Confessions of a Wall Street Analyst (28 page)

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 analyst, 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.
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 analysts, 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 analyst 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 bashing 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.
-ranked. The
I.I.
-ranking had always been the yardstick by which all of us were measured, on the assumption that without a high
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 analysts 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 analyst—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 analyst 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 co–global 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 analyst. 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 analyst “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 publishing pieces about the growing conflicts between analysts 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 analyst, 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 nobody 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 analyst, 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 analysts who they thought might be ready to move, but had ended up only accelerat
ing 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, unassuming guy who had once been an analyst 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 Association of Securities Dealers, Frank would personally rake in over $200 million.
³
At the time, I didn’t know what the numbers were, however.

The dinner went well, and was followed by a 7:00
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
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 analyst, 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 assistant, 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 swanky Phoenician Resort in Scottsdale, Arizona.