head-to-head not only on several major deals but also on what we believed was the appropriate role of an a.n.a.lyst. with Jack Grubman had existed since my MCI days, but my reversal on the Baby Bells had taken it to a whole new level. Now, as 1996 dawned, it would ratchet up a few more notches as we came down on the opposite side of almost every new strategic move announced in our industry. We spent this year locked in combat, going head-to-head not only on several major deals but also on what we believed was the appropriate role of an a.n.a.lyst.

In part, that was because there were so many new deals to disagree about. The Telecom Act of 1996 launched one of the biggest merger and initial public offering (IPO) waves in history. President Clinton signed it on February 8, in a midday ceremony at the Library of Congress. Al Gore, claiming credit for his "information superhighway" legislation, was present, as was Reed Hundt, Gore's high school buddy and chairman of the Federal Communications Commission.

Over the next four years, seven of the nation's eight largest local phone companies, the Baby Bells, would enter into multibillion-dollar mergers, mostly with each other. The major long distance companies would scramble to find a way to offer local service, with both WorldCom and AT&T paying huge premiums for startup compet.i.tive local carriers such as MFS and Teleport. Even MCI would be gobbled up in dramatic fashion. And with the emergence of the Internet as a transformative communication tool, new long distance companies such as Qwest and Global Crossing emerged, offering "broadband," or high-speed data transmission services. The numbers were mind-boggling and the pace was staggering.

More deals, of course, meant more multimillion-dollar fees for bankers. Yet this deal frenzy wasn't just about M&A, nor was it only about the Bells versus the long distance inc.u.mbents. It was also the beginning of the IPO boom, in part because the new entrants in the telecom field desperately needed capital to compete against the fat inc.u.mbents.

On April 1, I awoke to the news that Southwestern Bell (SBC), based in Texas, was buying Pacific Telesis, another Baby Bell based in San Francisco, in a $16.7 billion deal. It was a smart move for SBC, in my view, but one that came as a huge surprise to most industry observers. I had not expected this particular combination, but I had been predicting Bell mergers, including the $23 billion combination of Bell Atlantic, based in Philadelphia, and New York-based NYNEX, which came three weeks later, on April 22.

I wasn't brought over the Wall in either case. Merrill's bankers, led by my colleague Tom Middleton, were advising Bell Atlantic and snagged a huge $30 million fee. I was informed of the Bell AtlanticNYNEX deal the night before its official announcement, because Merrill's compliance lawyers wanted to make sure I knew I would be restricted from commenting on the deal and should remain silent in the morning. I viewed both mergers positively, for both the cost savings and the greatly expanded geographic coverage it would give the merged companies. I thought they were doubling their bets on something good. Not surprisingly, Jack's view was the exact opposite: that the Bells were putting all of their chips on something bad.

Nothing Personal?

But Jack and I didn't disagree on absolutely everything-or so I thought. We were both bullish on the new startup local phone carriers, companies that were building local phone networks to compete with the formerly monopolistic Baby Bells. The two largest of these startups were the Jim Crowefounded MFS, which had been the first of the group to have an initial public offering back in 1993, and Teleport Communications. Salomon had handled MFS's IPO before Jack came to the firm.

Now, in June of 1996, Teleport wanted to go public. Although I firmly believed that the Bells had the advantage over the long distance companies, I believed just as firmly that these startup local carriers were a good investment story. With their fiber-optic cables, they offered the only possible alternative for the long distance companies wanting to bypa.s.s the Bells' local monopoly. Either AT&T, MCI, and the others would be the startups' natural customers or, desperate to reduce their dependence on the Bells, they'd buy them up-hopefully at big premiums. My colleague Mark Kastan and I had been recommending MFS shares since January, having t.i.tled our initial report "MFS: Desperately Sought a.s.sets" on the theory that it was a good acquisition candidate.

Merrill was handling the Teleport IPO largely because, seeking a cheaper telecom option, it had been one of the company's founders and had been one of its largest customers. So it was Mark Kastan's and my job to come up with an estimate of the price the public markets would pay for the company. This was much tougher than making such a prediction for an already publicly traded company. Teleport's history was much shorter, and there were few similar public companies to which it could be compared. Indeed, MFS was the only similar company. If I had been a.n.a.lyzing Bell Atlantic or SBC or GTE, by contrast, I would have had a huge base of information to start with and, of course, a long history of how its price-to-earnings ratio and other valuation measures compared with those of other companies.

Just when the Teleport IPO road show was set to begin, MFS and its banker, Salomon, suddenly announced that MFS would soon be selling an additional $1.17 billion of stock to the public in what is known as a secondary offering. The announcement was unusual because it meant that both Teleport and MFS were coming to the capital markets at the same time and competing for investors' attention and dollars. Since MFS shares were already publicly traded and the company's management was better known than Teleport's, there was a risk that Teleport's offering would be overshadowed by the MFS road show. It seemed as if MFS and Salomon were trying to undercut Teleport and Merrill by showing everyone who was boss of this new sector.

As Teleport's IPO approached, Mark and I hosted two conference calls, one to Merrill's retail brokers and one to several hundred inst.i.tutional investors. Somehow, Jack managed to hear one of our conference calls, and he went bonkers. Was it personal? Or was it just Jack being his intensely compet.i.tive self? I didn't know. Whatever the reason, Jack was so agitated when he heard what we were saying that he apparently decided to violate the rules of both his own bank and the Securities and Exchange Commission. At Salomon-and at all investment banks-all research reports had to be reviewed by an internal compliance department before being sent to clients, to make sure that a.n.a.lysts had a reasonable basis for recommendations and also to keep them from inadvertently publishing confidential information about a banking client.

The SEC's regulations at the time stated that a research a.n.a.lyst could not write about a company if his firm was in the process of underwriting a stock offering for that company. This was to prevent the underwriting firm from "conditioning" or hyping the market in advance of an offering.

Nevertheless, on June 18, 1996, Jack faxed a two-page report to hundreds of his clients, t.i.tled "Merrill Commentary on Teleport/MFS Comparison Flawed." It was 13 days before the MFS offering and 9 days before the Teleport IPO, a time during which he was supposed to be restricted from writing reports on MFS. Someone faxed it to the CFO of Teleport, who faxed it on to me.

I blanched when I read some of this report. It sure seemed as if it was conditioning the market with its bullish comments on MFS. And the personal venom really got me. The first sentence read: "Merrill Lynch (lead manager of Teleport IPO) held a conference call yesterday where they attempted to justify Teleport vs. MFS by putting forth typically stupid arguments." The next paragraph was subt.i.tled "Reb.u.t.ting Merrill's ridiculous arguments of yesterday." It read: "It is no wonder that our auto a.n.a.lyst returned from Merrill after a couple days given the lack of intellectual honesty put forth by them vis-a-vis MFS and Teleport."1 Okay, I thought, this guy has really hit the skids. Jack was referring to the fact that a few days earlier, Merrill had hired an a.n.a.lyst from Salomon who decided that he didn't want to stay, as happens occasionally. Sometimes a.n.a.lysts just didn't feel comfortable in their new culture and quickly hightailed it back home, often scoring another raise in the process. What did this have to do with the opinion of a telecom a.n.a.lyst on Teleport? Well, maybe you would have had to take a Being John Malkovich Being John Malkovichtype journey into the folds of Jack Grubman's brain to find a connection.

That was weird, all right. But the real issue was that Jack had apparently sent out a report that could boost MFS's stock price-in effect, conditioning the market in violation of SEC regulations. I didn't really mind; I knew our a.n.a.lysis of Teleport and MFS was not "stupid." I figured Jack's emotional outburst could only hurt him with our mutual clients. Jack's attacks also brought me more attention from the buy-side. But I did send a copy to Andy Melnick, the head of research at Merrill, who apparently pa.s.sed it on to Herb Allison, who ran Merrill's investment banking business and would soon become Merrill's president. About a week later, I was told that Herb had called his counterpart at Salomon, Deryck Maughan, to complain.

I later heard from a few clients that the Salomon compliance department had contacted them as part of an investigation into the report. They were asked when and how they received this fax. Apparently, Jack's report had not been approved by compliance. It sure looked as if Jack was finally about to get what was coming to him.

But if Jack received a reprimand of some sort, it was never apparent. He simply continued on his merry way, interpreting his job as he saw fit. And it appeared to me that Salomon condoned it or, at the least, ignored it, thereby reinforcing his behavior. Whether or not he was using not-yet-public information prior to Frontier's acquisition of ALC, or whether he was bypa.s.sing a compliance review or simply making unsupported, outlandish accusations, he pushed the line, was rewarded for it, and did it again, each time advancing just a little bit further. Worst of all, I thought, he was establishing a model that many younger a.n.a.lysts would try to follow in the months and years to come.

Despite Jack's interference, Teleport's IPO was a big success. The initial price of the stock was $16, and it closed at $17.63 at the end of the first day. Within three months of the offering, Teleport's stock price had risen 34 percent, to $23.63. MFS, too, succeeded in its offering, raising over $1 billion.

About a month after this incident, I got the news that I had landed the top spot in I.I. I.I. for the second year in a row, with Jack coming in second again. I was relieved, more than anything. The only thing harder than making number one was staying number one. for the second year in a row, with Jack coming in second again. I was relieved, more than anything. The only thing harder than making number one was staying number one.

Internet Ignorance As the deals kept coming, one after the other, I felt like a tennis player facing Pete Sampras. The best I could hope for was to return the serve and buy enough time to get in place for the next one. The next month, on August 26, 1996, WorldCom shocked the Street when it announced that it was buying MFS, Teleport's compet.i.tor and Jack's favorite startup local carrier, for $14.4 billion or $55 a share, a 23 percent premium over MFS's trading price. This was good news for Mark and me and better news for Jack. We'd all been recommending MFS shares, so investors who followed our advice made lots of money. But the buyer and and the seller, WorldCom and MFS, were both Salomon clients, not to mention Jack's favorite two companies at the time. It appeared to many that Jack, like the Wizard of Oz, had orchestrated this deal. And Jack, with his smug insinuations, played this new part to the hilt. the seller, WorldCom and MFS, were both Salomon clients, not to mention Jack's favorite two companies at the time. It appeared to many that Jack, like the Wizard of Oz, had orchestrated this deal. And Jack, with his smug insinuations, played this new part to the hilt.

Jack had an increasingly powerful ally and friend in the form of Bernie Ebbers, the CEO of WorldCom. WorldCom now did almost all of its business with Salomon Brothers, thanks in large part to Bernie's favorite a.n.a.lyst. As the 1990s went on, Jack and Bernie came to be thought of in the same breath. WorldCom's mushrooming growth and soaring stock price made Jack look increasingly brilliant, while Jack's growing influence, combined with his constant touting of WorldCom's stock, made Bernie look equally astute. The two were becoming close friends as well. Bernie was Jack's starmaker and Jack was Bernie's.

Despite our frustration over Jack's triumph, Mark and I thought the deal made tremendous strategic sense. And it fit in perfectly with our earlier prediction that the long distance companies desperately needed to build or buy local infrastructure. Nevertheless, we thought WorldCom was paying a very steep price, so we repeated our cautious stance and Neutral rating on WorldCom shares.

We estimated the acquisition would reduce WorldCom's earnings per share by 87 percent, from $1.24 to just 17 cents, because MFS, as a startup, was losing ma.s.sive amounts of money. Investors seemed to agree: WorldCom's shares fell 16 percent the day of the acquisition announcement, while MFS shares jumped 28 percent that same day to approach the price WorldCom had offered for the company.

I wanted to know more about the pricing of the deal. So two days later, Mark and I met with Jim Crowe, MFS's CEO and founder. A former executive at the privately held Omaha construction firm Peter Kiewit & Sons, Crowe had astutely pushed Kiewit into telecom as a logical outgrowth of its construction capabilities. After all, building a startup local carrier was basically one huge construction job: digging up city streets, pulling fiber through sewer conduits, drilling holes through foundation walls, and constructing power rooms to house telecommunications equipment.

Jim Crowe had the appearance and deep, booming voice of a marine drill sergeant. A fit guy in his mid-forties, he stood about six feet two and wore a flattop that made him look like a frowning Herman Munster. He was completely obsessed with his company and an indefatigable evangelist for it. This didn't mean he was a schmoozer type, however. No, a meeting with Jim Crowe was like a meeting with the school nerd who'd been born again. He'd come at you again, and again, and again, not with words and jokes, but with numbers. He never smiled, never laughed, and he had what seemed like a compulsive need to quantify everything, a trait that he and I shared. One might have thought Jim and I would have gotten along famously. We didn't.

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 (p.r.o.nounced "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 becoming the top-ranked a.n.a.lyst, but the stresses were building from just about everywhere else.

There were the bankers wanting bullish opinions on their client companies and the inst.i.tutional 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 a.n.a.lysts. 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.

IF THERE WAS ONE WATERSHED YEAR for the telecom business-and the a.n.a.lyst-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 inst.i.tutional, dove into the market headfirst. for the telecom business-and the a.n.a.lyst-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 inst.i.tutional, dove into the market headfirst.

To keep the party going, all eyes looked to the Wall Street a.n.a.lyst. The media salivated over us and glorified our market influence and stardom, even when hinting at a.n.a.lyst conflicts of interest. "More important, at many firms, is how much investment banking business an a.n.a.lyst brings in.... Also important at some firms is the trading volume the firm does in the stocks an a.n.a.lyst covers," The Wall Street Journal The Wall Street Journal had noted as early as June 1994. had noted as early as June 1994.2 And, in an early 1997 Journal Journal article ent.i.tled, "For Salomon, Grubman Is the Big Rainmaker," a reporter wrote: "This dual role [of a.n.a.lyst 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." article ent.i.tled, "For Salomon, Grubman Is the Big Rainmaker," a reporter wrote: "This dual role [of a.n.a.lyst 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. 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 a.n.a.lysts 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 a.n.a.lysts.

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 a.n.a.lyst 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 a.n.a.lyst. In the 1980s, powerful traders and investment bankers came to be known as BSDs-Big Swinging d.i.c.ks. Now, by the mid-1990s, the BSDs were the a.n.a.lysts-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. Inst.i.tutions, 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 pa.s.sionately 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 Andalucia, 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 a.s.signments. Last but certainly not least, the bank's a.n.a.lyst 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 gra.s.s 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 a.n.a.lyst 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 a.s.signed 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.

Joe was uncharacteristically quiet. I suppose he was trying to act gracious and authoritative, as he'd seen other chief executives act in the past. Or perhaps he knew what was coming.

He deferred to Cy Harvey, who was president of the Anschutz Corporation and, at least for today, was the designated stand-in for Phil Anschutz. A round, quiet man who had seemed rather gentle until this point, Cy didn't waste any time by describing his latest elk hunt. Instead, he sat down and immediately launched into a diatribe against a very stunned a.n.a.lyst-me. He explained that he had just read my most recent report, in which I argued that the long distance industry was headed for an increasingly compet.i.tive period given the entry of the Bell companies and low-cost startups like Qwest. I had, indeed, written this; it was, and had been, my basic position for the past few years. At risk, I believed, were the inc.u.mbent long-distance players, not the startups or the Bells. But Cy failed to see the distinction. He thought I was bearish on the long distance market and, by extension, on Qwest.

"I don't understand how Merrill could be a lead underwriter [of the coming Qwest IPO] with a research opinion that is so negative on long distance," he said menacingly. I stopped eating my m.u.f.fin, mid-bite, and swallowed anxiously. What the h.e.l.l was going on here? I sneaked a look around the table to see Middleton and Allison equally frozen, smiling thinly, forks in air. A guy we'd never heard of named Cy Harvey was telling us that Merrill wouldn't-and shouldn't-underwrite Qwest's IPO because of my research opinions. Not only was this a breach of social decorum-these "meet and greets" were supposed to be light light-but it was a naked attempt to corner me, or at least intimidate me. And the irony was that I was actually bullish on Qwest.

I tried to look unruffled as I planned my response. I looked over at Allison, who, although normally pretty hard to faze, seemed startled. I hoped this was no big deal for a former naval officer. I had never had a run-in with Allison about my research or opinions, even though there had likely been many complaints from AT&T and MCI, two of telecom's largest fee generators. Tom Middleton, the banker, and I had a mutual respect for each other, so I felt that I'd have some backup there, though he certainly wouldn't have complained if I suddenly turned into a screaming bull on all the companies that needed banking help.

I waited for Cy to finally stop haranguing me, and when he took a breath, I jumped in. I told him, as calmly as I could, that my report was about AT&T, MCI, and Sprint-the inc.u.mbent long-distance companies-and that I thought the Baby Bells were, as a result of the Telecom Act, going to take considerable market share from them. But to do so, the Bells would need to lease or buy long distance capacity from other companies such as Qwest. "That would be very good for Qwest," I said. Cy didn't seem to register what I had said.

Middleton, trying to defuse things, suggested that we set up a meeting with Joe and Qwest's CFO, Robert Woodruff, to develop some models. This was a normal course of action for an a.n.a.lyst: dig in deeply and work up a range of valuation possibilities and an estimate of what price the market might pay for the IPO. This was a guessing game, affected by macroeconomic events, industry trends, investor psychology, and a million other factors, but ultimately we all had to make a call. I said my final view on Qwest would come after my team and I had completed our forecasting and valuation a.n.a.lysis, which likely would take a month or two. I promised to dig deeply into Qwest's business plans and its financials.

But Cy would have none of it. He repeated himself a few more times, hammering the point home just in case we'd missed it (we hadn't): How could Merrill expect to underwrite the offering when its research a.n.a.lyst was so negative? (Believe me, Merrill didn't expect to win the deal by this point.) I wondered if Salomon had lobbied for the banking by contrasting Jack's more bullish reports with mine. Another explanation that crossed my mind as I sat there was that Merrill's bankers, my own colleagues, had set me up in order to cover their own a.s.ses and show Herb that the reason this IPO wouldn't be won was not because of any failure on the banking side, but because of my research opinions. Maybe I was getting a bit paranoid, but it wasn't hard with this crowd glaring at me. I took solace in the realization that I was still the top-rated a.n.a.lyst on that silly poll and that I still had another year left on my three-year contract.

The room was thick with tension, and everyone in the room sensed it and wanted to avoid it, even Joe Nacchio, who would normally be the first to jump into the fray. But it was one of his first days on the job, he barely knew Cy, and he probably understood that the worst thing would be to have a big bank like Merrill, with so many retail investors, as an enemy when he was personally holding millions of Qwest stock options. So he decided to try to calm the waters.

"I think Robert and I should meet with Dan and his team and explain our plans, our opportunity, and the a.s.sumptions underlying our forecasts," he said, far more calmly than the argumentative man I remembered from AT&T. "I'm sure that will help." Perfect, I thought. Bring me up the learning curve, show me why your a.s.sumptions are what they are, and I'll go back and a.n.a.lyze it, forecast it, put it into my strategic view of the industry, and come up with a fair valuation.

At this point, Allison chimed in for the first time, trying in his measured way to calm everyone down. "You know," he said, looking at Cy, "there are many similarities between the long distance industry and ours, investment banking. Many a.n.a.lysts have alleged that our business has overcapacity too. Yet investment banks' stocks have been soaring for the past several years despite the caution of many a.n.a.lysts." In other words, in a market like this one, it might not matter what any research a.n.a.lyst thought. Cy just grimaced. Whatever was up his b.u.t.t wasn't going away.

Finally, the meeting ended. Mark Kastan and I went back down to our offices on the 20th floor. "Boy, did we just get ambushed or what?" I fumed. "That's pretty embarra.s.sing to have a client attack our research in front of Herb. Who is that Cy guy anyway?"

"I don't who he is, but he must be Phil's hatchet man," Mark replied. Yeah, I thought: knows nothing, hears nothing, just delivers the final blow and moves on. The whole thing unnerved me, especially when banker Tom Middleton called me later that day to needle me a little bit.

"Quite a meeting, huh, Dan?" he chuckled. "How's it feel to be the guy that Herb Allison will remember for losing one of this year's biggest IPOs?"

The answer was that I felt incredibly p.i.s.sed. p.i.s.sed because some jerk who knew next to nothing about telecom was trying to do what Bernie had joked about two years earlier: make investment banking fees contingent on bullish research opinions. Pound the table, win the business. Simple as that. And Tom turned out to be right: in February 1997, Qwest made its selection for the lead underwriting slot for its IPO. It was...Surprise! Salomon Brothers.

Much to the chagrin of every telecom banker on the Street, Salomon and its star a.n.a.lyst-c.u.m-banker, Jack Grubman, were increasingly dominating the telecom banking business. There was no joint lead underwriter on the Qwest IPO, which was tantamount to a loss for us and every other serious investment bank out there. No, the whole enchilada went to Salomon, along with the power to determine how many shares various clients got, called allocation. Merrill and everyone else were relegated to a co-manager role, which meant nothing other than that we'd all be thrown a very cheap bone to be sure some shares went through each of our firms. I was hardly surprised.

Fido Loves WorldCom Despite the Qwest debacle, I was feeling quite pleased with the way the industry was shaking out. The Bells were advancing and AT&T was struggling, as I had predicted; many of the merger and acquisition deals seemed to support my arguments; and my clients seemed more than pleased with my research. But not everyone thought I was heading in the right direction, least of all when it came to WorldCom, which continued its pattern of aggressive growth and acquisitions-with Jack cheerleading all the way.

Fidelity Investments, the world's largest mutual fund manager, wasn't a big fan of mine. Or more accurately, the new telecom a.n.a.lyst there, Nick Thakore, wasn't. Nick was a young, very smart MBA from Wharton who a year earlier had replaced Abby Johnson as Fidelity's telecom specialist. Abby, the daughter of Fidelity's founder, Ned Johnson, became president of Fidelity Management & Research Co. in 2001 and is now worth roughly $12 billion, thanks to her dad's astute estate planning. Not bad for a former telecom a.n.a.lyst.

In the spring of 1997, I went to visit Thakore during one of my Boston marketing trips and found myself being ripped a new one by this 20-something man-child. Mark Kastan remained the lead a.n.a.lyst on WorldCom, rating it Neutral. I agreed with Mark's caution about WorldCom. Mark also felt strongly, as I did, that the Baby Bells' entry into long distance was going to hurt all the existing long distance players, including WorldCom. And, embarra.s.singly, neither he nor I yet understood how radically the Internet would change the dynamics of the telecom industry.

But Thakore had bought the Jack Grubman pitch, hook, line, and sinker, and told me that I had it all wrong. He parroted the lines I'd heard before: WorldCom would achieve even higher earnings and revenue growth rates than investors were expecting. Thakore was focused entirely on short-term earnings-per-share, rather than on the longer-term, industry-wide events and trends I thought would have a negative impact.

Thakore's argument was reasonable, but it was also one he had to make. That was because he-and Fidelity-had made a huge bet already on WorldCom following its acquisition of MFS. It had been a smart bet, as WorldCom shares had already risen from $18 to $25 since the MFS deal was announced. But his recommendation was, in large part, a self-fulfilling one: WorldCom continued to rise in part because because Fidelity, the largest inst.i.tutional investor in the world, had purchased so many shares. Companies like Fidelity moved the market all on their own, creating momentum that usually proved them right after the fact. Trying to mimic Fidelity's stock purchases was a good strategy, one that many individuals and companies employed, but it had a major downside: if you were still in it when "Fido" started selling, you were toast. Fidelity, the largest inst.i.tutional investor in the world, had purchased so many shares. Companies like Fidelity moved the market all on their own, creating momentum that usually proved them right after the fact. Trying to mimic Fidelity's stock purchases was a good strategy, one that many individuals and companies employed, but it had a major downside: if you were still in it when "Fido" started selling, you were toast.

Thakore clearly wanted Mark and me to turn bullish on WorldCom's shares, pushing Merrill's retail customers into the stock and propelling its price further upward. That way, I thought to myself, Fidelity could sell its shares at an even higher price. But he couldn't say that. He had to argue the merits of the stock as earnestly as he could.

To be fair to Thakore, I had no way of knowing if he truly believed WorldCom shares were undervalued or if he was just bluffing. I didn't know if he saw me as the old guy who just didn't get it or as the old sage who cut through the hype. What I did know was that our difference of opinion was bad news for me; because of Fidelity's size, I.I. I.I. counted Thakore's vote as four times the vote of smaller inst.i.tutions. This meant, in a survey in which even one or two votes can make the difference, I might be losing four votes just because of my (and Mark's) caution on Thakore's favorite stock. Although my job was to give advice to my clients, to have a strong difference of opinion with them wasn't always a winning strategy. counted Thakore's vote as four times the vote of smaller inst.i.tutions. This meant, in a survey in which even one or two votes can make the difference, I might be losing four votes just because of my (and Mark's) caution on Thakore's favorite stock. Although my job was to give advice to my clients, to have a strong difference of opinion with them wasn't always a winning strategy.

Irrational Exuberance Nor was it a winning strategy to have a difference of opinion with the companies I covered. Although my research had lost Merrill the lead manager spot for Qwest's June IPO, the fact that we had been selected as lowly co-managers meant I still needed to come up with a valuation for the stock, which was going to go public in June. I asked Megan and Mark to meet with Robert Woodruff, Qwest's CFO, and to dig deeply into the numbers.

On March 27, we had another meeting with Joe Nacchio and Cy Harvey, but this time, the tone was altogether different. All smiles, Joe led the discussion, telling us all about his latest hires from AT&T and offering to answer any questions we had about Qwest's plan. We interrogated him about the technology, industry pricing trends, traffic and cost trends, spending plans, key executives, and a host of other subjects. Joe was charming and as forthcoming as I'd ever seen him. Cy was quiet, looking bored. Maybe this Mr. Nice Guy stuff was no fun for him.

But the charm offensive would melt away as soon as they heard the numbers I'd come up with. By April 2, after a five-day marathon of creating different scenarios and models for the company, using a variety of a.s.sumptions, Mark and Megan came to me with a preliminary valuation for the company that averaged all of their scenarios: $1.5 billion. After reviewing their work and adjusting some of the variables, I was comfortable with their conclusions. We told Tom Middleton, who in turn, told Bob Woodruff and Cy Harvey. It turned out that our number was much lower than the valuation the Anschutz folks had modeled internally, $1.8 billion, and the whopping $2.2 billion Salomon had predicted. The reaction was not positive, to say the least.

I knew Qwest would try to pressure us to raise our valuation. Did they know something we didn't? Once we had come up with our model, it was typical for us, or any other a.n.a.lyst, to go over the a.s.sumptions with the company to make sure we hadn't missed or misinterpreted anything. This was another opportunity for the company to try to convince us that we were too conservative and that a higher valuation was in order. We expected that, and came dressed in our finest suits of skepticism.