Confessions of a Wall Street Analyst (10 page)

All the investment banks brought in their big guns for these privatization presentations. Tully showed up in Germany in the battle for Deutsche Telekom’s business, and Komansky and I flew to Madrid on one of Merrill’s three private jets for a Telefonica de España pitch. We lost both of them. Win Smith, descendant of the venerable Smith family of Merrill Lynch, Pierce, Fenner & Smith and a Merrill executive vice president, came along on a privately chartered jet to Lima, Peru (we won that one). On my flight back from Germany, I sat across the aisle from Jon Corzine, then Goldman Sachs’ co-CEO and future U.S. senator from New Jersey. He had just led Goldman’s presentation to the German government and, like me, had to rush back to the Frankfurt airport and push through the crowds at the security checkpoint in order to make the day’s last flight back to the States.

The funny thing about all of these meetings between senior bank executives and government officials was that the big guys never said anything of substance. Their job was to make small talk, jokes (nothing too culturally offensive), and then bring in the “experts” to show off the firm’s technical qualifications. I was a straight man to their comedy routine.

Over my next six years at Merrill, as capitalist fever spread throughout the world, I traveled to virtually every country with a publicly-traded telecom company or with the near-term prospect of a privatization. My travels took me all over Latin America (Brazil, Chile, Peru, and Mexico), Asia (Malaysia, Thailand, the Philippines, Singapore, Hong Kong, China, Japan, and Taiwan), Australia, New Zealand, Israel, and much of Europe (France, Spain, the Netherlands, Denmark, Sweden, Germany, Italy, Hungary, and Greece). Merrill became the number two global underwriter of telecom privatizations, behind Goldman.

It sounds exotic. But every trip was made in the shortest time possible—often just overnight, even if it meant traveling 24 hours each way for a two-hour pitch. After all, if I didn’t get back and keep my investment ideas and face in front of my institutional investor clients, I would have no chance of getting
I.I.
votes—which would send my career into a tailspin.

Here’s how a typical day would go: in order to get to Jakarta for a Monday morning meeting, I’d leave Saturday evening from JFK and fly to Amsterdam on Singapore Airlines. Staying on the same plane, I’d lay over for an hour in Amsterdam, where I could check my voice mail and call in any changes to reports my team had drafted. Then I’d fly to Singapore, arrive around 6:30
AM
, connect to a one-hour flight to Jakarta, and arrive at about 8:30
AM
Jakarta time. Elapsed time: 24 hours.

There was no time to relax on the plane, because I’d have a stack of articles about the country ready for perusing plus, if it was a banking trip, a three-inch-thick briefing book. Fortunately, Singapore Airlines was one of the first major airlines to install fully reclining seats in its first-class cabin, and that made a huge difference. I’d walk off the plane and be met by a driver, who would take me straight to the Park Hyatt or the Regent. I’d take what sometimes amounted to a $300 shower, since the room had been reserved from the night before.

After a change of clothes, I would rush to the first of many meetings that day. It was only as the day went on that things got brutal. Usually there were meetings stacked on meetings with the company executives from different
departments—the marketing folks followed by the finance people, for example—and I had to stay alert and ask lots of questions.

Then came the hospitality portion of the visit: our hosts would insist on taking us out for a deluxe, booze-filled dinner showing off the culinary achievements of Indonesia. By this time, it was all I could do to keep my head from rolling off my neck, but it was time to be sociable. I didn’t drink at these events, even though just about everyone else did. I could never keep up with the locals, not to mention the bankers. So I just didn’t do it. Doubtless a lot of people thought I was a boring old teetotaler, but it was strictly for self-preservation.

The other problem I had was the food. I loved tasting every regional specialty, but let’s face it: I am a guy from Buffalo with minor lactose intolerance. Sure, Buffalo is the home of spicy chicken wings, but add some funky spicy rijsttafel and papadam to my fast-developing jet lag and I was in big trouble. I’d sit there, listening to the local Merrill banker flattering the company’s CEO and CFO, praying for the evening to end. “Please,” I prayed to the god of digestion, “hang in there, stomach!” Getting back to the hotel was often a race to the bathroom. It was an unanticipated downside of seeing the world.

But that wasn’t the end of my day, either. By the time we’d get back to the hotel, it was 10:00 or 11:00
PM
, which meant the markets were open in New York. So after calling home, I’d check in on how the telecom stocks were trading, get my messages, and read all my faxes, articles, and any draft reports.

Then there were the clients. Just because I was halfway around the world didn’t mean I didn’t have to carry on with their care and feeding. I’d stay up until 2:00
AM
reading, checking voice mails, and returning calls. Finally I’d get in bed, but every few minutes I’d hear the scratchy noise of faxes being shoved under the door. I wouldn’t be able to sleep much because of jet lag, so I’d regularly get up and check them, then check my voice mail again, and finally get up at 6:00
AM
and start the whole process all over again. A long trip to Indonesia, believe it or not, would be two days.

Once, I had a few hours free, so I hoped on a flight to Bali and sat on the beach for an hour and then hired a driver to show me the religious shrines—just so I could say I had actually been to Bali and seen its treasures. Pathetic. I had to laugh: when they told me I’d be seeing the world, I didn’t realize that meant I’d be seeing it through car windows.

Mississippi Madness

Singapore Airlines it ain’t. That’s what I was thinking as Rick Klugman and I boarded the decrepit 16-seat propeller plane from Atlanta, Georgia, to Jackson, Mississippi, one October afternoon in 1993. Because there were no direct flights from New York to Jackson, we’d flown to Atlanta first and laid over for two hours. All this in order to see some tiny long-distance reseller Rick was interested in. I didn’t quite see the appeal, but I trusted Rick and figured he knew what he was talking about. Plus I’d never been to Jackson. If my move to Merrill was about seeing the world, wasn’t a hotel room in Jackson as exotic as one in Jakarta?

The company was called LDDS, an acronym for Long Distance Discount Services, which pretty much summed up exactly what it did. It leased excess long-distance capacity from AT&T, MCI, Sprint, or WilTel, a Tulsa-based wholesaler that installed fiber-optic lines inside its oil pipelines to carry phone calls. LDDS then resold the long distance service under its own brand to small businesses and residential customers. There were hundreds of these Mom-and-Pop-type long distance resellers, and the sector was ripe for serious consolidation. Merging many of these companies would create economies of scale in everything from sales to billing to technology. So keeping abreast of the most successful of these was critical for those of us who covered telecom. Although Rick handled most of the largest resellers, I’d often go with him when visiting a new company.

Rick had first brought this company to my attention right after we started at Merrill. Investors were asking about this LDDS outfit, he said, and he had to figure out what the deal was. I got the picture, although I already felt we were overextended: resellers were hot, in part because Jack Grubman had been the first of the rated telecom analysts to initiate coverage, with very positive ratings. Now the rest of us were playing catch-up while Jack enjoyed the better access and attention from these executives that came from having been the first to the party.

Our taxi pulled up to a seedy, sorry-looking Holiday Inn in the middle of downtown Jackson that just happened to be across the street from the equally forlorn LDDS world headquarters. We could have stayed somewhere more deluxe, but the choices were limited and I, by this time, valued 15 minutes more of sleep a lot more than some ultracreamy shampoo in a
hotel room farther away. As I got ready for bed, I thought about this peculiar Wall Street ritual: the company visit.

The first visit to a public company is a weird combination of brownnosing and shoe-leather detective work. It’s an analyst’s obligation to thoroughly kick the tires of a company, to determine whether or not to launch coverage of the stock and, if so, where the gray areas and potential weaknesses lie. After all, the only thing worse than missing out on a hot stock is leading your clients into a bad investment and actually losing their money.

There was another side to the company visit too: the attempt to make nice with the management and gain their respect, or at least their belief that I could influence their company’s stock price. If I was able to, they might be more forthcoming with information that would give my reports an extra edge, allow me to host meetings for them, or agree to speak at my conferences. Indirectly, there was the hope that they’d also do some of their banking with Merrill, which might reflect well on me.

Hence, the ideal scenario for analysts was to find undervalued stocks, recommend them to investors, watch the stocks rise by virtue of good earnings reports that the analyst, ideally, had predicted, humbly accept credit, intelligently talk strategy with company executives, and then let the bankers try to sell the company M&A (merger and acquisition) and financing services.

All of these things were on our minds the next morning, October 4, 1993, at 9:30, when we walked into the dingy headquarters of LDDS. It looked more like a two-bit actuary’s office than a national telecom company. But that was the essence of this company, a no-frills, cheapskate approach to telecom founded by Bernie Ebbers, a one-time gym teacher and milkman who got the name for his company from a waitress in a diner. As the legend goes, she wrote LDDS, for “Long Distance Discount Services” on a paper napkin as she served Bernie and his three buddies coffee. Never would a napkin receive such iconographic status, as LDDS went on to become MCI WorldCom, the most celebrated—and later, reviled—company in telecom history.

We were led into a conference room, where we were joined by the CFO at the time, Charles Cannada. Rick had prepared a list of questions, and we spent about 90 minutes discussing virtually every aspect of the business, from the cost of local access to the various sources of revenue. LDDS had already made some 50 acquisitions, all of which, it claimed, had been successfully assimilated into the company’s operations and generated lots of cost savings in the process. The strategy was classic “roll-up:” buy the little
guys, squeeze the costs out, and plow the savings into more acquisitions. When we probed further on the acquisitions front, Cannada suggested that we wait to talk to Bernie, the CEO, since he made all the major M&A decisions for the company.

Finally, Bernie Ebbers walked into the room. He was tall and thin, with an easy, long-limbed jauntiness about him that projected a casual confidence. Rather than the classic business suit the rest of us wore to meetings, Bernie dressed in cowboy boots, slacks, and a narrow string tie. He was from western Canada originally, but had come down to Mississippi for college on a basketball scholarship and stuck around, becoming a gym teacher and then buying a motel business before giving the telecom sector a whirl. I couldn’t decide whether he had deliberately dressed down to demonstrate how informal and approachable he was or whether he had dressed up in his very best duds.

Bernie didn’t kiss our asses, probably because in the 10 months since Jack Grubman had launched coverage, the stock had shot up 63 percent. Jack had been the first to discover and tout the company to investors, and Bernie clearly appreciated it. LDDS had also just inked another acquisition—Advanced Telecommunications Corporation (ATC), a medium-sized Florida reseller whose CFO, a young man from near Albany, New York, named Scott Sullivan, would soon join the company as treasurer. A year later, in December of 1994, Scott was promoted to CFO, replacing Cannada. Bernie, Scott, and Jack would together create a partnership that would bring all of them riches and accolades for many years. Ultimately, however, that symbiosis would turn sour, creating a disaster not only for the three of them but for practically every investor and employee in the sector.

Bernie, Rick, and I had a pretty freewheeling conversation. We asked him whether there were more acquisitions to be made; yes, he assured us. We asked whether he’d have to sell out to a network company like Sprint or MCI at some point. He intentionally smiled at the
selling
question, but never in our wildest dreams did it occur to us that he’d end up actually trying to
buy
both of those much larger, established companies.

Bernie asked us questions, too; he seemed particularly interested in whether the Street preferred organic, or internal, growth to acquisition-fueled growth. He didn’t ask us about how institutional investors viewed telecom, but he did ask about the types of stocks that Merrill’s brokers liked. He clearly saw Merrill as a conduit to the individual investor.

Rick thought Bernie was a cool guy. He might be cool, I thought, but
there was also definitely something a little off. I couldn’t get a handle on him. Was he a smooth-talking salesman or the real deal? He was so different from the other telecom execs, who to a man were buttoned up corporate straight men with long careers in the industry. But a former P.E. teacher? What could he possibly know about telecom—or P/E ratios, for that matter?

For lunch, Bernie and Charles took us across the street to the Jackson City Club, at the top of a local bank building. It was probably the best view in Jackson, but it wasn’t the Rainbow Room. We helped ourselves to the buffet lunch (I took it easy—southern fried food did me in almost as quickly as Indonesian) and kept talking. When we returned, Bernie invited me into his office while Charles took Rick back to the conference room. Clearly, Bernie wanted to have a private chat with me. As I sat in front of Bernie’s large, virtually empty desk, he looked me in the eye and pulled out a two-inch-thick loose-leaf binder. “Dan, you guys were asking a lot about additional acquisition opportunities,” he said. “Let me show you our list.” My eyes got big. Was he going to show me his planned deals? That would be absolutely proprietary information—info that, if I passed it along, could make my clients millions. Of course, having that information in advance, if he actually went ahead with the deals, would be the textbook definition of insider information. I just looked at him.