Part 9 (1/2)

Exactly six weeks later, on May 17, 1999, Global announced another deal: it was acquiring Baby Bell US West, even before its Frontier acquisition had closed I had heard nothing about it until the evening before, when the Merrill bankers asked o over the Wall and show up at the Rainbow Rooh questions that the two CEOs, Sol Trujillo of US West and Bob Annunziata of Global, should be ready for before their presentation to analysts later thatGlobal, and Merrill's teleco Global's prey, US West

Sol Trujillo, a friendly but intense career US West employee who had worked his way up to the top, clearly saw this deal as a way to transfor telecorowth new-economy outfit He had been enamored with the buzz-and stock prices-these new-econo ever since he had attended the Vortex Conference at Laguna Niguel a year earlier

But neither Global Crossing's nor US West's shareholders were enthusiastic about the deal The conservative US West holders saw it as radical and risky, while Global Crossing's holders, new-economy-Kool-Aid drinkers, saw it as a waste of money on old, tired assets Global's shares, which had hit an all-time record of 64 a share by May 13, fell 30 percent in three weeks, closing at 4575 on June 2 US West shares fell, too, by 15 percent, in part because many of its shareholders lacked confidence in Global

The pressures on Sol to find a better deal wereAnd it didn't help matters any that the analyst at their invest but factual research on his company, US West The US West executives were livid, especially because they saw Jack Grubressive buy reco In effect, Jack had written a glowing prognosis for a h Salo through

US West couldn't understand as going on After all, I'd had an AccuUS West deal was announced What had happened to it? Al Spies, US West's CFO, feared that investors were perceiving my silence as opposition to the deal ”How can your best friends become your worst enemies?” Al asked one of our bankers I wasn't an eneations of conflicts of interest But that didn't do thee foundered, over at Qwest Coest andits CEO, Joe Nacchio, to do so stock Eventually, he called the telecom bankers at DLJ, one of the few unattached fir frenzy US West had hired Lehan Stanley was advising Frontier, and Salo side

Joe told the DLJ bankers to prepare a bid for both Frontier and US West On the evening of Sunday, June 13, 1999, while Qwest's PR team called reporters, Qwest's chairman, Phil Anschutz, called Sol Trujillo, and Joe Nacchio called Frontier's CEO, Joe Clayton, to explain their proposal Qas offering a total value of 32 billion, or 6137 a share in Qwest stock-only a dollar more than what Global's offer was noorth-for US West; and 114 billion, or 6170 a share for Frontier, roughly equivalent to Global's 62 offer Joe and Phil were assu partner and thus didn't need to outbid Global byWhen the markets opened on Monday, Qwest shares sank faster than a mobster in cement shoes They fell 24 percent that day, from 4488 to 3413, and proceeded to fall another few dollars to 3250 over the next teeks Apparently, investors orried that the bidding ould escalate into an out-of-control war of egos, and that Gary Winnick and Joe Nacchio were violating their new-econo their souls to the old world

Believers asked themselves, Why would any corowth in demand for Internet communications waste its valuable stock on an old-school company whose copper wires were already obsolete? Or,their investors didn't-that their stock prices were overinflated, and that their true business prospects weren't good enough to go it alone? Both choices spooked investors, and the result was a ave both possible combinations the Bronx cheer

Nonetheless, Qwest's CEO and its chairood losers, decided to up their offers by 4 billion On Wednesday, June 23, Qwest issued a press release announcing it was now offering 69 for US West shares and 68 for Frontier shares Several weeks passed with no apparent movement Yet behind the scenes, I subsequently learned, both co as hurting everyone Eventually, both Joe and Gary sent out feelers via their bankers to look for a compromise, or at least a cease-fire A harried, cootiations ensued Bankers and lawyers scraos appeared to have been wrestled back to Earth Global and Qwest agreed to a truce: Qould get US West for 69 per share, and Global would get Frontier at 63 per share All four boards voted approval, and the PR teaan to prepare press releases

But that, of course, would have been too easy Aoccurred as the lawyers and the bankers weretouches on the docuotiations, Phil Anschutz, Qwest's chairman, had told Sol that he and Joe would be co-CEOs of the newly ed companies, or at least that is what Sol understood When the US West board voted in favor of the er, the deal they approved had the poith anyone, particularly not with so his 26 years at AT&T So when someone frouage describing the setup, he blew a gasket He ran down the halls of DLJ in search of Tom Middleton, the Merrill banker, and yanked hi conference room As Tom told me years later, Joe closed the door, poked To to be co-CEO with that bozo, you are wrong! I don't knohere that idea ca to stay cool, told Joe that that was the deal that had been approved by US West's board, and for that to change, there would have to be another board vote ”US West will have half the board seats,” Toive them veto power over all major decisions They don't need to have a co-CEO and, besides, what a stupid idea You better go back and tell them we have a serious problem here”

It was now 6:00 PM PM and the docu finalized When Sol heard about Joe's threats, he was not a happy est shareholders liked the Qwest deal and were far less concerned about his ego than their financial returns They respected Joe as a terrific telecoer, even if his brash personality rubbed so way, and many felt that Joe's style was exactly as needed to make it in this Wild West telecom industry More important, with the deal's terms already fully vetted in public, Sol could not possibly ask his board or his shareholders to walk away from the deal because he was not happy with his own role and the docu finalized When Sol heard about Joe's threats, he was not a happy est shareholders liked the Qwest deal and were far less concerned about his ego than their financial returns They respected Joe as a terrific telecoer, even if his brash personality rubbed so way, and many felt that Joe's style was exactly as needed to make it in this Wild West telecom industry More important, with the deal's terms already fully vetted in public, Sol could not possibly ask his board or his shareholders to walk away from the deal because he was not happy with his own role

Sol knew Joe had maneuvered him into checkmate Sol reconvened his board by phone and recommended approval of the new deal with himself as co-chairman and Joe as CEO and co-chairman Joe would run every aspect of the coely ceremonial US West's board approved the recommendation And poor old Sol retreated to his hotel room

I hadn't been over the Wall for any of this, and I'd been happy about that Froe mess But then Tom Middleton called He told me that Joe and Sol wanted the research analysts at their bankers' firms to help the questions, reviewing the slide presentations, and playing devil's advocate With his usual sarcasolf ca to the year before, when I'd canceled golf school after Bell Atlantic announced it was buying GTE The funny thing was that ere about to go, and this tio, and this tireat,” I said ”Congratulations to you But, in fact, we are signed up for golf cao I don't care if I have to do 10 conference calls fro”

I wasn't trying to be ornery, but I'd been through this stuff before, and frankly, it had lost sory withon the deal But, realistically, what value was I really going to provide at this point?

Tom and I both knew the analysts would sit around all weekend with their feet up on so, at which point Sol and Joe, although they hated each other, would stroll into a conference roo to be blood brothers What was the point of skepticisreened, and The Wall Street Journal The Wall Street Journal and and The New York Times The New York Times had already been spoon-fed the scoop? Most i paid between 10 million and 30 million Why would any of the bankers want a research analyst to ask any skeptical questions at this late stage in the game? Even I saw the downside of that one had already been spoon-fed the scoop? Most i paid between 10 million and 30 million Why would any of the bankers want a research analyst to ask any skeptical questions at this late stage in the ga I wasn't going to change ood-bye,like ”I should have been an analyst” But despite everyone else helping Joe and Sol get ready, both of them were in for another disappoint Global Crossing shares fell heavily, from 4638 the day before the announcement to 26 over the next two months, while the other acquirer, Qwest, dropped 16 percent, US West fell 7 percent, and Frontier slipped 17 percent in the same period

To Publish or Not?

By mid-July, it had been exactly fourother than factual suh I had ht was the best decision at the ti to suffer for it I had been essentially mute on four of the major companies in my industry for months while my competitors, whether they worked for the banks involved or not, continued to speak out The Merrill sales for so stocks, and I couldn't say anything during the most important period of the year for me-the time when the II II votes were cast votes were cast

I feltdidn't see to it, and I, as the lone holdout, was the only person paying the price So in a move that now looks blatantly inconsistent, I decided to resue of Qwest and US West I issued reports on each of thes, on July 21

My earlier conversations with the lawyers didn't really play into it at all, at least not at first I liked the way the two deals had ended up In the QwestUS West deal, I thought the decision to dramatically cut US West's dividend ise, since it freed up h-speed Internet access, as Plus the stocks had fallen so far that they were now good values Based onas much as 33 percent and US West's 28 percent

But I wasn't totally sanguine either ”Our rating is Accumulate instead of Buy,” I wrote ”Despite such attractive upside, we anticipate the usual pressure fro arbs and the approxier close We are also concerned about increasing wholesale [long distance] pricing pressure and new initiative startup costs at both coan and I immediately started to work on a si and Frontier But, within a few days, I began to have second thoughts Merrill was going to make about 20 million, butconsummated Since the shareholder votes hadn't yet happened, it occurred toabout any of these four companies My opinion, if positive, could be interpreted as trying to influence shareholders to vote yes on a deal that Merrill hadon I asked the compliance folks about it, and they reminded me that I was cleared to write whatever I wanted thanks to the SEC's No-Action Letter

But I quickly realized that regulation or no regulation, I had just violated the principles I had so steadfastly held to back in March when this particular four-way M&A episode got started I began to fear that ht think my report was not an honest one, and that it was somehow tainted by the interests of Merrill's bankers

So I h I couldn't undo the Qwest and US West reports and their Accu on our resu and Frontier until the shareholder vote was over As with every move an analystunhappy This time it was Global's chaired that whilebullish reports, I hadn't yet published an opinion or forecasts for either Global Crossing or Frontier

Then there was the fact that I had already written such reports about US West and Qwest My position was obviously contradictory After all, Global had hired Merrill to be advisers Wasn't it reasonable to expect so with Dave Komansky, Merrill's CEO, and the bankers told me the lack of research ”support” would probably co to , I felt that I was really pushi+ng it this ti precedent by writing on the first two co to defend e on the other two I had ignored the shareholder-vote conflict issue in one case and noas invoking it along with gested that I should publish on the second deal just as I had on the first On the other hand, trongs didn't uns and not publish until after the Global Crossing and Frontier shareholder votes were complete, which fortunately was just a few nored the shareholder-vote conflict issue in one case and noas invoking it along with gested that I should publish on the second deal just as I had on the first On the other hand, trongs didn't uns and not publish until after the Global Crossing and Frontier shareholder votes were complete, which fortunately was just a few Frontier deal had been approved by both sets of shareholders, I resu By the end of the year, investors' negative reactions to the deals had dissipated in the ongoing frenzy for Internet and teleco shares bounced back to 50 per share, not as high as the 64 they had reached on May 13 but still more than double the 23 they had traded at a year earlier And Qwest shares had recovered, too, to 43 per share, down froh of 48 but still up 72 percent in the last year Not bad for coenerated enorer, and had turned themselves inside out fro both new-and old-economy assets I felt a bit schizophrenic myself

7 The Leak, the Ambush, and the Dupe The Leak, the Ambush, and the Dupe

1999

The contract was ready for signing All I had to do was put pen to paper and I'd have a nifty 15 million bonus that I hadn't even expected, in addition to having doubledof all was the fact that the bank would never evenless

”Shame on Them?”

IN THE FALL OF 1999, 1999, Institutional Investor Institutional Investorof the All-A at the trends in the research business and the changing role of the research analyst For the third year in a roas the second-ranked telecom analyst, behind Jack Grubman I wasn't surprised at all: he was not only the best-known analyst in telecom but also the best-known analyst on all of Wall Street Some hated him, soazine published its annual ranking of the All-A at the trends in the research business and the changing role of the research analyst For the third year in a roas the second-ranked telecom analyst, behind Jack Grubman I wasn't surprised at all: he was not only the best-known analyst in telecom but also the best-known analyst on all of Wall Street Some hated him, some loved him, but everyone listened to what he had to say

And if you really listened to what he said, it was pretty a II II interviewed Jack as part of its cover story, and he was proud to speak out, a ressive actions in favor of the co Saloest deals on the planet interviewed Jack as part of its cover story, and he was proud to speak out, a ressive actions in favor of the co Saloest deals on the planet

”Though soet hi out on deals, many more rave about the connections he's made with top telecoazine wrote

Jack's response was bold, even for hied so dramatically You try to do your best to stay objective, but it's becoe,' says Grub that disclosure of potential conflicts to clients is essential 'They knohen I have an ax to grind-I tell them There are known conflicts and potential land mines But anyone who steps on one, it's really shame on them'”1 Earlier that year, Jack even announced proudly to a rival banker that ”when it comes to Bernie and me, there's no Chinese Wall” He also sent a blast voice ersa competitor at PaineWebber who had predicted that WorldCo Nextel, a wireless cootiations had recently been broken off ”I was there and I didn't see [the PaineWebber analyst] there across the table,” he bragged ”Believe ether This deal is dead!”

Jack was si all of our noses in the fact that he was on the inside of these negotiations and the rest of us weren't-so how could any of us predict the future better than him? The New York Ti the voice ured Arthur Levitt's SEC would now be propelled into action, even if it hadn't before published a short article suured Arthur Levitt's SEC would now be propelled into action, even if it hadn't before2 This was typical Jack: brash, arrogant, reckless, and-literally-daring He was daring the authorities to catch him Jack seemed to feel he could tell the world that he knehat he was doing was dangerous and possibly wrong, but somehow he felt he was so clever that he could fly above the fray Shame on them?

The 14 Billion Leak On September 8, 1999, about 200 Wall Street investors and analysts who covered the telecom sector arrived at the Kansas City Hyatt for an all-day eiant Thebefore in the hotel's ballrootiet a seat next to Bill Also seated at the table were eight other analysts Some were from the sell-side like enon and poached salmon and sipped red wine, it was business as usual foron at Sprint and then turn that edge into value for my clients

We had about 30 minutes before Bill Esrey was scheduled to speak to the entire rooer to sneak in a few questions that ht tease out a little inforicVirtually all of Sprint's coht up in the epidemic of M&A activity So when the conversation turned toward possible ers or acquisitions on Sprint's part, we all leaned forward in our chairs Would it be better, I asked, for Sprint to partner with a Baby Bell such as Verizon or BellSouth, or to n-owned coave the expected pluses andto lean away from both moves As often was the case with Bill, who seeive us nothing to go on

Finally, I threw out the question none of us expected a serious response to: -distance company, like AT&T or MCI WorldCom? It was a very unlikely scenario, since it would certainly set off alarm bells in the world of antitrust, and since Bill hied company So I was surprised to hear him suddenly launch into a discussion of the pros and cons of a WorldCoer He remained firmly in the theoretical, but it seehed the cons Bill said the cost-savings would be huge When probed, he said he didn't think the governrounds Uncharacteristically, he didn't even criticize Bernie Ebbers and the rest of WorldCoement It was odd to hear the usually reticent Bill Esrey entertaining such an idea at all He wouldn't really consider such a move, would he?

We all wanted to press him further on this, but just then our private tiroup He bounded up on stage with the energy of a fit ranch hand, his bald head reflecting the bright lights With a slight lisp, he delivered an upbeat outlook for the corow 20 percent per year for the next three years, propelledabout any possible deals

When the speech was over, my tablemates and I went out into the lobby for a break Suddenly, the cell phone of one of the buy-side analysts rang insistently It was a banker friend, calling from Ger SprintWorldCoive Sprint 094 shares of WorldCom, or about 70 for each Sprint share, more than 50 percent above its current price If true, it would be enoran to puer, and excite that had not yet been announced? I strained to hear more

As we left the ballroom and descended the steps to the hotel lobby,Jack Grubh the front entrance of the hotel with two telecoroups Shoulders hunched in his oversized, double-breasted suit, he projected the cocky confidence of aon his every word Jack and the two buy-siders had gone out to eat, intentionallyBill Esrey's speech and, of course, the chance to pick Esrey's brain at dinner How could they afford to skip out on these opportunities, which, after all, were the analyst's bread and butter? To skip the dinner and the interaction with Esrey and Sprint's top executives meant they must have felt pretty confident about their own abilities to predict the future Or perhaps they siain far itated, adrenaline on overload, my buy-sider friend spotted Grub to ask Jack,” he said ”Since this involves WorldCom, if it's real, he'll know for sure” He assu and, therefore, that Jack one over the Wall About 30 minutes later, I ran into the investor at the hotel bar ”Dan, Jack says those nuht: 094 WorldCom shares for each Sprint share”

The specificity of the ru had been announced How could Jack know the exact ratio of the deal? Had a Salomon banker or someone from WorldCom tipped him off? Had he been over the Wall and decided to share what he'd heard?