Confessions of a Wall Street Analyst (8 page)

But Merrill? If Morgan Stanley was the aristocrat of the Street, Merrill was the arriviste, at least when it came to banking. Morgan Stanley had no retail arm, whereas Merrill’s bread was buttered by the small investor, served by over 10,000 brokers in 500 offices throughout the world. Morgan Stanley stuck to its fee structure and prided itself on being choosy, while Merrill—eager to convert its highly successful retail brokerage into a world-class investment bank—offered aggressive discounts to win banking business. Cool and snooty versus aggressive and loud; pink pants versus pinky rings; country club versus Paddy’s Pub; the two firms couldn’t have been more different.

After a pleasant breakfast with Les, he told me that Merrill’s head of domestic research, Andy Melnick, would like to meet me on January 20. All the banks had secret clubs or restaurants where they did their wooing. Andy liked to do his recruiting at Fraunces Tavern, a colonial-style eighteenth-century restaurant near Wall Street where George Washington made his farewell address to his officers in 1783. It made perfect sense; Merrill, the firm with the nouveau reputation, tried to buy itself gravitas with meetings at a place like this. I guess they had a deal with the management, because we met for breakfast, even though Fraunces Tavern didn’t serve breakfast—not to regular folks, anyhow.

For us, they did serve breakfast, but apparently we didn’t merit heat. I could see my breath as I chatted with Andy and Jack Lavery, Merrill’s head of global research and Andy’s boss. There was one waiter, clearly brought on for these special meetings, who must have known more about Merrill’s pay structure than anyone else in the world. I should have hired him as a consultant when I was negotiating my salary.

“We are in the process of building the number one research department in the world,” Andy said, “and you are critical to our success. Our firm is completely focused on telecom, and to get a piece of the coming privatization wave, we must have the best possible U.S. telecom analyst.”

Jack and Andy mentioned that they had thoroughly checked me out with buy-siders and were convinced that I was moving up in the
I.I.
rankings, which they seemed to be very, very concerned about. They also talked
up the power of their trading operation, which meant that an analyst’s calls would have a lot more impact than they would elsewhere.

I was impressed, and asked how they would feel about bringing over my associate, Rick Klugman. Rick was a young, eager, loyal guy whose shirttail was invariably hanging out of his pants. He was very bright and worked his tail off, and I hoped to get him a big raise. It didn’t seem to be a problem. Andy presented himself as the kind of guy who would mentor young analysts but otherwise stay out of the way. I found his “aw shucks” approach appealing, even if I didn’t totally buy it.

What I didn’t realize at the time was that Merrill was desperate to recruit an
I.I.
-rated analyst because the British government was about to choose several firms to lead the third and final phase of the $22.9 billion privatization of British Telecom, and had indicated that no bank without an
I.I.
-ranked analyst would be considered.

A few days later, I met Dan Tully, Merrill’s CEO and chairman, in his office, which was decorated in standard-issue Wall Street: lots of golf mementos and pictures of Tully with various presidents and CEOs. A jovial, smart, and charming guy, Tully and I hit it off right away. I was flattered that he was making time for me, which was of course the point. With his gift of gab and Irish charm, it was easy to see why he’d been so successful. He quickly homed in on my favorite topics—skiing and family—and we spent the entire time talking about our kids. He called me “Danny Boy,” to break the ice. Later, whenever we ran into each other, we’d race to be the first to call the other “Danny Boy!” I knew I was a bit insolent, but Tully was more the common man than any other executive I had ever met.

Having met the approval of Merrill’s CEO, I then met, on February 2, 1993, with Tom Davis, its head of investment banking, and Jerry Kenney, who was Jack Lavery’s and Andy’s boss and Merrill’s chief strategist. Again, the meeting was treated with as much secrecy as Nixon’s trip to China. It took place at the Essex House, an upper-crusty hotel on Central Park South. My instructions, which had a satisfying whiff of James Bond about them, were to ask at the front desk for the key to room 2112 or whatever it was. Merrill rented a suite there, and when I walked in the room, the two executives were already waiting for me.

I had had to sneak out of the office, telling Rick Klugman that I was going home for my luggage, as I was bound for Amsterdam that evening. Because we worked so closely together and talked so frequently, even when I was traveling, it was a real challenge to come up with a valid excuse for going
AWOL. I had enjoyed the process so far, but I wasn’t at all sure I wanted to make the move. Things were going really well at Morgan Stanley, and the pay, of course, was dramatically higher than I could have imagined making just a few years earlier. But Merrill understood something that Morgan Stanley didn’t. The countries of the world, from Indonesia to Britain, were now in the process of
privatizing,
that is selling to the public, scores of nationally owned phone companies. If one bank could become known as the go-to place for these deals, there were literally billions of dollars to be raised and hundreds of millions in banking fees to be made. Morgan Stanley took privatization seriously on a case-by-case basis, but once I heard the Merrill guys’ pitch, I realized that they were a lot more ambitious.

“Look,” Jerry said, “we need to have the world’s premier telecom research, because fifteen countries or more are going to privatize their telecom companies over the next five years. We want you to be our global telecom leader, and we want you to be our main U.S. telecom analyst as well.”

It seemed as if Merrill was offering me the chance to build my own team, see the world (first class, of course), and participate in the economic restructuring of the post–Cold War era. It had been four years since the fall of the Berlin Wall, and capitalism was now the only game in town. As governments from Europe to Asia to Latin America privatized their largest companies, they could raise a huge amount of cash and inject capitalism into a large part of their economies. Telephone companies were perfect for privatization: they sold a necessity, demand was growing steadily in Europe and very rapidly in the developing world, and new services such as cellular were blossoming.

Then there was the money part. If Merrill was right about the market, the privatization fees would be so huge that the salary and bonus of an analyst was basically irrelevant, a point no one hesitated to make. The headhunter had told me that the job would pay in the high six figures, and I had in my head a sense that that probably meant about $800,000. It was an absurd amount of money, especially because I would be doing something I enjoyed so much.

“Hi, I’m John Mack…”

All of this happened just before bonus checks were handed out on Wall Street. Bonus time on the Street was the most eagerly anticipated, tension-filled month of the year. The rumors began early and spread faster than the
usual sex or political gossip. And, once you found out your “number,” it was time to move.

The end of February on Wall Street was the equivalent of summer in the Serengeti Plain, with the annual mass migration not of zebras and springboks, but of bankers, brokers, and analysts to their competitors who were willing to pay more. It was a time to plop new butts in all the suddenly empty chairs, disconnect and reconnect phone lines, empty and fill cabinets, and order new corporate credit cards. It was perfectly normal to walk in one morning and discover that the chemicals analyst you sat next to had evaporated into thin air. One day he was your neighbor; the next day he and his crew had decamped to Goldman, where they were already at work launching coverage. It wasn’t worth it to make great office buddies, because they didn’t last.

So the Tom and Jerry Show continued, climaxing with Jerry Kenney, the strategist and designated closer, making an offer that made my toes curl. “This is going to be your platform,” he said, mustering up all of the salesmanship he normally used on banking clients. “Merrill’s sales force will help you move to number one [on
I.I.
].” And, oh yes…how would you feel about $1.2 million per year, guaranteed for three years?

“Holy. Fucking. Shit.” I almost blurted aloud. Four years earlier, I was a cog in MCI’s wheel, making $70,000 a year. Now I would earn in one year what I once yearned for in a lifetime. And they also were offering me the chance to head the global research team leading the privatization charge and advising governments around the world. How could this be?

What I didn’t know at the time was that I hadn’t been the first choice for the job. Merrill had gone after a few better-known analysts, including Frank Governali of Credit Suisse First Boston (CSFB) and Joel Gross of Donaldson, Lufkin & Jenrette (DLJ), and had come up empty. Merrill had offered them a lot less money to begin with—apparently not enough to convince them to leave their safer perches and try to build a new platform. Merrill had upped the ante with every succeeding offer.

Even though I probably would have taken the lower offers they made to Frank and Joel, I got the benefit of Merrill’s panic. So I tried to paste on a poker face and told Tom and Jerry I’d let them know. I needed to go home to get my luggage (it wasn’t a complete lie) and then on to JFK to catch that plane to Amsterdam. Jerry knew that. “Tell you what,” he said, putting a cherry on top of the sundae, “after he drops me off at my apartment on Park Avenue, my driver will take you home to Scarsdale to get your stuff, and then to the airport.”

After talking it over with Paula, it became clear that going to Merrill was a no-brainer. I was getting a promotion to managing director and a huge salary increase, and I would have a bigger staff and more dollars to pay them. Equally important, Merrill had far more investor clients—and potential
I.I.
voters—because it served not just the largest money-management institutions, as Morgan Stanley did, but also many smaller ones. But I still had to play the game.

On February 9, exhausted from the one-day trip to Amsterdam, I walked into the office of Jay Cushman, head of Morgan Stanley’s domestic research, to get my bonus numbers. Jay and Jack Curley, the head of global research and Jay’s boss, greeted me with huge smiles.

“Congrats, Dan,” Jack said. “You had a great year and we’re going to bump you up from $350,000 to $475,000. You’re doing a great job, and this percentage increase is really good compared to the average for the division.”

Most people would have seen a 30 percent increase as a pretty fantastic raise. I would have too, if I hadn’t had that sizzling offer burning a hole in my pants pocket. I had no intention of staying at this point—I felt Merrill understood the importance of telecom in a way that Morgan didn’t—but this game had rules and I had to play it out.

“To be honest,” I said, “I’m quite disappointed.” This was the script everyone knew to use when you were contemplating making a move. Jay was silent. Jack repeated his line, that the increase was much better than the department average and that it was a reflection of the great work I was doing.

Although I was leaving, I couldn’t say anything to anyone until my bonus check cleared at the end of February. As soon as it did, I told Ed the whole story except for the amount Merrill was offering, which I didn’t want to leak out. Ed told me my decision made a lot of sense, but asked for a day or so to see if there was anything he could do. I was going to miss Ed, but I knew that this was the right move and that we’d stay friends for years to come.

A day later, Jay came into my office and closed the door. “We’ve talked with the bankers,” he said, “and the bankers really pay the bills. We want you to stay, and we’re thinking that next year we can pay you $750,000.” Clearly, this was a gangbusters offer in his eyes.

But then came the catch: “Of course, Dan, it’s dependent on the telecom bankers making their budget for 1993….”

That was all I needed to hear: I had no idea what the bankers’ budget was, or what their chances of reaching it were, and I certainly didn’t want my
pay tied to how much money the firm received from the companies that I was assigning stock ratings to!

That evening, I flew to Kansas City and St. Louis for meetings with analysts and portfolio managers at American Century, Waddell & Reed, and Boatman’s Bancshares Inc. I called Andy Melnick at Merrill the next morning to tell him it was a go. After my meetings, I went to the airport and then spent much of the rest of the day grounded by a snowstorm, having Andy fax a contract to the airport’s business center so I could review it and then forward it to my lawyer.

On March 1, I told Jay I had decided to take the Merrill offer. I’d already taken all my important reports home with me, because when you leave, you’re outta there the second you give notice. Any files and professional material belong to Morgan, not you. There aren’t any good-bye parties on the Street. It’s just one big see-ya…and don’t let the door hit you in the ass on the way out.

Hold on, Jay said. “Bob Greenhill [Morgan Stanley’s president] wants to see you. Go to his office at 2:30
PM
today.” Well, okay then. So at 2:30 on the nose, I went upstairs to the president’s office on the 32nd floor. I waited in his office for quite a while, until finally someone walked in. It wasn’t Bob Greenhill at all.

“Hi, I’m John Mack,” he said, shaking my hand. Mack headed Morgan Stanley’s fixed income department. He was a North Carolinian of Lebanese descent whose father had been a wholesale grocer. Unlike most of the big shots on the Street, Mack was deadly serious and not one for shooting the breeze. He got right to the point.

“Bob resigned today,” he said. He apologized for being late and for the crazy circumstances of him standing in for Greenhill. Mack was very charged up, having just found out a few hours ago that he was being promoted to president of the firm. He had a bunch of crises on his hands already, such as how to hold on to all those Greenie loyalists who might be offered lucrative deals by Smith Barney, where Greenhill had gone. He did focus on me, though, for about 10 minutes.