Confessions of a Wall Street Analyst (22 page)

Five days later, in early June 1998, he did. I picked up the phone anxiously. “I’ve talked to Oren,” Dick 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 Dick 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 Antitrust 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 manuscripts 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 asserted 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 analyst.

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 hell 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 damn 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-ass, stick-in-the-mud analysts who were messing up Merrill’s deal flow in a big way.

B
Y 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.I.
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 Saturday 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 damn 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 God 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 Saturday at 9:00
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 assume yes for now and thus get all the tables and models ready to go.

I
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.

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 antithesis 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, assuming 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.