Confessions of a Wall Street Analyst Part 7

I felt pretty confident that I'd keep my number one spot. In July, when I'd got the call from the I.I. I.I. folks, I a.s.sumed, or hoped, anyhow, that I was still number one. There wasn't a request for a picture, but I knew they already had one from the previous two years, so I didn't sweat it. But then, sometime in September, a client told me that Jack had told him that he had retaken the top position. A sinking feeling told me he was telling the truth. When the magazine came out the next month, I found out Jack was, indeed, the top dog again, and that I had come in second. folks, I a.s.sumed, or hoped, anyhow, that I was still number one. There wasn't a request for a picture, but I knew they already had one from the previous two years, so I didn't sweat it. But then, sometime in September, a client told me that Jack had told him that he had retaken the top position. A sinking feeling told me he was telling the truth. When the magazine came out the next month, I found out Jack was, indeed, the top dog again, and that I had come in second.

I was very disappointed, as much for my team as for me, as we had busted our b.u.t.ts. But timing is everything, and to correctly predict in August that the MCI and BT deal would be renegotiated in dramatic fashion wasn't nearly as important, in my world, as being right in the spring during I.I. I.I. voting season. I had been right at the wrong time. At the time of the vote, what buy-side voters remembered was the incredible stock performance of WorldCom, Jack's favorite, which had rocketed from $19 to $26 in the nine months between its acquisition of MFS the previous August and May 1997, when the voting season. I had been right at the wrong time. At the time of the vote, what buy-side voters remembered was the incredible stock performance of WorldCom, Jack's favorite, which had rocketed from $19 to $26 in the nine months between its acquisition of MFS the previous August and May 1997, when the I.I. I.I. ballots were mailed. Back then, no one knew that MCI's deal with BT was about to go sour and MCI shares would go into a tailspin. ballots were mailed. Back then, no one knew that MCI's deal with BT was about to go sour and MCI shares would go into a tailspin.

But actually the truth was simpler than that: Jack was the most energetic, bullish, and visible cheerleader for our entire industry, a once-sleepy group that was suddenly red-hot-and making a lot of people a lot of money. I told my team that number two was something to be proud of. I think they felt a little better, but not much. And I just resolved to work that much harder. Jack had the market's momentum and the inside edge behind him, but I, as always, believed I could grind it out.

Jack and Bernie: Inextricably Linked Hospitals are like Wall Street in one major respect: the only way to get good information is to get there at the crack of dawn. If you need to talk to a doctor, the best bet is to catch him or her on the early rounds, before the new challenges of the day bubble over and the other streams of anxious families arrive.

This was why my older brother, his wife, and I were pulling into the parking lot of Buffalo General Hospital at 6:30 AM AM on a chilly Wednesday morning, October 1, 1997. It was just over a month after the BT-MCI deal had been renegotiated. It had been a stressful few days; my mom had had what we hoped was a benign tumor removed from her brain, but we had no idea what her prognosis was. She was recovering very slowly. We had lots of questions for the surgeon about her status, but he'd been impossible to track down, so we decided to ambush him when he came out of the ICU at the end of his morning rounds. on a chilly Wednesday morning, October 1, 1997. It was just over a month after the BT-MCI deal had been renegotiated. It had been a stressful few days; my mom had had what we hoped was a benign tumor removed from her brain, but we had no idea what her prognosis was. She was recovering very slowly. We had lots of questions for the surgeon about her status, but he'd been impossible to track down, so we decided to ambush him when he came out of the ICU at the end of his morning rounds.

But I was still in the car when my pager beeped with a message from my colleague Mark Kastan. I looked down and read a sentence that I was sure had gotten garbled somehow. It said: "Wcom buying MCI, call my cell now, need to make joint call."

"Holy s.h.i.t," I yelled. "He must have it backwards." How could tiny WorldCom buy ma.s.sive MCI? It would be like a minnow swallowing a whale. My brother and sister-in-law turned around from the front seat. I could see the irritation and stress on their faces. Surely I had more important things to think about that morning than some stupid deal. "What company is blowing up now?" my brother said sarcastically, recalling my fiasco with IDB back in 1994, on the day of Jennifer's eye surgery.

"Oh, no, it's just the opposite," I said, still incredulous. "Kastan says WorldCom is bidding for MCI, but he must have mixed it up. This is big. I've got to stay in the car and figure it out. I'll meet you in the waiting room, okay?"

Of course I wanted more than anything to go inside and figure out what was happening with my mom. But even if the opposite were true, that MCI was buying WorldCom, this was, at the time, the biggest deal ever in our sector, one that would completely realign the telecom planets, and one that I absolutely had to be out in front on. Yes, my priorities were out of order, but that was what Wall Street was all about, wasn't it?

My brother suggested that I stake my claim to the bank of pay phones inside, but I told him I had no time. I had to reach Mark Kastan immediately, figure out what was happening, and decide what our reaction would be. I plugged my cell phone into the car lighter and dialed Mark's cell as he was en route to Manhattan on the ferry from Hoboken, and he said the words I had never imagined hearing: yes, it was WorldCom making an unsolicited, hostile bid for MCI, in an audacious move to try to steal it from BT and to become, in one fell swoop, the second largest telecommunications company in the world.

This was huge news, and not particularly good news, for me. But it was absolutely wonderful news for Jack. WorldCom, this company that Jack had touted incessantly and that I had always regarded as something of a joke ever since that fateful meeting in Mississippi with Bernie Ebbers, was suddenly very much for real. According to the announcement, Mark told me, the deal would increase WorldCom's earnings per share by 22 percent in the first year. I checked the math against our models, factoring in an estimate of savings from eliminating duplicate costs. The numbers jibed with WorldCom's claims. I didn't much like either company, but the combination of the two would change the industry for the better.

"Dan, I know you don't like them," Mark said, "but this deal will add more than 20 percent to earnings per share. That's huge, and it's good for the industry to have one fewer compet.i.tor. Let's upgrade WorldCom."

Mark had worked as an a.n.a.lyst at a money management firm for nearly 10 years before joining me at Merrill, and he still thought like a buy-sider. In this case, this meant ignoring the long term and instead focusing on what this meant for earnings in the next few years. If I thought about the deal that way, I had to admit he was right. This was a blockbuster story: the numbers worked like a charm (on paper, at least); and it was the perfect opportunity for us to move over to the bullish side on WorldCom. I'd predicted trouble from the hugely expensive MFS acquisition a year earlier, and I'd been wrong: the stock had almost doubled in the time frame, and I'd missed every bit of it. By this point in time, the bull market was beginning to take on a life of its own, and the companies that showed the best growth prospects were fast becoming investor darlings. This was the case with WorldCom.

This was a major dilemma. I still didn't feel confident that WorldCom could transform successfully into a telecom giant. Nor did I support the thesis that the long distance carriers like AT&T, MCI, and Sprint had the edge. That was Jack's story. My story was that the Baby Bells had the advantage.

But on the other hand, my job was to help my clients make money, and it was clear to both of us that WorldCom together with MCI had quite a bullish earnings outlook. A marriage of MCI and WorldCom made a lot more sense than MCI with BT, for three reasons: it would reduce the number of long distance compet.i.tors; it would combine WorldCom's and MCI's huge long distance networks and sales forces, saving gobs of money by eliminating redundant equipment and employees; and it would help MCI build local networks far less expensively than if it did it on its own.

So I took a deep breath and told Mark he was right. We'd upgrade WorldCom to Acc.u.mulate from Neutral, leaving MCI at a "no rating," or "6-6," in accordance with Merrill's rule that we couldn't rate stocks in the process of being acquired.

Knowing I needed some time to focus on my mother, Mark offered to get everything ready for the 7:30 Merrill morning call and page me when it was time to call in. My brother had tracked down the surgeon, and the news was worrisome: the surgery had gone fine, but my mom was coming out of the anesthesia very slowly, which concerned him a little bit and us a lot. We didn't know what to think.

At 7:10, my pager sounded again. "Cleared for call," it read. "7:30 a.m. for 4 mins, pls call ofc now." Twenty minutes later, we would speak to about 150 of Merrill's inst.i.tutional salespeople and to Merrill's 12,000 retail brokers, who needed a concise summary of our upgrade so that they could call their clients-individual investors-and convince them to buy WorldCom shares as soon as the market opened at 9:30.

I called Mark, who walked me through the latest info on the newswires. It was a hostile bid, with no guarantee that MCI would accept it. WorldCom was offering the equivalent of $41.50 per MCI share in WorldCom stock, a whopping 41 percent above MCI's current trading price of $29.43 and 23 percent above BT's revised offer of $33.80. From MCI's perspective, there was no way CEO Bert Roberts and the board could turn this down, especially after all of the humiliation they had endured with BT. WorldCom could pay this price because of its high-flying stock and powerful price-to-earnings ratio. When put side by side, WorldCom's offer was virtually the same as BT's original offer. If this deal went through, all of those arbs that had been squeezed so badly would be bailed out if they still held MCI shares.

We spoke on the squawk box together, Mark from Merrill's morning call room and me from a pay phone inside Buffalo General Hospital, where I controlled two lines, to the dismay of hospital visitors who were trying to call their families. I talked on one and checked my voice mail on the other. We explained that we thought one less compet.i.tor would be good for the long distance market and that the 20 percent boost to earnings was very positive.

I spent a few more hours at the phone bank, talking with clients and salespeople about the deal and our upgrade. Periodically, I'd take a break and check in at the ICU, where my sister and dad had since arrived, to see how Mom was doing. For lack of anything better to do, they were all watching the coverage of the deal on CNBC, bemused that the faraway stock market was having as much of an impact on my life as what was happening in the ICU a few feet away. We still had little news on Mom's condition.

Although the day was one adrenaline rush followed by another, I must admit that the high point wasn't the call, but rather our quick field trip to the Anchor Bar for lunch. The Anchor Bar was an inst.i.tution in Buffalo, world famous as the place that had invented Buffalo wings. Every good Buffalonian knows how a real Buffalo wing should look and taste: an oily mix of Tabasco, b.u.t.ter, and cayenne pepper, the requisite plastic tub of blue cheese with some slightly soggy celery nearby. I was starving and stressed, so it was a welcome respite. In the days that followed, my mom's condition started to improve, although she had to stay in the hospital for several more weeks. Her tumor did turn out to be benign.

In mid-October, in a scene reminiscent of the 1980s, local phone company GTE stepped in, countering with an all-cash bid for MCI that most of us on the Street thought was absurd because there was little overlap between the two companies and therefore little in the way of cost savings. BT remained silent, apparently seeing this as an opportunity to escape the company that, just three months ago, had shocked all of us with a 40 percent cut in its earnings outlook.

But MCI didn't respond to either GTE's or WorldCom's offer, and Bernie lost his patience. On November 10, 1997, nearly a month after GTE's bid, WorldCom upped its offer, announcing in a conference call that it would pay $51 per MCI share in stock, up dramatically from the earlier $41.50. Bernie, ever the cowboy, called Bert Roberts, MCI's CEO, his "new boss" during the conference call, although of course the opposite would be true.

WorldCom's CFO, Scott Sullivan, Bernie's straight man, reiterated his estimates of the cost savings and additions to earnings per share that would result from the merger over the next five years. Indeed, Scott's intimate knowledge of every cost item was impressive. He sure seemed to have a handle on the details.

In the end, GTE folded, BT bowed out, and MCI enthusiastically, or so it appeared, accepted WorldCom's offer. WorldCom had won control of MCI in a deal worth $37 billion. Although I felt a little uneasy about the snake devouring the elephant, it would have been suicidal to bet against WorldCom at this point. WorldCom's bold takeover of MCI, a company four times its size, was the event that signified the arrival of telecom to the center of the world stage.

Our once-sleepy industry was suddenly looking like Barbarians at the Gate Barbarians at the Gate all over again, with breathtaking hostile takeover offers fueled by a stock market that was making anything possible. In four short years, a tiny upstart company run by a former gym teacher had catapulted itself into the same league as old Ma Bell. WorldCom symbolized how the telecommunications industry had transformed itself from a snooze-inducing swampland to the glamour girl of the Street. all over again, with breathtaking hostile takeover offers fueled by a stock market that was making anything possible. In four short years, a tiny upstart company run by a former gym teacher had catapulted itself into the same league as old Ma Bell. WorldCom symbolized how the telecommunications industry had transformed itself from a snooze-inducing swampland to the glamour girl of the Street.

And we, the a.n.a.lysts, were at the nexus of it all. On one hand, we were trying to deliver thoughtful a.n.a.lysis on what the deals really meant; on the other, we were influencing the deals themselves by advising the companies involved and pushing our vision of the industry out to the world with our research. It was a high-stakes balancing act, for sure.

This was also the event that catapulted the team of Jack Grubman and Bernie Ebbers to the top of the telecom universe. The two reinforced each others' power, daring anyone to match their audacity. Within hours of MCI's accepting WorldCom's bid, Jack Grubman, his disastrous secret-doc.u.ment claim now a relic of the past, told anyone who would listen that he was the guy who convinced Bernie and Scott to make the offer for MCI. He may or may not have been, but it didn't matter: Jack's behind-the-scenes role in WorldCom's acquisition of MCI made him into a magnet for the buy-side. Money managers and buy-side telecom a.n.a.lysts began to realize that Jack might know about market-moving events before they were announced. He brandished his image as the telecom industry's consummate insider, one who orchestrated mergers and acquisitions, brought in big fees for Salomon's bankers, and according to some buy-siders, provided advance notice of upcoming deals. All I could do was sit back and watch.

Jack Plays Loose: I Play Banker A few months after WorldCom won MCI, the next round of Bell mergers got rolling. SBC, formerly Southwestern Bell, pounced on Ameritech, the Chicago-based Baby Bell. SBC would now have a geographic reach that covered one-third of the United States, stretching from California to Texas to Ohio. The $62 billion deal was announced on Monday morning, May 11, 1998, and made perfect sense to me. The two companies had lots of duplicate costs that could be eliminated. Plus, an enlarged service area was particularly important for improving service to traveling ("roaming") cell phone customers and for SBC's plans to begin offering long distance services.

That wasn't the spin the chairmen, Ed Whitacre of SBC and d.i.c.k Notebaert of Ameritech, used, however. They promised the deal would help the American consumer because the money the merged company saved would be used to build its own startup local carriers in areas outside its own traditional service regions. That, they argued, would bring compet.i.tion and lower prices to customers served by Baby Bells Bell Atlantic, BellSouth, and US West. To pitch the deal as pro-consumer was absolutely critical because the Federal Communications Commission and the Ant.i.trust Division of the U.S. Department of Justice were beginning to take a hard look at whether the telecom merger wave had gone too far.

Although I was a supporter of the Baby Bells, I thought Ed Whitacre and d.i.c.k Notebaert's pro-consumer story was total bull and was presented for one reason only-to get government approval. It was too late and far too expensive, in my opinion, for SBC, or any of the Bells, to begin the long process of building local telecom carriers in other areas, and they were probably too slow and bureaucratic to get it done anyhow. And, most important, the Bells had lots of great opportunities to grow inside inside their own regions by offering long distance, wireless, and high-speed Internet access services. So what was the point of major spending outside their home areas? their own regions by offering long distance, wireless, and high-speed Internet access services. So what was the point of major spending outside their home areas?

But that wasn't what Jack Grubman was saying. Suddenly, the guy who had ridiculed everything the Bells had done for the past several years did a complete about-face. Jack wrote, "The reason we have always liked Ed Whitacre is in a sense he reminds us of Bernie Ebbers."5 Given Jack's endless worship of Bernie, it seemed that he was anointing SBC boss Ed Whitacre a king. Given Jack's endless worship of Bernie, it seemed that he was anointing SBC boss Ed Whitacre a king.

In my mind, Ed Whitacre was indeed very smart and savvy, and I liked his personality. He was a circ.u.mspect and serious Texan who avoided the Internet and dot-com hype that so many others in the telecom industry were embracing. Jack's firm, Salomon Smith Barney (SSB), was SBC's adviser on the deal. Even though Jack had argued that SBC's purchase of PacTel and Bell Atlantic's acquisition of NYNEX were both bad moves, he now lauded this similar deal as brilliant and good for both consumers and shareholders.

Many savvy buy-siders looked cynically on what Jack was doing. One e-mailed me later that morning, attaching Jack's report on the merger with a cover message: "Here's the JG scoop-and to me it reads as if he is getting paid by SBC for this note. In other words, for SSB to get the big money on this it has to go through, and for that to happen the DOJ must be satisfied that this will probably add to compet.i.tion. If you like this deal-which you seem to-I'd pipe down and let JG do his magic!" I doubt that SSB's retail investors understood it quite this way.

I don't know for sure whether or not Jack was brought over the Wall on this deal and therefore knew about it beforehand. But on May 6, 1998, just five days before before the merger was announced, Jack had come out with a report called "CLECs [Local Startups] Surpa.s.s Bells in Net Business Line Additions for the First Time." Never mind that his math was wrong. What mattered was what he wrote toward the end: "If [a Baby Bell] acquires a.s.sets for capabilities that take them away from being a regional carrier on defense into a more offensive, fully-integrated national or even global provider, then we would gladly rethink our investment position on that particular [Baby Bell]." the merger was announced, Jack had come out with a report called "CLECs [Local Startups] Surpa.s.s Bells in Net Business Line Additions for the First Time." Never mind that his math was wrong. What mattered was what he wrote toward the end: "If [a Baby Bell] acquires a.s.sets for capabilities that take them away from being a regional carrier on defense into a more offensive, fully-integrated national or even global provider, then we would gladly rethink our investment position on that particular [Baby Bell]."6 What he seemed to be signaling was that if a Baby Bell began to compete out of its home territory, exactly what SBC and Ameritech were now announcing, he would consider upgrading it. There was nothing illegal in a statement like this, but it sure seemed to me that he already knew something was coming and that he was laying the groundwork for the news to come and for his radical reversal of opinion.

On the morning of the merger announcement, May 11, Jack published a long and detailed report on First Call, the wire service for research reports, at 10:09, just 20 minutes after the Whitacre and Notebaert investor conference call about the merger had ended. I had barely finished listening to the call and had just begun to write up my initial comments when his report crossed the wire. He didn't give any recommendations about SBC or Ameritech shares, because, with SSB advising SBC, his compliance department would likely have limited his commentary to the publicly announced facts of the merger. Since Salomon would be collecting a fat fee for advising SBC, it would face a conflict of interest between its corporate client, SBC, and its investor clients. Nevertheless, he did brashly add a few sentences that 99 out of 100 compliance officers would have-and should have-deleted.

"From an SBC perspective, a.s.suming this line is kept in by our lawyers," a.s.suming this line is kept in by our lawyers," he wrote, "we think the strategic moves they are making will clearly be additive to long-term shareholder value." he wrote, "we think the strategic moves they are making will clearly be additive to long-term shareholder value."7 In effect, he had issued a buy recommendation on SBC, and even Jack thought he was going too far, hinting that that line would be deleted. But it wasn't. In effect, he had issued a buy recommendation on SBC, and even Jack thought he was going too far, hinting that that line would be deleted. But it wasn't.

In conversations with my buy-side clients, I also learned that Jack had been telling people that morning that SBC had been planning to announce a deal to purchase an unnamed startup local carrier at the same time as it announced its Ameritech acquisition. The implication was that such a deal might still happen. Had he been told this in over-the-Wall meetings? I figured this, along with the comment in the research report, might set off alarm bells over at the Securities and Exchange Commission. Maybe, finally, someone would start an investigation.

The next day, I wrote a client the following e-mail: "...Interesting to essentially upgrade a stock for which he is restricted. He may have finally tripped the wires at the SEC.... Word is he is whispering that the original SBC plan was to announce [an acquisition of a startup local carrier] today in addition to the Ameritech bit."

The client wrote me right back. "As for JG, it was no whisper. His salespeople left me a message saying he thought SBC would announce a [local carrier] deal with the Ameritech deal but it will come soon." With information like that, money managers might load up on a group of startup local carrier shares that day and hope for a big takeout price on one of them. But the deal never came: Jack's information, wherever it came from, might have been juicy, but it wasn't always right. Just like the BT-MCI secret addendum.

What was most fascinating about this deal was that Salomon got the banking business even though Jack had been negative on SBC before the deal was announced, rating it only a "3," or Neutral. Was this because SBC, to its credit, didn't pay attention to the research position of the a.n.a.lyst and simply hired the bankers it liked best? Or was it more strategic than that? Did SBC hope to turn Jack around with this deal, bringing the top-ranked telecom a.n.a.lyst to its side? We'll probably never know. But when I visited Ameritech's CEO, d.i.c.k Notebaert, in Chicago later that month, he told me that the folks at SBC had a.s.sured him an upgrade from Jack was in the offing.

My banker colleagues were distraught. Neither company had hired Merrill as a merger adviser, and they were particularly distressed to be excluded because it would cause Merrill to suffer in the M&A "league tables," a ranking compiled by Securities Data Corporation (SDC). SDC measured the value of each M&A deal and tracked which investment banks had been hired as advisers. Its results were published every quarter in The Wall Street Journal The Wall Street Journal and and The New York Times. The New York Times.

These league table rankings were to investment bankers what the I.I. I.I. magazine a.n.a.lyst poll was to sell-side research a.n.a.lysts-a very silly measure that often inspired absurd behavior. Just as a.n.a.lysts traveled to Birmingham, Alabama, for a one-hour meeting with one voter, bankers offered services for cut-rate fees. Merrill was building a very successful M&A practice and, at this moment, it was ranked number one, leading Goldman Sachs by about $40 billion. But this deal was worth $62 billion, so missing out on this merger would push Merrill down in the rankings and boost the firms hired by SBC and Ameritech-Salomon and Goldman Sachs. magazine a.n.a.lyst poll was to sell-side research a.n.a.lysts-a very silly measure that often inspired absurd behavior. Just as a.n.a.lysts traveled to Birmingham, Alabama, for a one-hour meeting with one voter, bankers offered services for cut-rate fees. Merrill was building a very successful M&A practice and, at this moment, it was ranked number one, leading Goldman Sachs by about $40 billion. But this deal was worth $62 billion, so missing out on this merger would push Merrill down in the rankings and boost the firms hired by SBC and Ameritech-Salomon and Goldman Sachs.

I was really perturbed. I felt strongly that SBC was hiring Salomon to buy an upgrade from Jack and get the benefit of his influence in Washington. The first, I thought, was wrong, and the latter would backfire. The staffers at the FCC had to know Jack's games. So, motivated by a sense of outrage and hoping to help my firm as well, I did something I'd never done before: I decided to don the banker hat and try to convince Ameritech to hire Merrill as its second adviser (in addition to Goldman Sachs). I met with Ameritech's conservative CFO, Oren Schaffer, in New York and basically pulled out all the stops. I explained that 30 of the past 38 mergers had had two investment banks representing each side, and that Merrill would work for as little as $1 million. It simply wanted its name attached and league table credit. I also told Oren that they and SBC looked silly cuddling up to Jack. "Everyone knows that his positive comments are driven by banking fees," I said. "The regulators will see through him too."

This was an aggressive role for an a.n.a.lyst to play, one that could certainly be perceived as a conflict of interest. But I had not been forced into it by anyone on the banking side, nor would my compensation be impacted by the outcome. Banking interests had never affected my investment opinions, and I had been positive on SBC and Ameritech and on Baby Bell mergers for three years already, anyhow. I simply wanted to help my banking colleagues, and I'd had it with Jack's questionable methods.

Oren punted, suggesting that I meet with his boss, d.i.c.k Notebaert. So, a few days later, I flew to Chicago and met d.i.c.k for breakfast at the Four Seasons Hotel on Chicago's Near North Side. I knew d.i.c.k well, as he had been a top Ameritech executive when I started at Morgan Stanley. He was short like me, sarcastic, and into corny practical jokes. Back in 1994, when I was cautious on the Baby Bells, I had written that they were stuck in a "dividend straightjacket"-meaning their investors were demanding continuation of the annual cash dividend when I believed that the Bells should invest their cash in new growth businesses. d.i.c.k sent me a real straightjacket after reading that report. I suppose it was funny.

Still, I thought d.i.c.k was a logical and reasonable guy. So I laid out the same argument again. He listened carefully, and said he appreciated the issues. He also explained his choice of Goldman Sachs. Goldman, he suggested, would likely be very helpful in getting the merger approved by federal regulators, since Bob Rubin, former co-chairman of Goldman Sachs, was now U.S. treasury secretary in the Clinton administration. d.i.c.k said that he'd get back to me.

Five days later, in early June 1998, he did. I picked up the phone anxiously. "I've talked to Oren," d.i.c.k said. "And we just can't do it." Ameritech was not going to add Merrill as an adviser. I conjured up various excuses in my mind. Perhaps he and Oren feared I'd be restricted from recommending Ameritech and SBC shares while the merger was awaiting shareholder and government approvals. Or maybe it was that, for all its connections, Merrill didn't have anyone as politically powerful as Bob Rubin.

Whatever the reason, I was disappointed. I had tried to play rainmaker to help my firm's banking business, and I had failed miserably. As Jack had suggested back in the 1980s, and as I had somehow forgotten, I was a lousy salesman.

But maybe Ed Whitacre and d.i.c.k Notebaert had the right idea after all. In early January 1999, eight months after the merger was announced and immediately after both sets of shareholders had approved it, Jack would upgrade SBC to Buy, or "1," SSB's highest rating, from his previous Neutral, or "3."8 He had, indeed, turned, although it may have cost SBC $25 million in merger fees paid to Jack's firm, Salomon Smith Barney. And in March 1999, the Ant.i.trust Division of the U.S. Department of Justice approved the merger with very light conditions. The FCC followed suit in October, and the two companies formally merged on October 6, 1999. He had, indeed, turned, although it may have cost SBC $25 million in merger fees paid to Jack's firm, Salomon Smith Barney. And in March 1999, the Ant.i.trust Division of the U.S. Department of Justice approved the merger with very light conditions. The FCC followed suit in October, and the two companies formally merged on October 6, 1999.

How I Lost My Bank $25 Million By the middle of 1998, the deals were coming so fast and furious that it was hard, if you were an investment bank, not to be bringing the dollars in hand over fist as you locked in to one underwriting fee after another. Bad deals, good deals, who cared? All that mattered, increasingly, was bringing new companies public, especially technology and telecom companies.

But a few firms were taking the lion's share of the business, and suddenly Merrill wasn't always one of them. Was that because of Jack's relentless bullishness? Because of Frank Quattrone, now at Deutsche Bank and formerly of Morgan Stanley, who had the tightest connections to most of the technology and Internet startups coming out of the West Coast? Goldman Sachs's high-level connections? Some failure on the part of Merrill's investment bankers? My refusal to play ball and join the hype brigade? It was hard to know. But what was clear was that life wasn't getting any easier for any of us at Merrill.

The pressure to greenlight deals and catch up to our hated rivals felt relentless. In an e-mail to a friend, I wrote "My calendar has been absolutely uncontrollable over the last two or three months. A bull market seems to bring every IPO candidate in the world out of the woodwork. Sometimes I think my job is a screener-like those people who read books and movie ma.n.u.scripts all day to determine which ones ought to go forward."

Case in point: Pathnet, a new Washington, D.C.based company that intended to wire up rural America, where AT&T and others had spotty coverage, using microwave technology instead of fiber. Pathnet intended to then wholesale this capacity to other telecom companies that, the theory went, needed it to meet the exploding demand from the Internet and cell phones. When the company announced it was planning to go public, the Merrill team reacted like a dog in heat. If the IPO succeeded and raised, say, $100 million, its bankers would earn roughly $6 million, a nice payday and hopefully the beginning of a long stream of other Pathnet deals ranging from bond issues to acquisitions to additional stock offerings.

Megan and I had done a lot of homework on this company, and we didn't feel good about it. At the bankers' request, I met with Dave Schaeffer, Pathnet's chairman, several times and I wasn't impressed. The market size seemed a lot smaller than they a.s.serted it was, the business plan seemed flawed, they'd hired a lot of second-rate executives from other telecom companies, and the executives had bragged to us that AT&T would be buying a lot of their capacity. But that wasn't quite true. Megan learned that AT&T was not at all committed to buying Pathnet's capacity. I decided I couldn't support Pathnet's IPO. There were just too many unsettling things about this company. And there was no way that Merrill could take the stock public without the support of its a.n.a.lyst.

But the bankers didn't know our viewpoint in June 1998, when they called Megan and me into a meeting in the corner office of Mark Maybell, head of all of Merrill's telecom and media banking, along with Tom Middleton, Merrill's top telecom banker, and Sean Wallace, the banker working with Pathnet.

"Dan, we've got to do this deal," began Wallace, a smooth-talking, overzealous, midlevel banker for whom I already had little respect. "I've already told them you are on board," he said.

Megan and I looked at each other. He had already told them I was "on board"? I wasn't. Nor, sadly for Wallace, was I about to be. It was a dog of a company, and I knew it. If I threw my weight behind Pathnet, I was setting myself up to fail, not to mention hurting Merrill's investor clients.

"Sean," I said indignantly, "you're asking me to put my name behind a brand-new company using a technology that is actually antiquated [microwave radio], and their largest potential customer tells us that they may not buy much from them!"

"I thought you were okay with this," he sputtered. "You and Megan have met with them several times, and you've even called some of their customers. Besides, we already have given our word [that we'd underwrite the IPO] to their venture capitalist owners in Silicon Valley. If we bait and switch, Merrill will never get any IPO business out of the Valley again."

Essentially, Wallace was arguing that I was going to torpedo Merrill's entire investment banking business. The logic went like this: tech was the biggest banking opportunity in the world, and Silicon Valley VCs (venture capitalists) controlled most of the technology IPO candidates. In order to break into this deal flow, Merrill's relations with the VCs had to get a lot better fast. So if I turned down Pathnet and the venture capitalists took it as a sign that Merrill was too conservative to work with the startup world, Merrill Lynch's bankers would be screwed.

"Sean, I agree that you have a problem," I said. "But I can't solve it for you. And anyway, why the h.e.l.l did you promise my support without consulting me? If we lose business in Silicon Valley, it won't be my fault.

"And I know one more thing," I said, looking at the other bankers: "If you guys had to put your name on a report about Pathnet, you'd be doing the same d.a.m.n thing I am doing!" The bankers weren't happy with our intransigence.

I wasn't happy either. These guys were trying to pressure me into supporting a lousy deal, and beyond that, they were trying to shift the entire weight of Merrill's investment banking future onto my shoulders. Mark and Tom would have loved it if Wallace's plan to ambush me into supporting Pathnet's IPO had worked. But I could also tell that they thought Wallace was as much of a jerk as I did for committing my support without my approval, and then trying to ram it down my throat.

I didn't change my mind, so the bankers ultimately had no choice but to tell Pathnet we couldn't do the deal. The company never did go public. But of course no one could know that at the time. All they knew was that Dan Reingold and Megan Kulick were pain-in-the-a.s.s, stick-in-the-mud a.n.a.lysts who were messing up Merrill's deal flow in a big way.

BY THIS POINT, I had managed to antagonize just about everyone, especially my own bankers and some of the companies I covered. I had hoped that this wouldn't translate to my buy-side clients, but perhaps somehow it did, as I remained in the number two spot on the I had managed to antagonize just about everyone, especially my own bankers and some of the companies I covered. I had hoped that this wouldn't translate to my buy-side clients, but perhaps somehow it did, as I remained in the number two spot on the I.I. I.I. poll for the second year in a row, unable to dislodge Jack from his land of boundless sunshine and everlasting opportunity. poll for the second year in a row, unable to dislodge Jack from his land of boundless sunshine and everlasting opportunity.

So I decided to get a little taste of sunshine myself, booking a week down in Florida with Paula and the girls in the last week of December 1998. We were going to spend some time with my parents and my brother and his wife, all of whom lived in Delray Beach, and relax a little bit.

I was also considering upgrading AT&T, because I was impressed with recent strategic moves undertaken by its new CEO, Mike Armstrong. I needed some time away from the hubbub to look closely at our models, sketch out a mock report, and decide whether it was the right time for an upgrade.

On Thursday morning, New Year's Eve day, we were sitting in the living room of my parents' home. Paula was talking to my mom, and my daughters were out on the patio reading, while I outlined an AT&T report on my parents' old IBM ThinkPad. CNBC was blaring on the television, because my dad watched it all day every day, as so many retirees do. Suddenly reporter David Faber came on with breaking news: According to his sources, Bell Atlantic, one of the Baby Bells, was bidding for AirTouch, the wireless division of Pacific Telesis that had been spun off in an IPO in December 1993. Oh, boy, I thought. There goes this vacation.

About 10 minutes later, my cell phone rang. It was Tom Middleton, the Merrill telecom banker, and I could tell by his tone that it was urgent. Could I be in Manhattan by Sat.u.r.day morning, he wanted to know, for a meeting with a very important client who had requested my presence? I knew it had to be Bell Atlantic, although I wasn't over the Wall yet. I knew that Merrill had advised Bell Atlantic when it bought Nynex in 1997 for $23 billion and just five months earlier, in 1998, when it announced its merger with GTE for $68 billion.

I didn't think Bell Atlantic should buy AirTouch, because it would be extremely harmful to Bell Atlantic's earnings and stock price. Bell Atlantic was still struggling to get its acquisition of GTE approved and digested. Another huge acquisition would significantly lower, or dilute, Bell Atlantic's earnings per share. "Why do they have to buy the d.a.m.n thing when a joint venture brings all the benefits of national coverage without the costs?" I asked Tom. His answer was simple. "Get up here and you'll see we're past that point already. Now we have to decide how high we go." I guess I was going over the Wall on this one.

I told Tom I thought it might be difficult to get a flight given that it was New Year's weekend, but that I'd try. Paula could tell from the snippets she'd overheard that another disruption was in the works.

My brother wanted to know if this had to do with the AirTouch news, and my 87-year-old father, who didn't have good ears, was convinced it was a done deal-that Bell Atlantic and some very large cellular company had merged. "David Faber said so and he is always right," he exclaimed. Mom and Dad had thought Faber was G.o.d ever since he anointed me the "winner" in his story about the BT-MCI renegotiation. I mumbled that I didn't know if anything was going on with Bell Atlantic and AirTouch. They knew better than to ask again.

Tom called back several hours later. "Dan," he said, "don't worry about getting a flight. The Bell Atlantic jet will pick you up at West Palm Beach Airport Sat.u.r.day at 9:00 AM AM. There is room for your family if they want to go too." Other than having to say good-bye a day earlier than planned, this was going to work out just fine. I gave the kids the choice of another day in Florida or a ride on a corporate jet. They chose the jet. They'd always wanted to ride in a limousine, and I explained that this was even better: it was an air limousine. The kids got their first corporate jet ride, and my parents and brother got to think I was a big deal. After BEL 005 touched ground at Teterboro Airport in New Jersey, I said good-bye to Paula and the girls, and hopped into one of the waiting cars and went straight to Bell Atlantic's headquarters at Forty-second and Sixth.

En route, I pulled out the rusty ThinkPad that I had commandeered from my parents, and continued writing my AT&T upgrade. I had been thinking about it the entire week and had outlined the logic in my head. I wrote in a stream-of-consciousness manner, leaving blanks for data and tables, and e-mailed it to Megan and Ehud Gelblum, an engineer I had recently recruited from AT&T Labs. I told them it was uncertain whether we would go with it, but they should a.s.sume yes for now and thus get all the tables and models ready to go.

I didn't didn't tell them that I was actually in New York. I couldn't, because, knowing I had come home sooner than scheduled, they would instantly conclude that Bell Atlantic was, in fact, bidding for AirTouch and that I was over the Wall. So while they sweated away at the office thinking I was still in Florida, I walked in through the side door of Bell Atlantic's headquarters and was sent up in the double elevators with a security escort to the 39th floor, where Ivan Seidenberg, Bell Atlantic's CEO, and Fred Salerno, its CFO, had their offices. tell them that I was actually in New York. I couldn't, because, knowing I had come home sooner than scheduled, they would instantly conclude that Bell Atlantic was, in fact, bidding for AirTouch and that I was over the Wall. So while they sweated away at the office thinking I was still in Florida, I walked in through the side door of Bell Atlantic's headquarters and was sent up in the double elevators with a security escort to the 39th floor, where Ivan Seidenberg, Bell Atlantic's CEO, and Fred Salerno, its CFO, had their offices.

Ivan Seidenberg was one of the executives I had liked the most in all of my years on Wall Street, probably because he was the ant.i.thesis of Joe Nacchio. Raised in the Bronx, Ivan was a Bell lifer whose first job was working as a cable splitter-installing and repairing copper cable lines underneath streets. Although he was a CEO, Ivan still went to Jets games every weekend with his longtime buddies. Although a lot of people underestimated him because of his calm, low-key approach, I thought he was one of the most astute of the Bell bosses. He was the type of guy who listened well, took in all of the information, and then came to a rational decision. He preferred to deal with problems through quiet negotiation rather than in inflammatory free-for-alls. In short, he was my kind of guy.

I was now officially over the Wall, and it was going to be tough to figure out how to handle the rumors, which were already being breathlessly reported by every television station and newspaper out there. I knew that the guy who ran the Merrill morning call would be all over me to make some comments on Monday. I hoped that whatever the outcome, it would become public before the weekend ended.

When I walked into the conference room, I saw Ivan, Fred, several other Bell Atlantic executives, Tom Middleton, and two other Merrill bankers-Michael Costa and Francisco Rey-sitting among reams of paper spread all over the table. Fred thanked me for coming and began to update me, a.s.suming that I knew everything that had gone on so far. Of course, I didn't have a clue, since I hadn't spoken to Middleton for 36 hours; all I knew was what Faber had reported on CNBC.

So I listened and nodded my head. Everyone was going through various prices to be paid for AirTouch and looking at the negative impact on earnings. They discussed the possibility that Vodafone, a British wireless telecom company that had partnerships or equity stakes in almost every country in the world except the United States, might also bid. But Chris Gent, Vodafone's CEO, was out of touch at a cricket tournament in Australia, so no one knew what to expect. The bankers and executives went through a series of scenarios, all of which hurt earnings by over 10 percent, with some as high as 25 percent or even 30 percent. For a slow but stable earnings grower like a Baby Bell, these were some seriously large and negative numbers. Although I thought the deal was a bad idea, it would be a great one for my firm; a $45 billion bid meant a potential fee for Merrill of approximately $25 million.

The meeting ended on an expectant note, with everyone wondering whether Vodafone would make a bid. The next day, they did. We were called back in for a long conference call with GTE, which was still in the process of merging with Bell Atlantic, and its CEO, Chuck Lee. The terms of the Bell AtlanticGTE merger specified that neither company could undertake a major strategic move without the approval of the other, so Chuck had veto power over this deal. GTE's bankers were Salomon Brothers, so a bunch of its bankers and Jack Grubman were also on this call.

Jack prattled on for about 20 minutes about how terrific the deal would be, how Bell Atlantic should outbid Vodafone so that it would have a national wireless "footprint," and how size and scale were going to determine the winners in telecom. Chuck Lee was in favor too. Everyone liked the deal, it seemed. Except for me.

The call ended, and Ivan and his CFO, Fred, indicated that they wanted to speak with me privately in Fred's office. Ivan asked me whether or not Bell Atlantic should bid again, and if so, how high it could go without its stock falling too far as a result of selling by investors displeased by the hit to earnings that would result.

I took a breath and in the course of ten seconds helped to lose Merrill one of the biggest deals of the year, if not decade.

"You are better off letting Vodafone win," I said. "Then it will have to come to you to partner. AirTouch will still need to have national coverage and there is no better, in fact no other, other, way to accomplish that than partnering with you. This way, your stock will go back up out of relief that you didn't make such a big acquisition with such a big effect on earnings. And your cellular customers will still get nationwide coverage but at a far lower cost." way to accomplish that than partnering with you. This way, your stock will go back up out of relief that you didn't make such a big acquisition with such a big effect on earnings. And your cellular customers will still get nationwide coverage but at a far lower cost."

Fred and Ivan just sat there, listening. Ivan, as always, had a poker face on. Finally, the CFO looked over at Ivan. "I think that's where we're headed, Ivan," he said, which was Fred's way of making a recommendation to his boss. Ivan didn't say anything at all.

When I came out of Fred's office, Michael Costa and Tom Middleton, the Merrill bankers, accosted me, wanting to know what had transpired. I told them that I had suggested they not make a counterbid. If the Bell Atlantic executives listened to me, that meant a lot of work and no payday for Merrill and lower bonuses for its bankers, especially these two.

Clearly, they were disappointed, but these bankers weren't stupid. As much as they wanted the fees and as frustrated as they must have been with me, they also agreed with my reasoning. And hopefully Ivan and Fred would respect Merrill for its sound, non-self-serving advice, and that would translate into some other payday some other time.

On January 15, 1999, AirTouch accepted Vodafone's counterbid of $66 billion, or $97 per share. Bell Atlantic never made another bid. And by September of that year, Gent had come to Bell Atlantic with a joint-venture proposal. I felt that I had saved Bell Atlantic shareholders a bundle. But I had helped to lose my firm roughly $25 million, the M&A fee for one of the biggest deals in history.

6. Oxygen Deprivation Oxygen Deprivation

1999.

"You know, Dan, our stock is down $4 today," he said, with the kind of bellowing laugh that can emanate only from a wealthy man, "and I've lost almost a billion dollars in just a few hours! Can you believe that? My net worth is actually down a billion dollars today!"

I laughed, as apparently was required. I guess it was somehow truly amusing that the coming or going of $1 billion did not really seem to matter. What a 1999 moment.