Read Confessions of a Wall Street Analyst Online
Authors: Dan Reingold
The bankers told us that the deal would likely be announced the following Wednesday, after both companies’ boards met and approved the deal on Tuesday. Damn, I thought. This meant the press conference and analyst meeting would interfere with my own conference, siphoning off my attendees. The Morgan and Salomon folks were probably thrilled, as an unsuccessful conference might mean fewer votes for me and a lower stature for Merrill’s telecom franchise.
So we swung into action, quickly offering to let the two companies an
nounce their merger at our shindig. We would shuffle some speakers around and create a one-hour slot early in the morning so Global Crossing’s and Frontier’s CEOs could present the deal and the new company’s plans. We convinced the executives that they would get far greater attention with all the major large investors in one place. We even offered to let my competitors from other Wall Street firms into the Grand Hyatt’s ballroom for the meeting, which normally we wouldn’t have done.
We couldn’t flag the schedule change, since it was confidential information and astute buy-siders would quickly suspect something was up. Last-minute events such as CEO or CFO cancellations were watched closely by professional investors because they often signaled important news in the offing. I did not tell my team about the upcoming merger, nor did they have any reason to suspect anything.
But apparently, other people did. Monday morning, as I was exiting the hotel elevator and approaching the coffee and muffins, stopping to greet every client I could, one of my most important clients pulled me aside. With a big shit-eating grin spreading across his face, he said:
“So, Dan, who’s going to buy Frontier on Wednesday for $62 a share?”
I blanched. He was blatantly flaunting the secret information he had. I looked down to try to hide my shock. How could he know? And what made him think I knew something about it? If I implied I knew, he’d take it as a confirmation and I might be illegally disclosing inside information. Fortunately, I was already harried, since in about five minutes I had to go to the podium and make my opening remarks.
“Wow, I didn’t know that,” I said, concentrating on holding my poker face. “Where did you get that from?”
“Oh, I went to a boxing match with Jack on Saturday night. You know he can’t keep his mouth shut.”
“I’ll try to check into it,” I said. “Let me know if you hear anything more, but I’ve got to get into the ballroom. I think I’m late already.” I didn’t have time to think too much about the leak; it was time to get the conference started. But it had happened again—with a deal I knew about this time. I wish I could have said I couldn’t believe my ears, but by this time, sadly, I could.
Later that day, Megan told me that same client also approached her and posed the same question, saying he had heard it from Jack at the Lewis-Holyfield heavyweight boxing match at Madison Square Garden on March 13. She, of course, had no idea what was going on at the Skadden law
offices across the street and thus simply exclaimed, “Really?” and probed him for more.
Later that afternoon, Michael Costa, the Merrill banker, found me in the Grand Hyatt hallway and asked me if I could meet with Global’s board at around 2:00
PM
the next day at Skadden’s office. They were asking both Jack and me, separately, to give our sense of how the markets would react to the deal. It was going to be very tough for me to sneak out of my own conference without anyone noticing, but I managed to get to Skadden at about 2:05
PM
on Tuesday. I was shunted off to a small conference room and informed that the board would call me when it was ready.
After about a half hour, I was getting antsy. I wanted to get back to my conference before anyone noticed I was absent. I certainly didn’t want to miss the 4:30 meeting I had arranged with our dinner speaker, Steve Case, AOL’s chairman and CEO. Although about 700 clients attended the conference, I had invited a select group of my top 25 clients to this meeting, which had to be kept very quiet. These kinds of meetings were highly sought after by buy-siders, because lots of important information came out. This was just another example of the fact that even the institutional investors didn’t play on an even playing field. Some would have a chance to chat in near-private sessions with Steve Case, while others had to try to trap him on his way to the men’s room before his speech.
Finally, bored and anxious, I took a walk down the hallway. I spotted Global chairman Gary Winnick milling about by some snacks. We chatted about the deal, and I suggested to him that if the market reacted well to this one, he ought to keep going, leveraging his supercharged stock as currency for the acquisitions of other companies. Chuckling, but somewhat serious at the same time, I said “Gary, I don’t see why you don’t buy US West and then BellSouth.”
Gary’s eyes lit up. He clearly liked the idea. But it soon became clear he had something else on his mind.
“You know, Dan, our stock is down $4 today,” he said, with the kind of bellowing laugh that can emanate only from a wealthy man, “and I’ve lost almost a billion dollars in just a few hours! Can you believe that? My net worth is actually down a billion dollars today!”
I laughed, as apparently was required. I guess it was somehow truly amusing that the coming or going of $1 billion did not really seem to matter. What a 1999 moment.
Much less amusing was the fact that Global Crossing shares had fallen so much today, while Frontier shares were up $2.50, just a day ahead of the merger announcement. It looked as if the news of the merger had leaked out to more people than just Jack’s boxing buddy.
As I stood there with Gary, being introduced to a few of the board members and to Tom King, a Salomon banker, someone came running out of the conference room looking for Gary. “Gary, I’ve got Joe [Clayton, Frontier’s CEO] on the phone. You need to talk to him.” He and Bob Annunziata, Global’s CEO, went into the conference room, returning about 15 minutes later with worried looks on their faces. Gary told me there was a last-minute snag with “those bastards in Rochester,” but that it would work out. By 3:00
PM
, another phone call came through, and everyone was relieved: they had a done deal.
We all went into the conference room, and the board members asked for my reactions to the deal from Global Crossing’s perspective. I told them it was a smart move, but that they should be prepared for some skepticism from those Global shareholders who were true believers in the power of the Internet.
“The market has given Global a currency with which to build itself, via acquisition, into a major company in this industry,” I said. “And you should use that currency while the bull market supports it.” Everyone listened politely. I finished and dashed back to my conference, slipping in just in time to introduce Steve Case to the 25 lucky buy-siders who were awaiting the private session.
Steve Case was up there with Level 3’s Jim Crowe as one of the most passionate advocates of the Internet, only he was a little more approachable. He was as ebullient as you’d have expected from an AOL CEO in 1999. Case was also our dinner keynote speaker. Over 700 buy-siders crammed into the Grand Hyatt’s ballroom and an overflow room. Sitting at Steve’s table was the new Merrill Internet analyst, Henry Blodget, a group of five buy-siders I’d handpicked, and me.
Before Case sat down, I leaned over and whispered to Henry, “Henry, you want to introduce Case as our dinner speaker, right?”
“Yeah, I should do that. You know I’ve never met Case. It will be interesting to introduce someone who I’ve never met.”
Hmmm, I thought to myself. This guy covers AOL and, on behalf of Merrill Lynch, recommends its stock to thousands of individuals and institutions around the world. How can he publish research reports on a com
pany without having ever met the driving force behind it? Geez, I bet sixth graders feel they know Steve Case better than Henry Blodget does. After all, Steve regularly writes e-mails to AOL subscribers.
Henry did a fine job introducing Case and moderating the Q&A session. No one could tell these two men were meeting each other for the first time. It was so un-Grubmanesque. Henry had a vision. He didn’t seem to need insider relationships. In fact, it didn’t seem to have even dawned on him that those relationships were necessary at all. How different the paths to Wall Street stardom and notoriety can be.
The next morning, Wednesday, March 17, the Global Crossing–Frontier merger was announced at about 7:00
AM
. Megan said, “You knew this all along, didn’t you? And Jack told [the client], didn’t he?” I shrugged my shoulders. “I just can’t believe he can get away with this much longer,” I said. It was just another day in M&A—except, of course, for those who knew about the deal before it happened. For them, it was a great day.
As I stood in the back of the Grand Hyatt’s ballroom at my conference listening to Global Crossing’s Bob Annunziata and Frontier’s Joe Clayton outline the deal’s terms and their joint future, Megan came over and asked, “Are we going to write this up or are we restricted?”
“Restricted, I’m sure,” I whispered in reply. “But check with compliance.” Since Merrill’s bankers were advising Global Crossing, I assumed I would not be able to say or write a word about the deal or either company until the merger was completed, which could take months. I had learned many years earlier that federal securities regulations didn’t allow a Wall Street firm to issue research on a company when the firm was acting as a financial adviser to that company. This was intended to avoid the accidental leakage of inside information and to keep research analysts from
conditioning the market
—hyping a stock’s price or biasing shareholders in some way.
There was another factor, too: although Merrill was going to be paid $20 million for its advice to Global Crossing, most of the fee was contingent on the deal being approved by shareholders and regulators. My opinion, if positive, could easily be interpreted as trying to influence shareholders to vote yes on a deal that my firm had millions riding on. I certainly didn’t want my clients to view my research as tainted, and I figured Merrill’s watchdogs
would have the same view. So, when clients approached me at the conference, asking what I thought of the deal, I could only explain, “Oh, sorry, looks like we’re gonna be restricted for a while, since we’re advising on the deal.”
An hour or so later, Megan slipped me a note while I sat on the dais listening to our next speaker. It said, “Restricted yes, but we can write the facts. Should I write it up?” I nodded yes, and thanked her.
Although it was a relief to be free of the pressure to opine on the deal, being restricted hurt me in other ways. It gave me fewer topics to talk to my clients about, which might push them into the arms of my competitors. The timing was particularly bad in this case because
I.I.
voting season was fast approaching. Factual summaries didn’t help, because they couldn’t include forecasts, stock recommendations, or target prices for the two companies involved in the merger—and therefore, added no value for my institutional clients, who had access to the same facts. The factual summaries were really written for Merrill’s retail brokers and, indirectly, their individual clients whose only other information source would be newspapers and CNBC.
Now, I’m no securities lawyer. But I figured the other firms involved in the deal, Salomon Smith Barney and Morgan Stanley, would also restrict their analysts. Salomon, along with Merrill, was Global Crossing’s banker, while Morgan Stanley advised Frontier. But I was wrong: the next morning, Jack issued a seven-page report upgrading his rating on Frontier shares two notches, to Buy (“1”) from Neutral (“3”) and dramatically raising his Frontier target price to $80, from $38 per share. He argued, correctly, that Frontier shares should be viewed as a derivative of Global Crossing’s. As such, his new Frontier rating and target price were derived from his new target price on Global Crossing, which he pegged at $72 per share.
Although Jack hadn’t explicitly issued an opinion on Global Crossing, since Salomon had represented Global and he was restricted from issuing an opinion about it, he had managed to get his point across indirectly through his Frontier report: the deal was a great one for both companies and shares of both companies offered tremendous upside to investors. Global Crossing shares were worth $72 at a minimum, 53 percent above their current price. And Frontier was worth at least $80.
I realized instantly that I (and Merrill) would be at a major disadvantage if I wasn’t publishing opinions on these two companies and Salomon was. Our traders would do less trading and thus make less in commissions. The
same would hold for our 12,000 retail brokers, who would have no recommendations to pass on to their customers. And Gary Winnick, Bob Annunziata, and Joe Clayton, I figured cynically, weren’t going to be very happy if one of the two banks they were paying millions to for merger advice went mute for the next three or four months. So although I felt that publishing anything like what Jack had done would be the wrong thing to do, I figured I’d better get some professional help to be sure.
The next morning, with my conference over, I walked down the hall to Merrill’s research compliance department. “How come Grubman can write this stuff?” I asked Ray Abbott, the compliance department’s resident lawyer, waving Grubman’s Frontier upgrade in front of his eyes. “I’m restricted, right? Why isn’t he?”
Ray took a glance through the report and said he saw my point. He then said there had been some changes in SEC regulations in late 1997. Ironically, he said, Merrill had actually been the firm that convinced the SEC to loosen up its research regulations a bit on M&A deals. But now Merrill’s competitors were using it to their advantage.
“It’s called a No-Action Letter,” Ray said. He tried to explain the SEC’s logic, but when he saw my eyes glazing over, he called another Merrill lawyer and asked him what I could and could not write about.
It turns out that this “No-Action Letter” was an extremely significant document, one that inadvertently further intertwined banking and research, put analysts in even more conflicted positions, and made investor interests subservient to those of investment banking clients.