Confessions of a Wall Street Analyst Part 9

Exactly six weeks later, on May 17, 1999, Global announced another deal: it was acquiring Baby Bell US West, even before its Frontier acquisition had closed. I had heard nothing about it until the evening before, when the Merrill bankers asked me to go over the Wall and show up at the Rainbow Room at 6:00 the next morning, armed with a list of tough questions that the two CEOs, Sol Trujillo of US West and Bob Annunziata of Global, should be ready for before their presentation to a.n.a.lysts later that morning. Salomon was advising Global, and Merrill's telecom banking team-switching sides this time-was advising Global's prey, US West.

Sol Trujillo, a friendly but intense career US West employee who had worked his way up to the top, clearly saw this deal as a way to transform his conservative, slow-growing, dividend-paying telecom company into a high-growth new-economy outfit. He had been enamored with the buzz-and stock prices-these new-economy companies were fetching ever since he had attended the Vortex Conference at Laguna Niguel a year earlier.

But neither Global Crossing's nor US West's shareholders were enthusiastic about the deal. The conservative US West holders saw it as radical and risky, while Global Crossing's holders, new-economy-Kool-Aid drinkers, saw it as a waste of money on old, tired a.s.sets. Global's shares, which had hit an all-time record of $64 a share by May 13, fell 30 percent in three weeks, closing at $45.75 on June 2. US West shares fell, too, by 15 percent, in part because many of its shareholders lacked confidence in Global.

The pressures on Sol to find a better deal were mounting. And it didn't help matters any that the a.n.a.lyst at their investment bank-me-was not publis.h.i.+ng anything but factual research on his company, US West. The US West executives were livid, especially because they saw Jack Grubman at Salomon publis.h.i.+ng aggressive buy recommendations on Frontier and, by extension, Global Crossing. In effect, Jack had written a glowing prognosis for a merger even though Salomon's fees, like Merrill's, were contingent on the deal going through.

US West couldn't understand what was going on. After all, I'd had an Acc.u.mulate, or "2," rating on US West before the Global CrossingUS West deal was announced. What had happened to it? Al Spies, US West's CFO, feared that investors were perceiving my silence as opposition to the deal. "How can your best friends become your worst enemies?" Al asked one of our bankers. I wasn't an enemy, I tried to explain. I was simply trying to avoid any allegations of conflicts of interest. But that didn't do them much good.

While the US WestGlobal Crossing marriage foundered, over at Qwest Communications, many of the largest and most important buy-siders were pressuring its CEO, Joe Nacchio, to do something equally grandiose with his equally high-flying stock. Eventually, he called the telecom bankers at DLJ, one of the few unattached firms in this banking feeding frenzy. US West had hired Lehman Brothers in addition to Merrill, Morgan Stanley was advising Frontier, and Salomon was on the Global Crossing side.

Joe told the DLJ bankers to prepare a bid for both Frontier and US West. On the evening of Sunday, June 13, 1999, while Qwest's PR team called reporters, Qwest's chairman, Phil Anschutz, called Sol Trujillo, and Joe Nacchio called Frontier's CEO, Joe Clayton, to explain their proposal. Qwest was offering a total value of $32 billion, or $61.37 a share in Qwest stock-only a dollar more than what Global's offer was now worth-for US West; and $11.4 billion, or $61.70 a share for Frontier, roughly equivalent to Global's $62 offer. Joe and Phil were a.s.suming, apparently, that Qwest was a more appealing partner and thus didn't need to outbid Global by much.

They were wrong. When the markets opened on Monday, Qwest shares sank faster than a mobster in cement shoes. They fell 24 percent that day, from $44.88 to $34.13, and proceeded to fall another few dollars to $32.50 over the next two weeks. Apparently, investors were worried that the bidding war would escalate into an out-of-control war of egos, and that Gary Winnick and Joe Nacchio were violating their new-economy creed by selling their souls to the old world.

Believers asked themselves, Why would any company that was all about the infinite growth in demand for Internet communications waste its valuable stock on an old-school company whose copper wires were already obsolete? Or, more chilling still, did these companies know something their investors didn't-that their stock prices were overinflated, and that their true business prospects weren't good enough to go it alone? Both choices spooked investors, and the result was a market that gave both possible combinations the Bronx cheer.

Nonetheless, Qwest's CEO and its chairman, Joe and Phil, never good losers, decided to up their offers by $4 billion. On Wednesday, June 23, Qwest issued a press release announcing it was now offering $69 for US West shares and $68 for Frontier shares. Several weeks pa.s.sed with no apparent movement. Yet behind the scenes, I subsequently learned, both companies were beginning to realize that this bidding war was hurting everyone. Eventually, both Joe and Gary sent out feelers via their bankers to look for a compromise, or at least a cease-fire. A harried, complex series of four-way negotiations ensued. Bankers and lawyers scrambled.

By Friday, July 16, the egos appeared to have been wrestled back to Earth. Global and Qwest agreed to a truce: Qwest would get US West for $69 per share, and Global would get Frontier at $63 per share. All four boards voted approval, and the PR teams began to prepare press releases.

But that, of course, would have been too easy. A major snag occurred as the lawyers and the bankers were meeting at DLJ's offices to put the finis.h.i.+ng touches on the doc.u.ments and get ready for a celebratory dinner. Early in the negotiations, Phil Anschutz, Qwest's chairman, had told Sol that he and Joe would be co-CEOs of the newly merged companies, or at least that is what Sol understood. When the US West board voted in favor of the merger, the deal they approved had them as co-CEOs.

But Joe had no intention of sharing power with anyone, particularly not with some Bellhead. He had dealt with too many of those guys during his 26 years at AT&T. So when someone from his public relations office asked him to approve some language describing the setup, he blew a gasket. He ran down the halls of DLJ in search of Tom Middleton, the Merrill banker, and yanked him out of a meeting and into an adjoining conference room. As Tom told me years later, Joe closed the door, poked Tom in the chest, and said, "If you think I'm going to be co-CEO with that bozo, you are wrong! I don't know where that idea came from and if it stays, the deal is off."

Tom, trying to stay cool, told Joe that that was the deal that had been approved by US West's board, and for that to change, there would have to be another board vote. "US West will have half the board seats," Tom told me that Joe yelled, incensed, "and that will give them veto power over all major decisions. They don't need to have a co-CEO and, besides, what a stupid idea. You better go back and tell them we have a serious problem here."

It was now 6:00 PM PM and the doc.u.ments and dinner plans were being finalized. When Sol heard about Joe's threats, he was not a happy man. But he was in a pickle. His largest shareholders liked the Qwest deal and were far less concerned about his ego than their financial returns. They respected Joe as a terrific telecom manager, even if his brash personality rubbed some of them the wrong way, and many felt that Joe's style was exactly what was needed to make it in this Wild West telecom industry. More important, with the deal's terms already fully vetted in public, Sol could not possibly ask his board or his shareholders to walk away from the deal because he was not happy with his own role. and the doc.u.ments and dinner plans were being finalized. When Sol heard about Joe's threats, he was not a happy man. But he was in a pickle. His largest shareholders liked the Qwest deal and were far less concerned about his ego than their financial returns. They respected Joe as a terrific telecom manager, even if his brash personality rubbed some of them the wrong way, and many felt that Joe's style was exactly what was needed to make it in this Wild West telecom industry. More important, with the deal's terms already fully vetted in public, Sol could not possibly ask his board or his shareholders to walk away from the deal because he was not happy with his own role.

Sol knew Joe had maneuvered him into checkmate. Sol reconvened his board by phone and recommended approval of the new deal with himself as co-chairman and Joe as CEO and co-chairman. Joe would run every aspect of the company and Sol's role would be largely ceremonial. US West's board approved the recommendation. And poor old Sol retreated to his hotel room.

I hadn't been over the Wall for any of this, and I'd been happy about that. From what I could tell from the outside, it was a huge mess. But then Tom Middleton called. He told me that Joe and Sol wanted the research a.n.a.lysts at their bankers' firms to help them prepare for the announcement by antic.i.p.ating questions, reviewing the slide presentations, and playing devil's advocate. With his usual sarcasm, Tom said "Dan, you and Paula aren't going to golf camp this weekend, are you?" Middleton was referring to the year before, when I'd canceled golf school after Bell Atlantic announced it was buying GTE. The funny thing was that we were were about to go, and this time I wasn't missing it for anyone. about to go, and this time I wasn't missing it for anyone.

"Well, Tom, that's great," I said. "Congratulations to you. But, in fact, we are signed up for golf camp again, and this time we're going to go. I don't care if I have to do 10 conference calls from the putting greens, but this time we're going."

I wasn't trying to be ornery, but I'd been through this stuff before, and frankly, it had lost some of its l.u.s.ter. Sure, I knew Al and Sol were already angry with me and that my firm had $30 million riding on the deal. But, realistically, what value was I really going to provide at this point?

Tom and I both knew the a.n.a.lysts would sit around all weekend with their feet up on some DLJer's desk until around 11:00 on Sunday evening, at which point Sol and Joe, although they hated each other, would stroll into a conference room, oozing self-confidence and pretending to be blood brothers. What was the point of skepticism when the deal was done, definitive agreements were already signed, and The Wall Street Journal The Wall Street Journal and and The New York Times The New York Times had already been spoon-fed the scoop? Most important, each of our firms was being paid between $10 million and $30 million. Why would any of the bankers want a research a.n.a.lyst to ask any skeptical questions at this late stage in the game? Even I saw the downside of that one. had already been spoon-fed the scoop? Most important, each of our firms was being paid between $10 million and $30 million. Why would any of the bankers want a research a.n.a.lyst to ask any skeptical questions at this late stage in the game? Even I saw the downside of that one.

Tom, realizing I wasn't going to change my mind, confirmed my cell phone number and said good-bye, mumbling something like "I should have been an a.n.a.lyst." But despite everyone else helping Joe and Sol get ready, both of them were in for another disappointment after the news crossed the wires on Monday morning. Global Crossing shares fell heavily, from $46.38 the day before the announcement to $26 over the next two months, while the other acquirer, Qwest, dropped 16 percent, US West fell 7 percent, and Frontier slipped 17 percent in the same period.

To Publish or Not?

By mid-July, it had been exactly four months since I had written anything other than factual summaries on Global, Frontier, Qwest, and US West. And although I had made what I thought was the best decision at the time, I was really beginning to suffer for it. I had been essentially mute on four of the major companies in my industry for months while my compet.i.tors, whether they worked for the banks involved or not, continued to speak out. The Merrill salesmen and my clients were calling me all the time looking for some guidance on these falling stocks, and I couldn't say anything during the most important period of the year for me-the time when the I.I. I.I. votes were cast. votes were cast.

I felt more and more anxious. What the others were doing didn't seem right, but clearly no one was objecting to it, and I, as the lone holdout, was the only person paying the price. So in a move that now looks blatantly inconsistent, I decided to resume coverage of Qwest and US West. I issued reports on each of them with Acc.u.mulate, or "2," ratings, on July 21.

My earlier conversations with the lawyers didn't really play into it at all, at least not at first. I liked the way the two deals had ended up. In the QwestUS West deal, I thought the decision to dramatically cut US West's dividend was wise, since it freed up money to invest in cell-phone service and high-speed Internet access, among other things. Plus the stocks had fallen so far that they were now good values. Based on my models, I saw Qwest shares rising as much as 33 percent and US West's 28 percent.

But I wasn't totally sanguine either. "Our rating is Acc.u.mulate instead of Buy," I wrote. "Despite such attractive upside, we antic.i.p.ate the usual pressure from short-selling arbs and the approximate one year wait until merger close. We are also concerned about increasing wholesale [long distance] pricing pressure and new initiative startup costs at both companies."

Megan and I immediately started to work on a similar report on Global Crossing and Frontier. But, within a few days, I began to have second thoughts. Merrill was going to make about $20 million, but most of the fee depended on the deal actually being consummated. Since the shareholder votes hadn't yet happened, it occurred to me once again that perhaps I shouldn't be writing about any of these four companies. My opinion, if positive, could be interpreted as trying to influence shareholders to vote yes on a deal that Merrill had millions riding on. I asked the compliance folks about it, and they reminded me that I was cleared to write whatever I wanted thanks to the SEC's No-Action Letter.

But I quickly realized that regulation or no regulation, I had just violated the principles I had so steadfastly held to back in March when this particular four-way M&A episode got started. I began to fear that my clients might think my report was not an honest one, and that it was somehow tainted by the interests of Merrill's bankers.

So I made yet another arbitrary decision. Though I couldn't undo the Qwest and US West reports and their Acc.u.mulate ratings, I told Megan to stop working on our resumption of coverage of Global Crossing and Frontier until the shareholder vote was over. As with every move an a.n.a.lyst makes, this decision translated to someone important being unhappy. This time it was Global's chairman, Gary Winnick, and his CFO, Dan Cohrs. They were outraged that while many a.n.a.lysts were writing bullish reports, I hadn't yet published an opinion or forecasts for either Global Crossing or Frontier.

Then there was the fact that I had already written such reports about US West and Qwest. My position was obviously contradictory. After all, Global had hired Merrill to be advisers. Wasn't it reasonable to expect some support from their friends? Gary scheduled a meeting with Dave Komansky, Merrill's CEO, and the bankers told me the lack of research "support" would probably come up. Although Dave never said anything to me about Gary or Global Crossing, I felt that I was really pus.h.i.+ng it this time.

So here I was, having set the wrong precedent by writing on the first two companies and now trying to defend my decision to not not reinstate coverage on the other two. I had ignored the shareholder-vote conflict issue in one case and now was invoking it along with my integrity in another. It was pretty inconsistent. Logic suggested that I should publish on the second deal just as I had on the first. On the other hand, two wrongs didn't make a right. So I decided to stick to my guns and not publish until after the Global Crossing and Frontier shareholder votes were complete, which fortunately was just a few months off. reinstate coverage on the other two. I had ignored the shareholder-vote conflict issue in one case and now was invoking it along with my integrity in another. It was pretty inconsistent. Logic suggested that I should publish on the second deal just as I had on the first. On the other hand, two wrongs didn't make a right. So I decided to stick to my guns and not publish until after the Global Crossing and Frontier shareholder votes were complete, which fortunately was just a few months off.

In September 1999, after the Global CrossingFrontier deal had been approved by both sets of shareholders, I resumed coverage of Global Crossing with an Acc.u.mulate rating. By the end of the year, investors' negative reactions to the deals had dissipated in the ongoing frenzy for Internet and telecom stocks. Global Crossing shares bounced back to $50 per share, not as high as the $64 they had reached on May 13 but still more than double the $23 they had traded at a year earlier. And Qwest shares had recovered, too, to $43 per share, down from a mid-April high of $48 but still up 72 percent in the last year. Not bad for companies that had gotten into a bidding war, generated enormous shareholder confusion and anger, and had turned themselves inside out from pure Internet startups to schizophrenic hybrids now owning both new-and old-economy a.s.sets. I felt a bit schizophrenic myself.

7. The Leak, the Ambush, and the Dupe The Leak, the Ambush, and the Dupe

1999.

The contract was ready for signing. All I had to do was put pen to paper and I'd have a nifty $1.5 million bonus that I hadn't even expected, in addition to having doubled my pay. It was truly surreal. The most surreal thing of all was the fact that the bank would never even miss it. A mere $1.5 million? For CSFB, it was a blip, nothing more, nothing less.

"Shame on Them?"

IN THE FALL OF 1999, 1999, Inst.i.tutional Investor Inst.i.tutional Investor magazine published its annual ranking of the All-America Research Team, along with a cover story looking at the trends in the research business and the changing role of the research a.n.a.lyst. For the third year in a row, I was the second-ranked telecom a.n.a.lyst, behind Jack Grubman. I wasn't surprised at all: he was not only the best-known a.n.a.lyst in telecom but also the best-known a.n.a.lyst on all of Wall Street. Some hated him, some loved him, but everyone listened to what he had to say. magazine published its annual ranking of the All-America Research Team, along with a cover story looking at the trends in the research business and the changing role of the research a.n.a.lyst. For the third year in a row, I was the second-ranked telecom a.n.a.lyst, behind Jack Grubman. I wasn't surprised at all: he was not only the best-known a.n.a.lyst in telecom but also the best-known a.n.a.lyst on all of Wall Street. Some hated him, some loved him, but everyone listened to what he had to say.

And if you really listened to what he said, it was pretty amazing. I.I. I.I. interviewed Jack as part of its cover story, and he was proud to speak out, a man at the top of his game. He made no apologies for his aggressive actions in favor of the companies he liked, as well as his role in helping Salomon Smith Barney's bankers land some of the biggest deals on the planet. interviewed Jack as part of its cover story, and he was proud to speak out, a man at the top of his game. He made no apologies for his aggressive actions in favor of the companies he liked, as well as his role in helping Salomon Smith Barney's bankers land some of the biggest deals on the planet.

"Though some money managers grouse that they can never get him on the phone because he's so busy helping out on deals, many more rave about the connections he's made with top telecom company executives from all that deal making," the magazine wrote.

Jack's response was bold, even for him. "'The role of the sell-side has changed so dramatically. You try to do your best to stay objective, but it's becoming an increasingly difficult challenge,' says Grubman, stressing that disclosure of potential conflicts to clients is essential. 'They know when I have an ax to grind-I tell them. There are known conflicts and potential land mines. But anyone who steps on one, it's really shame on them.'"1 Earlier that year, Jack even announced proudly to a rival banker that "when it comes to Bernie and me, there's no Chinese Wall." He also sent a blast voice mail to upward of 1,000 buy-side a.n.a.lysts and money managers mocking a compet.i.tor at PaineWebber who had predicted that WorldCom would end up acquiring Nextel, a wireless company, despite the fact that negotiations had recently been broken off. "I was there and I didn't see [the PaineWebber a.n.a.lyst] there across the table," he bragged. "Believe me, these companies are not getting back together. This deal is dead!"

Jack was simply rubbing all of our noses in the fact that he was on the inside of these negotiations and the rest of us weren't-so how could any of us predict the future better than him? The New York Times The New York Times published a short article summarizing the voice mail and, once again, I figured Arthur Levitt's SEC would now be propelled into action, even if it hadn't before. published a short article summarizing the voice mail and, once again, I figured Arthur Levitt's SEC would now be propelled into action, even if it hadn't before.2 This was typical Jack: brash, arrogant, reckless, and-literally-daring. He was daring the authorities to catch him. Jack seemed to feel he could tell the world that he knew what he was doing was dangerous and possibly wrong, but somehow he felt he was so clever that he could fly above the fray. Shame on them?

The $14 Billion Leak On September 8, 1999, about 200 Wall Street investors and a.n.a.lysts who covered the telecom sector arrived at the Kansas City Hyatt for an all-day meeting with the management of Sprint, the $80 billion telecommunications giant. The meeting had kicked off the evening before in the hotel's ballroom with a dinner and a keynote speech by Sprint's longtime CEO, Bill Esrey.

I managed to get a seat next to Bill. Also seated at the table were eight other a.n.a.lysts. Some were from the sell-side like me, and others were buy-siders from money management firms and large pension funds. As we dined on filet mignon and poached salmon and sipped red wine, it was business as usual for me: find out what was going on at Sprint and then turn that edge into value for my clients.

We had about 30 minutes before Bill Esrey was scheduled to speak to the entire room, so we jumped right into it, each of us eager to sneak in a few questions that might tease out a little information about how the numbers were looking and what strategic moves Bill might be contemplating. Virtually all of Sprint's compet.i.tors had been caught up in the epidemic of M&A activity. So when the conversation turned toward possible mergers or acquisitions on Sprint's part, we all leaned forward in our chairs. Would it be better, I asked, for Sprint to partner with a Baby Bell such as Verizon or BellSouth, or to merge with a foreign-owned company, such as Deutsche Telekom? Bill gave the expected pluses and minuses of each, seeming to lean away from both moves. As often was the case with Bill, who seemed to hate a.n.a.lyst meetings, he was just vague enough to give us nothing to go on.

Finally, I threw out the question none of us expected a serious response to: might Sprint consider merging with another long-distance company, like AT&T or MCI WorldCom? It was a very unlikely scenario, since it would certainly set off alarm bells in the world of ant.i.trust, and since Bill himself had often slammed WorldCom as a poorly managed company. So I was surprised to hear him suddenly launch into a discussion of the pros and cons of a WorldComSprint merger. He remained firmly in the theoretical, but it seemed-to my ears at least-that the pros outweighed the cons. Bill said the cost-savings would be huge. When probed, he said he didn't think the government should oppose such a merger on ant.i.trust grounds. Uncharacteristically, he didn't even criticize Bernie Ebbers and the rest of WorldCom's management. It was odd to hear the usually reticent Bill Esrey entertaining such an idea at all. He wouldn't really consider such a move, would he?

We all wanted to press him further on this, but just then our private time was over and it was time for Esrey's speech to the entire group. He bounded up on stage with the energy of a fit ranch hand, his bald head reflecting the bright lights. With a slight lisp, he delivered an upbeat outlook for the company, projecting that revenues would grow 20 percent per year for the next three years, propelled mostly by Sprint's wireless PCS unit. He said nothing about any possible deals.

When the speech was over, my tablemates and I went out into the lobby for a break. Suddenly, the cell phone of one of the buy-side a.n.a.lysts rang insistently. It was a banker friend, calling from Germany, he said, who had heard a very specific rumor of a coming SprintWorldCom merger that would give Sprint 0.94 shares of WorldCom, or about $70 for each Sprint share, more than 50 percent above its current price. If true, it would be enormous, the biggest deal ever. My blood began to pump, fueled by a combination of fear, anger, and excitement. How could someone in Germany already know something that had not yet been announced? I strained to hear more.

As we left the ballroom and descended the steps to the hotel lobby, we saw Jack Grubman coming through the front entrance of the hotel with two telecom a.n.a.lysts from two of the world's largest mutual fund groups. Shoulders hunched in his oversized, double-breasted suit, he projected the c.o.c.ky confidence of a man who knew billions hung on his every word. Jack and the two buy-siders had gone out to eat, intentionally missing Bill Esrey's speech and, of course, the chance to pick Esrey's brain at dinner. How could they afford to skip out on these opportunities, which, after all, were the a.n.a.lyst's bread and b.u.t.ter? To skip the dinner and the interaction with Esrey and Sprint's top executives meant they must have felt pretty confident about their own abilities to predict the future. Or perhaps they simply felt that their powers of prognostication would gain far more from two hours with Jack Grubman.

Agitated, adrenaline on overload, my buy-sider friend spotted Grubman and homed in like a heat-seeking missile. "I'm going to ask Jack," he said. "Since this involves WorldCom, if it's real, he'll know for sure." He a.s.sumed that Salomon would be doing the banking and, therefore, that Jack might have gone over the Wall. About 30 minutes later, I ran into the investor at the hotel bar. "Dan, Jack says those numbers are exactly right: 0.94 WorldCom shares for each Sprint share."

The specificity of the rumor-and Jack's confirmation of it-staggered me. Nothing had been announced. How could Jack know the exact ratio of the deal? Had a Salomon banker or someone from WorldCom tipped him off? Had he been over the Wall and decided to share what he'd heard?

Suddenly, I had two big problems. First, I had a Neutral rating on Sprint's stock. If the rumor was true, I would look pretty bad, since Sprint's shares would trade way up once the deal was announced; $70 was a huge premium to Sprint's current $46 stock price. Should I upgrade my Sprint rating based on what I had heard? It was only 9:00 PM PM and I had all night to write it up, get it approved by Merrill Lynch's compliance department, and announce it to Merrill's brokers the next morning. I would look brilliant if the deal was ultimately announced. and I had all night to write it up, get it approved by Merrill Lynch's compliance department, and announce it to Merrill's brokers the next morning. I would look brilliant if the deal was ultimately announced.

But there was a second, much bigger problem with that. If Jack's confirmation was based on inside information, now I, too, was in possession of it. If I upgraded the shares, I could be using that inside information illegally. On the other hand, people traded on rumors all the time. Maybe Jack and these guys were simply dealing in gossip, which to my knowledge wasn't illegal. But this seemed like too big a leak in too big a deal. Surely, it was going to be the one that would finally get someone busted. I left my Neutral rating in place and decided to take my lumps if the merger actually happened. Better to be wrong than in stripes.

It took sixteen days for The Wall Street Journal The Wall Street Journal to sniff out the rumor. On September 24, to sniff out the rumor. On September 24, The Journal The Journal printed a story speculating that WorldCom and Sprint executives were discussing a merger, causing Sprint shares to jump almost $4 or 8 percent that day. But the two stocks had already moved and some investors had already profited: in the sixteen days before the printed a story speculating that WorldCom and Sprint executives were discussing a merger, causing Sprint shares to jump almost $4 or 8 percent that day. But the two stocks had already moved and some investors had already profited: in the sixteen days before the Journal Journal's "scoop," Sprint shares had risen by a total of $5.4 billion, or $6 3/16 per share; and WorldCom shares had dropped by $1.9 billion, or 93 cents per share. And the market value of Sprint PCS, also likely to be acquired in the transaction, rose $6.4 billion, or $6.75 per share during the same 16-day period.

Together, that added up to a total of $13.7 billion of shareholder value that had changed hands, with some investors winning thanks to their inside information and others losing thanks to their lack of it. If you or your mutual fund sold shares of Sprint during that time, the buyer of your shares may have been armed with an unfair edge. Alternatively, you or your fund manager may have bought shares of WorldCom without realizing what the seller may have known-that WorldCom shares would likely fall once the deal was announced. You'd been cheated without knowing it. After the article appeared, another twelve days pa.s.sed before the deal was officially announced-at, yes, exactly the ratio that the investor had heard and Jack Grubman had confirmed. It was clearly old news for some big players.

It was indeed the biggest deal ever announced in the history of Wall Street, and not only did Jack Grubman know about it beforehand but, it appeared, so did at least one of the world's largest money management firms. It had happened again. But this time, the leaker had given four weeks' notice, rather than the three days' when Global Crossing bought Frontier or the 15-minute heads-up given when Frontier bought ALC.

Of course, it was impossible to know where the original leak had come from. It was equally impossible to know whether Jack had obtained this confidential information while over the Wall-that is, while he and Salomon Smith Barney were advising WorldCom in the negotiations with Sprint. Perhaps he was merely pa.s.sing on a rumor that someone else had pa.s.sed to him. But if he had been over the Wall, it was a suicidal move, I thought, given that there had already been an internal investigation at Salomon over his compliance issues. I had also heard whispers that the SEC had been preparing a big file on him. With The Wall Street Journal The Wall Street Journal's critical pieces about him in 1997 and the one about Level 3 a few months earlier highlighting the conflicts of interest between his research recommendations and his banking maneuvers, I felt certain that his every move was being tracked.

A few months earlier, I'd received a call from a Forbes Forbes reporter who wanted to write a story on how some a.n.a.lysts might be using advance information to their advantage as well as promising bullish research on a company's stock in exchange for that company's investment banking business. I gave him some ideas to pursue and names of people to call, stressing that I wanted to remain off the record. I hadn't heard back from him by this time, but with all these questions percolating, I figured it was only a matter of time until Jack got what was coming to him. I told Paula, for what felt like the tenth time, "Well, he's finally tripped the wire. If he's breaking the law, it's just a matter of days now." reporter who wanted to write a story on how some a.n.a.lysts might be using advance information to their advantage as well as promising bullish research on a company's stock in exchange for that company's investment banking business. I gave him some ideas to pursue and names of people to call, stressing that I wanted to remain off the record. I hadn't heard back from him by this time, but with all these questions percolating, I figured it was only a matter of time until Jack got what was coming to him. I told Paula, for what felt like the tenth time, "Well, he's finally tripped the wire. If he's breaking the law, it's just a matter of days now."

The Ambush In the meantime, my relatively skeptical reports and opinions apparently weren't playing well in the executive suites of Merrill Lynch. As Salomon continued to win the lion's share of telecom deals, David Komansky, Merrill's CEO, couldn't help but notice. Merrill had, earlier that year, hired Henry Blodget from Oppenheimer & Co. as its Internet a.n.a.lyst after his outrageous call that Amazon.com would go to $400 a share came true and anointed him the hottest name in Internet stocks. Although Merrill still lagged several other banks, the banking that had begun to flow Merrill's way as a result of his hiring made it all the more obvious that this wasn't happening in my sector.

As more and more companies went public, there were more and more companies to cover. While our telecom team had expanded to six people to meet the demand, there were certain companies, like Level 3 and other dot-com types, that just weren't going to be covered by me-partly because I didn't have the time, partly because I thought they were overinflated blobs of nothingness and not necessarily telecom companies. This frustrated Merrill's bankers and executives, of course.

Although I didn't hear this story until years later, in the middle of 1999, David Komansky had a meeting with Tom Davis, who ran Merrill's investment bank and reported directly to him. Komansky apparently complained about Merrill's low market share in telecom investment banking deals and asked what exactly was causing it to lag so far behind SSB's. I don't know if the words "Why can't Dan be more like Jack?" were ever uttered, but that apparently was the strong implication. Salomon was cleaning up in the telecom sector, and Merrill wasn't. David Komansky, naturally, wanted to rectify the situation.

I was beginning to feel increasingly out of step with the Merrill team-and with the evolving role of the a.n.a.lyst, if what that meant was that I had to be like Jack. But I was hardly about to quit. I still viewed my job as the best in the world. It was lots of fun, intellectually challenging, and brought personal dividends from press quotes, mentions on CNBC, and the appreciation of my team and clients. My job was also outrageously well-paid, and I had a contract that in 1998 had been extended through 2000 with a fixed sum regardless of how much telecom banking work Merrill did, or whether I made it onto the I.I. I.I. list, or how my stock picks turned out. list, or how my stock picks turned out.

I still loved the essence of the job: my team, debates with clients, and the adrenaline rush during breaking news events. Since I'd started at Merrill, I'd hoped to take early retirement at 50, and now, at 46, I still had a way to go at a time when the once-rational market had reached heights that none of us could ever have imagined. By September 1999, the Dow Jones industrial average and the NASDAQ index had more than tripled from the end of 1992.

A few months before the Sprint meeting, back in June of 1999, Andy Melnick, Merrill's director of research, came to me with a proposal to hire Tim Weller, one of Donaldson Lufkin & Jenrette's telecom a.n.a.lysts, to work side by side with me. The idea was simple: he could cover some of the newer stocks that I wasn't interested in covering or didn't have time to cover. I had met Weller a few times at a.n.a.lyst meetings over the past year or so and thought he was extremely bright and funny.

I also had a fond memory of Tim from three years earlier, when Jack Grubman sent out the report bas.h.i.+ng Merrill's and my integrity and claiming that MFS was so much better than Teleport. Tim backed me up. His report said: "Our friend Jack Grubman has pointed out a few reasons why he feels MFS is a better company than Teleport. Since Jack has a fondness for hyperbole, we offer a few counterpoints to keep him honest."

With a PhD in electrical engineering from the University of Illinois, where he studied with Mark Andreessen, the inventor of the Web browser and a co-founder of Netscape, Tim was one of the very few people on my side of the Street who could claim to understand the Internet. Perhaps for that reason, he was much more positively disposed toward the smaller dot-com telecom companies than I was.

One thing Tim wasn't, however, was I.I. I.I.-ranked. The I.I. I.I.-ranking had always been the yardstick by which all of us were measured, on the a.s.sumption that without a high I.I. I.I. rating investors wouldn't follow our advice and thus companies wouldn't hire our firms for big deals. Merrill's consideration of Tim made me wonder if this equation was beginning to change, favoring a.n.a.lysts who could convince investors to buy new-economy stocks, regardless of their ranking on some silly old-economy survey. rating investors wouldn't follow our advice and thus companies wouldn't hire our firms for big deals. Merrill's consideration of Tim made me wonder if this equation was beginning to change, favoring a.n.a.lysts who could convince investors to buy new-economy stocks, regardless of their ranking on some silly old-economy survey.

Although I found the idea of another telecom a.n.a.lyst-particularly one who didn't report to me-a bit threatening, on the face of it Andy Melnick's idea made sense, and I thought it might work out fine. If he covered some of these stocks that I had refused to or that fell outside of my traditional coverage, that would lighten my team's workload. It also meant Tim-not I-would have to deal with the crazy valuations the market had put on some of these Internet-related startups. And, of course, he would have to deal with the deal-crazed bankers trying to ramp up Merrill's share of technology and telecom deals.

So Tim came to our offices to meet with Andy and me, and everything was going smoothly until we started talking about stock coverage. Tim said he wanted Level 3 and Qwest as well as the Internet-type companies that I hadn't been covering anyhow, some of which I hadn't even heard of. They all made sense to me except for Qwest. "I'd love to get Joe Nacchio off my back, but it's a core company for me," I said. "Qwest is buying US West; it's a Bell company far more than it is a dot-com or Internet company."

I went home and started to think that maybe there was something sinister going on here. Most distressing to me was the possibility that Merrill wanted to transfer responsibility for some of the stocks I covered to an a.n.a.lyst who might be more bullish. It sure began to smell funny. The more I thought about it, the more I worried. Why would they bring in someone of Tim's caliber if they intended for me to stay? Was a palace coup in the works, an ambush meant to ultimately push me out the door?

Of course, they would still have to pay my salary and bonus through the end of 2000, but next to the potential banking fees, that would be a pittance for Merrill. It was a very neat way around the problems I was causing: simply bring on a bull who didn't have any of my issues or concerns and give him coverage of the hot, deal-making companies such as Level 3.

But I felt a lot better when Rosemary Berkery, Andy's coglobal research director, came to me a few weeks later and asked if a new, extended contract would make it easier for me. I said it was a possibility, but only if my coverage list was protected. Otherwise, I pointed out, investor clients and salespeople would see it as a signal that my responsibilities were being reduced, which in turn, would hurt my ability to compete for attention and votes.

So a few days later she came back to me with a new three-year contract that took me through Spring 2002. It explicitly stated that Qwest could be taken away from me if Merrill hired a new senior-level a.n.a.lyst. It was a switch from my prior contract, which had said that Merrill couldn't reduce my responsibilities unless it was willing to pay out my contract in full and send me on my merry way-not an entirely unappealing scenario.

I upped the ante a bit, asking Rosemary, a serious, hard-nosed professional who later became Merrill's general counsel, to make it a four-year deal, one that would take me to my Spring 2003 early retirement target date. She said yes-if I would agree to an exception that allowed Merrill to hire an a.n.a.lyst "with responsibility for companies engaged in Internet applications plus Qwest, Level 3 and up to two other companies engaged in or entering into similar businesses." This meant Merrill could take away the new economy's hot highfliers, even Global Crossing, but they couldn't take any of my core companies, such as AT&T, WorldCom, or the Baby Bells, and that satisfied me.

Yet it was all for naught. It turned out that Tim Weller wasn't quite as interested in the job as he'd said he was. In August of 1999, he accepted the CFO job at a red-hot Internet startup called Akamai Technologies. When it went public at the end of October, Weller was suddenly worth over $300 million on paper, making whatever he'd been negotiating for at Merrill a joke, at least until Akamai's stock later collapsed. On the other hand, if he had come to Merrill and taken over coverage of Qwest shares, it would have worked out a lot better, certainly for me and possibly for both of us: within two years, Qwest would become my most disastrous stock pick.

Still, the whole saga kept me on edge for a while. I knew Merrill couldn't and wouldn't fire me, as it would be a public relations nightmare to do so without any poor performance or wrongdoing on my part. The press had already been publis.h.i.+ng pieces about the growing conflicts between a.n.a.lysts and bankers, and I knew several journalists who would love a story like this one. Plus Merrill would have to pay me. But I couldn't stop worrying. What did all this mean?

A Piece of the Action at CSFB A ringing telephone quickly put an end to my anxiety. On the line was Al Jackson, global head of equity research at Credit Suisse First Boston. I didn't know Al, but I did know that CSFB was a long-established investment bank that had hit hard times a few years earlier. It was now experiencing an amazing revival, thanks in large part to my old colleague Frank Quattrone.

CSFB had recruited Frank in 1998 from Deutsche Bank and now controlled the lion's share of the technology and dot-com IPO business in Silicon Valley. But CSFB had lost its well-regarded telecom a.n.a.lyst, Frank Governali, to Goldman Sachs earlier that year and had apparently struck out with everyone they'd tried to hire. They hadn't even thought of contacting me, since they believed I was very satisfied at Merrill. But n.o.body knew the real story.

The call followed that beautiful script, and I was pretty jazzed to hear it.

"Dan, I'm sure you're happy and Merrill is taking care of you," Al said, "but I figured I'd go for a long shot and see if you wanted to talk. We are thinking big numbers."

I played it cool. I told Al that I was very loyal to Merrill, but that, like any good a.n.a.lyst, my mind was always open to new information. He told me what kind of money they were thinking about, which, it turned out, was close to where I already was. I told him so. "Tell you what, Dan," he said, with disappointment in his voice. "Let me talk it over with some folks here and I might get back to you." I figured that was the end of it, since they surely thought that Merrill would match anything CSFB offered.

To my surprise, Al called back a few days later and said he had gotten approval to talk to me about "much higher levels." He invited me to have dinner with him, Chuck Ward, the co-head of the investment bank, and Brady Dougan, who was then the global head of the securities division and today runs CSFB. It turned out that CSFB had been courting a few other a.n.a.lysts who they thought might be ready to move, but had ended up only accelerating their spiraling pay packages. One was Blake Bath, who went back to Lehman and managed to double or triple his salary and bonus. This call, Al said, had been a shot in the dark. "We know Merrill will never let you go," he said.

So one evening in mid-September, I slipped into the CSFB building, the art deco former Met Life building at Twenty-fifth and Madison, and headed up to the executive floor, where a private dining room had been reserved. Al, Chuck, and Brady greeted me warmly. Al Jackson was a thin, kind, una.s.suming guy who had once been an a.n.a.lyst and had survived as research director through multiple management changeovers. Chuck Ward was a very serious, all-business type who from the first meeting was focused entirely on one thing: profits. He was a banker's banker. Brady Dougan had been a derivatives trader, and he still carried that mentality, working 14-hour days and not bothering to smile (it wasted time and energy). Brady's tie was always askew, as if his body had been struggling to stay in its suit all day and was on the verge of giving up.

The pitch was the same pitch I'd heard in the past-we love telecom, we want to make it a huge part of our franchise, blah blah blah-but there was a twist: these guys actually had something to leverage. They wanted to play off of their incredible momentum in the technology business, momentum that had bounced into their lives with the arrival of the inimitable Frank Quattrone and his team from Deutsche Bank. Frank Quattrone's organization handled everything from investment banking to brokerage for wealthy individuals to, yes, research, and had vaulted CSFB to the top of the league tables in the technology sector.

I had heard from other sources that Frank and his group had a "piece of the action"-that is, the group's compensation was an explicit percentage of the profits his group generated. Fifty percent was the rumor, but it turned out to be 33 percent of any revenues the group brought in over $150 million. In 1999, Frank's group brought in $600 million, which meant Frank ended up with $150 million to divvy up between himself and his staff. Between 1998 and 2000, according to the National a.s.sociation of Securities Dealers, Frank would personally rake in over $200 million.3 At the time, I didn't know what the numbers were, however. At the time, I didn't know what the numbers were, however.

The dinner went well, and was followed by a 7:00 AM AM breakfast a week or so later at the Soho Grand Hotel, a great place to meet because Wall Streeters never went there, particularly not at 7:00 breakfast a week or so later at the Soho Grand Hotel, a great place to meet because Wall Streeters never went there, particularly not at 7:00 AM AM. My general sense was positive. I thought they were extremely serious about supporting me and bringing my team over with big raises as well, which was a critical part of any deal. I figured I was in a no-lose situation: with the new contract at Merrill, I was well protected from banker pressure, and if I got an offer from CSFB, I'd take it to Merrill and see what happened.

About midway through the breakfast, Brady Dougan pulled out a one-page set of sample contract terms. It offered two choices: one, a fixed contract like the one I had at Merrill but with a raise of about 60 percent, and another with some very unusual incentives. The men had hinted at something similar to Frank's deal, and it turned out that they were willing to give me a percentage of any new telecom deal fees that CSFB landed in the sector.

I was stunned. I was an a.n.a.lyst, not a banker, yet they were proposing that I be paid on commission, just like a banker was. I would get a piece of whatever deals I brought in or indeed of any telecom deal at all, which seemed to create an obvious incentive to make my recommendations more bullish than they would otherwise be. If that happened, I'd be putting my financial interests first, ahead of my clients'. Was this the way others were being paid?

I was taken aback, but decided that, as in all negotiations, there are times when it is simply better to listen than to talk. The breakfast ended with Al Jackson promising to get me a draft of the full contract within the next few days and me agreeing to meet more CSFB executives the following Friday.

So on October 15, I told my executive a.s.sistant, Connie, and my team I would be working from home and spent a whole day upstairs in CSFB's private dining room while the head salesmen, traders, and others came upstairs to meet me. I really liked everyone, and their we-try-harder enthusiasm appealed to me a lot. The next Monday afternoon, I returned one last time for a meeting with Ernesto Cruz, then head of U.S. equity capital markets, which is the department that gets the IPOs done by running the road shows, and pricing and allocating the shares. We talked about the conference I'd been running at Merrill, which was of great interest to CSFB. Ernesto asked me how much I spent on the conference. When I told him $1 million, he laughed. "Frank spends over $2 million on his," he said, referring to Frank Quattrone's over-the-top technology-investor conference held each November at the sw.a.n.ky Phoenician Resort in Scottsdale, Arizona.

Frank's conference, which he had successfully moved from Morgan Stanley to Deutsche Bank and then to CSFB, was the most exclusive of all investor get-togethers, an absolutely sizzling ticket. In November of that year, Robin Williams would show up and perform for free-just because he was an investor in one of Frank's client's funds and wanted to get in the door! Wow, I thought. I could throw one h.e.l.l of a party with $2 million.

Finally, Allen Wheat, CSFB's CEO, came in. Allen seemed to be a lot of fun, a motorcycle-riding New Mexico native who was extremely approachable and seemed sophisticated. He was very different from the street-smart David Komansky. He gave me the standard talk about how important telecom was and then mentioned how he liked to hire the best and let them do their job without interference. Now that was music to my ears. At first, I thought he meant he didn't allow anyone to interfere with research a.n.a.lysts' opinions. But it turned out he wasn't talking about research. He was talking about giving his bankers and traders the freedom to make money any way they wanted to, as he did with Frank Quattrone and others.

While I was trying to figure out what to do, I was surprised, and I guess a little bit flattered, to receive a call from Frank. I hadn't spoken to him since we were both at Morgan Stanley, but certainly life had changed for both of us, particularly him. Frank had become arguably the most influential banker in the entire world by now, the Jack Grubman of banking. Frank had more money and more power than just about any employee of an investment bank, and as a result, people were awed by him.

None of that came up on the call, however. Frank made nice, acknowledging our common heritage at Morgan Stanley and telling me how much progress CSFB had made in the previous few years. He said that the technology group was anxious to work closely with the telecom group. It was a natural fit, he said, because the big telcos were such huge users of technology and telecom equipment. The tech companies he handled, such as Lucent, Cisco, and numerous Web startups, would love to have better information flow about the telecom service companies and certainly would want their investment banker to be able to make introductions. On my end, I figured that I could gain from this cross-fertilization as well, by its making me better prepared to predict how new technologies, particularly the Internet, would impact my companies going forward.

He sounded incredibly open and friendly, and I had never had any sort of run-ins with him in the past. But I couldn't help but wonder whether he might somehow try to influence my research. This worried me a lot. I remembered that Wall Street Journal Wall Street Journal piece back in 1992, when both of us were at Morgan Stanley, describing his attempts to influence a research a.n.a.lyst's opinion. I found it hard to imagine he'd be more hands-off now. piece back in 1992, when both of us were at Morgan Stanley, describing his attempts to influence a research a.n.a.lyst's opinion. I found it hard to imagine he'd be more hands-off now.

While I was mulling this over, a FedEx package arrived at my home. Inside was the draft contract Al had promised at our last breakfast. Instead of a fixed salary and bonus, CSFB was offering me a piece of the action: 2.5 percent of any telecom fees earned by CSFB above $150 million per year. As long as a telecom company anywhere in the world paid CSFB a fee after that point, I would collect my piece. I didn't even have to cover the company myself: if CSFB underwrote a bond offering for Korea Telecom, advised France Telecom on an acquisition, or managed the IPO of an Internet service provider, I would personally reap 2.5 percent of the fees earned.

Given the current rate of IPOs and deals that the bank was bringing in, this had the potential to be one amazingly lucrative offer. A doubling of CSFB's telecom investment banking business to $300 million in the next year, for example, which was entirely possible, would mean an extra $3.75 million in my pocket. There were also payments for an I.I. I.I. ranking of number one, two, or three and additional incentives if CSFB ranked in the top five spots in three different league tables: telecom M&A, telecom stock underwriting, and telecom junk-bond underwriting. At our last breakfast, I had suggested some sort of bonus tied to the performance of my stock recommendations. Oddly, that was the one incentive that didn't show up in this letter. Clearly the big money was coming from the banking. ranking of number one, two, or three and additional incentives if CSFB ranked in the top five spots in three different league tables: telecom M&A, telecom stock underwriting, and telecom junk-bond underwriting. At our last breakfast, I had suggested some sort of bonus tied to the performance of my stock recommendations. Oddly, that was the one incentive that didn't show up in this letter. Clearly the big money was coming from the banking.