Part 13 (2/2)
In contrast, Global's president, David Walsh, substituting for CEO Tom Casey, and Joe Nacchio were just as ebullient as could be Joe exulted over the strong demand Qwest had seen in January, while Walsh confirmed the first quarter's positive outlook
Perhaps because I was no longer reco his stock, or perhaps because his stock was in free fall (having plummeted from 41 to 16 over the last year), Bernie Ebbers didn't speak at this year's event Yet WorldCom was unquestionably the main topic of discussion in the hallways, as it had been everywhere I'd gone for the past few months On January 22, 2001, Fortune Fortune published a piece, ”Can Bernie Bounce Back?” that described hiht ood takeover candidate published a piece, ”Can Bernie Bounce Back?” that described hiht ood takeover candidate1 I didn't know if anyone was truly thinking about buying WorldCoht it would be an incredibly stupid , with the stock at 2275, and said: ”We remain on the sidelines on WCOM”
By the ti WorldCoht buy WorldCo News later that day asked ht Bernie would sell the coh he supposedly had been looking for 50
”In a New York minute,” I said offhandedly
”Who could afford WorldCom?” he asked
”That's the proble-distance business, deulatory review2 If that was Bernie's way out of the fix he was in, he was in big trouble If that was Bernie's way out of the fix he was in, he was in big trouble
Global's Insider Game It should be obvious by now just how unevenly information travels on Wall Street Of course, the individual investor gets the least infor field is not level for institutional investors that aren't as big or as powerful or don't have as many votes in the II II survey as others, or for those who si There are the official rules and then there is the way things really are survey as others, or for those who si There are the official rules and then there is the way things really are
A perfect example took place on June 14, 2001, when I sponsored a private roup of seventeen carefully selected clients As it turned out, a lot of hedge fund guys ca names as SAC, Pequot, Galleon, and Chilton Some of the to hear some bad news that would drive the stock down They wouldn't be disappointed
The 's New York headquarters It was a very modern space, with lots of black and silver and a sleek new-economy feel to it The schedule called for an executive froory of the company to make an inforot ready for the 2:00 PM PM 's fourth CEO in three years, Tom Casey, a former banker at Merrill and lawyer to telecom companies, stride into the room with Global's president, David Walsh, by his side To to start, I was surprised to see Global Crossing's fourth CEO in three years, Tom Casey, a former banker at Merrill and lawyer to telecom companies, stride into the room with Global's president, David Walsh, by his side Toenda
The turnover at the top of Global had been worrisome-the stock traded down every time one of the CEOs left-but at the saeous amount of money in salary and stock options (Bob Annunziata left with 16 million for 11 months of work) that no one was surprised when they headed off to the beach after a year or so
Yet later it was learned that Tom Casey's predecessor, the previous CEO, Leo Hindery, convinced that Global Crossing's business was not as strong as everyone believed, had written a devastating memo to Chairman Gary Winnick at the tih this wouldn't be discovered by investigators until the following year Leo predicted the coes ”Like the resplendently colored sal up river to spawn, at the end of our journey our niche too is going to die rather than live and prosper,” he wrote ”The stock market can be fooled, but not forever, and it is fundaour bootie all over the world, [we should] sell ourselves quickly to whichever of the six possible acquirers offers our shareholders the highest value”3 But the booty shaking apparently hadn't attracted anyone, so here was Casey, standing all alone, his booty still He wanted to chat with the group before the sales presentations began, so I introduced hiht down to business Casey asked what he said was a ”hypothetical” question: ”What would you guys think,” he said, ”if we stopped selling IRUs and instead sold capacity only via shorter-terhts of use, were long-terhts to use Global's fiber-optic network-its main asset
Tom Casey's ”hypothetical question” immediately raised eyebrows in the room Most of my seventeen clients had their BlackBerries and, boy, did a lot of thuet a workout Just about everyone in the room understood in a split second what I did-that Globaltrouble for the stock To its policy, nor had he warned that its forecasts were in jeopardy, but his hypothetical question caused everyone to ask their own question, which was so: ould he even consider voluntarily halting the IRU gravy train unless custo off it?
I immediately asked for more Hoould they make this transition, and ould they consider it? Others asked Toher price competition or slower demand, and whether, if Global made this move, it would be a temporary or permanent decision His answers didn't satisfy anybody Everyone orked for a hedge fund, and therefore was able to sell stock short, instantly sent a note back to their trading desks: ”SHORT GX!” In the course of one hour, fro's stock dropped 17 percent, froain the insider's advantage the big guys had over the little guys Other than those of us in Global Crossing's conference roo-not individual investors, not institutional investors, not even those watching CNBC and other financial news shows
At 5:00 PM PM, Tom Casey and Global's IR director, Ken Si, this one a dinner hosted by Jack Grubman I rushed back to the office and prepared a report withIt see to the customer and thus future revenues would be lower I left at about 10:00 PM PM and Ido and Ehud stayed at the office to ot hoo Ehud asked if he could run the report by Ken Sietconcrete and in writing I said fine At around ht, Ehud and Ido called back to say that Ken had awakened Global's CFO, Dan Cohrs, at the St Regis Hotel and that he would soon be calling us to talk about it and Ido and Ehud stayed at the office to ot hoo Ehud asked if he could run the report by Ken Sietconcrete and in writing I said fine At around ht, Ehud and Ido called back to say that Ken had awakened Global's CFO, Dan Cohrs, at the St Regis Hotel and that he would soon be calling us to talk about it
As tired as I was, I was happy about this Cohrs knew the forecasts cold and thus we'd at least get a sense of whether our nuher than theirs Either e'd be s again On the line were Ehud and Ido, a very sleepy and annoyed Dan Cohrs, and an equally sleepy but not-yet-annoyed me The CFO didn't waste any time
”Dan, do you have to publish this?” he asked in a raspy voice ”I don't see why you have to or why you would want to It was a private , Tom's comments weren't official, in fact they were hypothetical, and we are not changing our guidance at all We said sis at Jack's dinner and Jack had no proble”
Well, hooray for hi, or Casey toned down his co how much they had scared the earlier audience? I had no idea, but I did know that I didn't appreciate Cohrs's atteoing to follow Grub stuff
”I understand your points and I appreciate them,” I said, as I had now learned to at least pretend to be listening before I delivered the news people didn't want to hear ”However, I already had some concerns about my forecasts that were amplified by the discussions today”
Cohrs cut ulation Fair Disclosure] proble with the SEC touidance” I didn't know if hethat the coroup that it hadn't shared with everyone-exactly what Reg FD prohibited
”Hold it right there,” I said ”I don't know if you have changed guidance or not But I do know that I'm more concerned about your revenue outlook, and I need to lower my forecasts as a result These are my forecasts,you lowered guidance We are siize if this puts you in a corner, but I just have to do it” forecasts I apologize if this puts you in a corner, but I just have to do it”
Cohrs, quite pissed, signed off It was now 1:30 AM AM and ere all exhausted The next , infor our forecast for Global's 2001 revenues by 8 percent Our report was published a fewwith the SEC and ere all exhausted The next , infor our forecast for Global's 2001 revenues by 8 percent Our report was published a fewwith the SEC
Also that : True Feedback True Feedback [e” appeared ”Contrary to co to uidance GX did not say it was changing [its] business model to a leased vs IRU business Pressure on stock overdone Reiterate buy” [e” appeared ”Contrary to co to uidance GX did not say it was changing [its] business model to a leased vs IRU business Pressure on stock overdone Reiterate buy”
We were onto sorade the stock fro, because Global was now at 866 a share-significantly below et price of 14 I concluded it was simply too cheap to bail out now
A feeeks later, I received a 's chairman I called back and his secretary hooked me into his cell phone, as he was en route to investment banker Herb Allen's exclusive annual po of business movers and shakers held every year in Sun Valley, a fact he wasted no tih Gary's tone was polite, his words were biting
”I heard you are predicting a revenue miss in the second quarter,” he said ”I just want you to know that you will be proven wrong”
I suppose those were intended to be fighting words, a threat in the sense that I would be estill on the stock, I was actually hoping he would be proven right And, given that the quarter was already over, I figured he-if anyone-should know Better to be wrong on the forecast but right on the stock, I figured
Nacchio's Wrath Just around the time of Gary Winnick's phone call, The Wall Street Journal The Wall Street Journal ran a story, ”Overbuilt Web: How the Fiber Barons Plunged the Nation into a Telecom Glut” ran a story, ”Overbuilt Web: How the Fiber Barons Plunged the Nation into a Telecoued that the race to build out capacity had os of Level 3's Jim Crowe and Qwest's Joe Nacchio than the need for more fiber Still, Qwest came out as the winner in the piece, mainly because it ell-diversified with its ownershi+p of US West It was clear that the biggest losers were incu-distance companies such as WorldColut, co up corporate and governh-speed data and Internet services and hitting their nuued that the race to build out capacity had os of Level 3's Jim Crowe and Qwest's Joe Nacchio than the need for more fiber Still, Qwest came out as the winner in the piece, mainly because it ell-diversified with its ownershi+p of US West It was clear that the biggest losers were incu-distance companies such as WorldColut, co up corporate and governh-speed data and Internet services and hitting their numbers
Not everyone, however, believed that Sian Stanley's fairly new teleco Qith an Outperforan Stanley's equivalent of CSFB's Buy A serious Irishman with a decent reputation, I didn't know him too well, but had seen some of his reports and they were excellent On June 20, 2001, he published a report, co-written with two other Morgan Stanley analysts, lowering his rating on Qwest to Hold based on a bunch of arcane accounting concerns
I studied the report carefully and reviewed each of its argu technical points about the accounting, I also thought these items would not affect future revenues or cash flow, the two ele The report also questioned whether Qwest's current rate of revenue groas sustainable, without showing any real evidence to the contrary I concluded it was just Flannery's hunch My analysis of Qwest's recent financial reports showed the opposite
At a time when most analysts were still bullish on Qwest, Siood old Joe Nacchio, as you uy pay Later that same day, Joe held a conference call to respond to Simon's report I couldn't re a conference call specifically to refute an analyst's report I thought it would be an interesting call, and I was right
”I'd like people toclearly,” Joe said ”There are no accounting issues or improprieties in Qwest's financial reports Letissues or irity are not going to be tolerated,” Joe raged, ”irregardless [sic] of whowhat I used to think was a reputable, branded firan Stanley This report is laced with innuendoes that are unsupported and are a direct attack on our intelligence and our integrity I'm extraordinarily disappointed hat I consider unprofessional and irresponsible behavior from a major investment bank”5 Joe didn't stop there To an audience of over 1,000 fund ers and analysts, he said he had called Phil Purcell, Morgan Stanley's CEO, and reaan Stanley would no longer be considered for Qwest's investnments and cast aspersions on the firan Stanley to be taking this approach with us, while at the sae financings in front of them, would make me look twice,” he shouted Thereafter, Si to its executives He also was blocked fro questions on Qwest's investor calls6 I was hardly surprised to hear this, given what I'd experienced with Nacchio But I couldn't believe how far he had gone Intio public with it not only was outrageously unprofessional but also ainst hireed with Siht to his opinion One friend of mine on the buy-side, ned lots of Qwest shares, even circulated a letter, to be sent to Nacchio, iladly signed it
I was torn about what this meant for the stock On one hand, I had never been a fan of Joe's, and this act certainly seemed like that of a CEO who had lost control On the other hand, I disagreed with Si at 30, was so cheap that it would be silly for investors to sell out now I felt that the stock had fallen too far on the news, and that investors would be wise to take advantage of this temporary dip to load up on the shares It reminded me of the irrational arb spread between Qwest and US West share prices when I was skiing in Vail
It's wortha co There are very few stocks that are not worth buying at soame, and smart investors look for mispriced or misunderstood stocks Often, the ements that have stumbled Qwest seemed to fit the bill: it looked as if it had been beaten up nificant accounting issues than for fundamental business reasons I felt that this would correct itself over tirow its revenues and operating cash flows as it had for the last few quarters price Investing is a relative game, and smart investors look for mispriced or misunderstood stocks Often, the ements that have stumbled Qwest seemed to fit the bill: it looked as if it had been beaten up nificant accounting issues than for fundamental business reasons I felt that this would correct itself over tirow its revenues and operating cash flows as it had for the last few quarters
Although the fiber glut was beco the Level 3s of the world didn't-a true blue, nuts-and-bolts local phone cotie plus and a substantial hedge against the long distance rade the stock, I decided to hold fir and countered the Morgan Stanley arguments in a conference call that I hosted for buy-side clients It would prove to be a horrible decision
The analyst Plays the Villain Life as an analyst had always been busy, but suddenly our job see Day Groundhog Day than anything else: hear bad news, absorb it, lower estis, try to quickly interpret it for clients, wash, rinse, repeat Gone were the deals and the road shows plugging IPOs for thestockscapital ThisIt was the one benefit of the downturn than anything else: hear bad news, absorb it, lower estis, try to quickly interpret it for clients, wash, rinse, repeat Gone were the deals and the road shows plugging IPOs for thestockscapital ThisIt was the one benefit of the downturn
Yet just when I should have been usinginto the numbers behind all the companies I covered, I simply slowed down I don't know if I was burned-out or depressed or preoccupied by the carnage around ht have helpedwas perfect I had a great staff with the skills and brains to do it, and a lighter schedule I should have focused ht have ledused to boost revenue numbers I didn't
As the s, turned into attack dogs And what these dogs dug up put everyone in my world on the defensive The ot ripped off, while every big executive or Wall Street insider walked away, pockets bulging with ill-gotten gains But it was not quite as simple as that Greed is a very deuys who picked up their chips and walked away at the right ti on the pass line and ca shots who truly believed that their co the world, and others who used their insider connections and infor swinging dicks, geniuses, or industry power brokers, suddenly everyone on Wall Street bore the scent of scandal The biggest fingers pointed at analysts, who had been lionized as ”power brokers” on the way up and noere being uru days were clearly over What had beco to become notoriety, and even those of us who had tried to stay on the straight and narroere beginning to be looked at with scorn We were crooks, manipulators, swindlers, or-best case-inco
In soest winners in the bubble econoest losers First to fall had been the Internet analysts, the et of Merrill Lynch and Mary Meeker of Morgan Stanley In March of 2001, Henry Blodget's role as analyst-cuhted in a series of articles in The Wall Street Journal, The Wall Street Journal, and subsequently an investor brought a suit against hiht were dogs Merrill would settle the suit a fewa tidal wave of similar lawsuits In May 2001, and subsequently an investor brought a suit against hiht were dogs Merrill would settle the suit a fewa tidal wave of similar lawsuits In May 2001, Fortune Fortune ran a cover story, ”Can We Ever Trust Wall Street Again?” featuring a very unflattering, sinister-looking picture of Mary Meeker ran a cover story, ”Can We Ever Trust Wall Street Again?” featuring a very unflattering, sinister-looking picture of Mary Meeker7 I didn't know either of theht the accusations were still far fro the bull's-eye After all, Merrill hadn't really been all that successful in the technology banking sphere, and neither of these analysts seemed to have used their insider information and connections to vault theht Grubht the accusations were still far fro the bull's-eye After all, Merrill hadn't really been all that successful in the technology banking sphere, and neither of these analysts seemed to have used their insider information and connections to vault theht Grubman had
But Jack quickly beca WorldCo, nor were the seely monthly death knells of the startup carriers he'd reco forThe anger went beyond the press to his own clients and brokers, who suddenly choreat inside connections to these companies, they wanted to kno could he not have known that they were in trouble? I was sure that finally, Jack's dealings were on the verge of being exposed, and I looked forward to that ulators and the politicians woke up fro hibernation with hearty appetites The dae was already done, but that didn't stop anyone fro as if they'd suddenly discovered that the earth did, in fact, revolve around the sun Led by Louisiana Republican Richard Baker, the House of Representatives announced it would hold hearings on the topic of conflicted research Arthur Levitt, the chairned in early 2001 His teer, announced in June an investigation into conflicts of interest on Wall Street, focusing particularly on analysts' own holdings of stocks they may have recommended At the end of June, the SEC finally issued an alert to investors identifying what it called ”key issues that could compromise the objectivity of the research”8 There were also rueneral, Eliot Spitzer, was launching his own investigation into conflicted research There were also rueneral, Eliot Spitzer, was launching his own investigation into conflicted research
In theto affect senior executives at the banks as well One of the first to take the fall was Allen Wheat, the CEO of CSFB In December of 2000, The Wall Street Journal The Wall Street Journal had reported that the SEC and the US Attorney's Office in Manhattan were investigating the way in which investations were that CSFB, and possibly other banks, were involved in a kind of kickback schee funds would receive large allocations of shares in hot technology IPOs if they agreed to pay higher-than-normal commissions had reported that the SEC and the US Attorney's Office in Manhattan were investigating the way in which investations were that CSFB, and possibly other banks, were involved in a kind of kickback schee funds would receive large allocations of shares in hot technology IPOs if they agreed to pay higher-than-normal commissions