6/30/2017 pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/grubman1.

htm

The Wall Street Journal Interactive Edition -- March 25, 1997

For Salomon, Grubman Is Big Telecom Rainmaker

By ANITA RAGHAVAN Staff Reporter of THE WALL STREET JOURNAL NEW YORK --

It was hardly the kind of promise you would expect from a securities analyst. Sitting in a hotel conference room
in New York last October, Jack Grubman, telecommunications analyst at Salomon Brothers Inc., told Denver
billionaire Philip Anschutz: "I bet I could get you Joe Nacchio." He did. In late December, Mr. Nacchio, the
powerful head of AT&T Corp.'s $26 billion-a-year consumer business, quit to join Mr. Anschutz's small start-up,
Qwest Communications Corp. The move came just months after Mr. Grubman brokered a meeting between the
two at New Jersey's Teterboro airport. Mr. Grubman, one of Wall Street's most respected securities analysts, is
much more than that: He also is a swashbuckling deal broker who can sometimes make or break a telecom
merger or stock offering. This dual role isn't always easy for either his clients or his bosses to swallow. But they
had better get used to it, because Mr. Grubman is emblematic of a new breed of Wall Street analyst. Analysts
increasingly play a central role in snaring investment-banking business. This isn't simply a matter of
accentuating the positive -- toning down negative comments about clients of the firm and using euphemisms like
"hold" for "sell." Some investment bankers have long expected that much of analysts, regarding them as
weapons they can use in making pitches to potential underwriting or merger clients. But because the bankers are
chock full of inside data about the client, a "Chinese wall" has, by tradition, separated them and their
information from the research analysts who recommend stocks. Much of this is changing now. Michael Holland,
a securities-industry veteran, says flatly that "the primary function of research analysts at top investment-
banking houses is to promote the firm's investment-banking product." Dual Role Often companies considering a
merger will call an analyst before calling a banker. And once a securities firm has been hired to do an
investment-banking deal, it may bring one of its analysts part way over the Chinese wall, to do financial
calculations and gauge the likely reception from investors. This dual role obviously is fraught with
complications and potential conflicts; it is a role that is hard to police and is dependent on the analyst's integrity.
"There are no hard and fast federal laws that say you can do this and you can't do this," says William McLucas,
the Securities and Exchange Commission's enforcement chief. "It really is a question of navigating the problem
case by case." Mr. Grubman, says Richard Irwin, who as head of ALC Communications Corp. was a Salomon
client, "has to remember each day he walks in to see a client which hat he has on." By its very nature, Mr. Irwin
says, the situation leaves an analyst "in a compromised position all the time." Fans Among Investors What
separates Mr. Grubman from the rest of the analyst pack is how skillfully he manages to walk the divide
between banking and research, with his credibility intact. Many analysts who try it wind up neglecting their
investing clients. But Mr. Grubman still has a big fan club in the investment community. His early bearishness
on AT&T, one of Wall Street's most important banking clients, has won him kudos from several high-profile
money managers. "Jack has helped me make a lot of money" in several stocks, says Jacqueline M. Cormier of
RCM Capital Management in San Francisco. He does the same for Salomon Brothers' parent, Salomon Inc. Last
year, he helped bring in about $60 million in investment-banking revenue, according to a Salomon executive.
This included $7.5 million in fees for the $14 billion merger of WorldCom Inc. and MFS Communications Co.,
a deal that helped propel Salomon to a seventh-place perch in the world-wide merger standings for the year. Mr.
Grubman had taken an early interest in WorldCom and forged a personal relationship, over pool games and trips
to "greasy hamburger joints," with its chief executive, Bernard Ebbers. Mr. Grubman last year received a hefty
pay package of nearly $3.5 million, making him one of Wall Street's best-paid analysts. His pay is so lofty that
some at Salomon joke about deals as being priced in $3.5 million "Grubman units." He is clearly a Jack of all
trades. His office, filled with "tombstone" mementos of deals he had a role in, looks just like a banker's. Yet Mr.
Grubman strenuously eschews the label. "I didn't want to be a banker," he says. "It's not my nature to grovel."
One morning in late December, Mr. Grubman was wearing his stock-analyst hat, pacing behind his desk and
fielding calls from angry investors. Frontier Corp., a telecom stock Mr. Grubman had been recommending and
just downgraded, had tumbled after it said it wouldn't meet the Street's fourth-quarter profit forecasts. "Absent a
takeover, this stock is dead money," he told a money manager on the phone. "Jack has never really had his heart
in the stock," one client says. But Salomon has a banking relationship with Frontier -- which took over ALC two
years ago -- and from June to December, Mr. Grubman had a buy rating on Frontier. Mr. Grubman concedes
frankly that "a lot of it is the residual from the banking relationship, no ifs, ands or buts." Relationship or not,
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/grubman1.htm 1/3
6/30/2017 pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/grubman1.htm

Mr. Grubman wasn't pulling any punches that day, having just sent out a research note to clients saying of
Frontier: "They've run out of excuses. We've run out of patience." Minutes later, Mr. Grubman donned his
banker's hat and talked deals. A Salomon banker, looking for guidance, told him that a company whose initial
offering Salomon might underwrite, Transcom Technologies Inc., was unhappy with the value Salomon put on
the company. Mr. Grubman told him to send this message to Transcom: "If you want to go with someone else's
valuation, you are not going to get the stock done." Transcom eventually decided to take its chances with
another underwriter, but hasn't yet picked one. Losing Out on Lucent Mr. Grubman's banking forays highlight
the tensions that the new breed of Wall Street analysts face. Rigorous research isn't always conducive to snaring
investment-banking work. Last year, Salomon was one of two major Wall Street firms shut out of the lucrative
underwriting of Lucent Technologies, a $3 billion AT&T spin-off that was one of the biggest initial public
offerings ever. Many Salomon insiders blame Mr. Grubman. Just a week before the bankers on the Lucent deal
were unveiled, Mr. Grubman was quoted in The Wall Street Journal as saying AT&T's repeated restructuring
charges "raise the question, have they really earned any money?" He went on to say he believed such jumbo
charges should be subtracted from earnings over a longer period that would more resemble the time when the
losses were actually incurred. "Wall Street investors are getting the wool pulled over their eyes. They don't
realize the whole earnings are a fake," he said. Though Salomon didn't get a piece of the Lucent offering, Mr.
Grubman is unrepentant. "The worst mistake AT&T made was to give the appearance that we lost the Lucent
deal because of my bearishness." The result, he says, was "I didn't have to think twice about pulling punches on
the company." The stock call pleased investors. "Jack was the only one with the courage to say that AT&T was
going to earn [just] $3 a share" this year, says Robert Gensler, who helps mutual-fund manager T. Rowe Price
decide which telecom stocks to buy. Not long afterward, AT&T brass released profit forecasts that largely
confirmed Mr. Grubman's bearish earnings view. The company declines to comment on Mr. Grubman. Give and
Take So even if his stance hurt Salomon by costing it a lucrative underwriting job, it may have helped the firm
by bolstering a star analyst's credibility. Mr. Grubman first downgraded AT&T to a "hold" two years ago; the
value of an AT&T share bought then has since risen 15%, compared with 53% for the S&P 500. The stock
currently trades at $35. "If Jack had been consistently negative on AT&T in his own outspoken way and the
stock had gone to 40 to 50 to 60, Jack would have been under a lot of pressure internally," one Salomon banker
observes. "If you are going to be flamboyant and aggressive, it helps to be right." Independent as he is, Mr.
Grubman concedes that "banking in general is a tough thing. There is always this push and pull between a
banker and an analyst over what you should say and shouldn't say." Despite his coups -- turning bearish early on
AT&T and the Baby Bells and being bullish on MFS -- he was No. 2, not first, in both the Institutional Investor
analyst poll and The Wall Street Journal All-Star Analysts Survey last year. (Different analysts took the top spots
in the two surveys.) Some of the stocks Mr. Grubman has recommended have just been treading water, such as
McLeod Inc., a Cedar Rapids, Iowa, provider of telephone services. Salomon took it public at $20 a share last
year and later did an "add-on" offering at $28; the stock is now at $18.625. "It goes without saying that if you do
a company's IPO, you are going to have a buy [on the stock], because frankly if you don't you shouldn't be doing
the deal," Mr. Grubman says. But he adds that "for every deal Salomon has done in the last 12 months, I have
personally turned down two deals." Indeed, Mr. Grubman's stature is so high these days that Frank Maturo, a
Salomon banker, recently told a client that "Jack has veto power over what the firm can do or can't do in
telecommunications." Mr. Grubman's clout derives in part from the high regard in which investors hold him.
Two years ago, New York hedge fund Tiger Management Co. netted $100 million after Mr. Grubman
recommended the fund buy WorldCom stock, people close to Tiger say. Omega Advisors, another hedge fund,
profited from his bullish bent on ALC. "The guy is brilliant, he is extremely well-connected in his industry, and
we would have done better if we had listened to him more often than we did," says an Omega partner, Charles
Leeds. Sticky Situations Trouble is, he isn't always available, and sometimes that can set off all kinds of alarms.
When Mr. Grubman was involved in the ALC acquisition by Frontier and restricted by Salomon from
commenting on ALC, "we started getting a few calls from institutional investors asking, 'Why is Jack restricted?'
" recalls Marvin Moses, former ALC chief financial officer. "It's an awkward situation. Just because an analyst is
not publishing quarterly updates, it raises red flags." Because of the alarms, securities firms' compliance officials
hate to restrict analysts from talking about a stock. Mr. Grubman says getting on the phone with an investor
while he is working on a deal is "dangerous." He tries to finesse the situation. If he gets a message to call a client
about a sensitive stock, he will call back when he is sure to get an answering machine, asking the client to leave
any specific questions on his voice mail. Since he spends so much time traveling, the maneuver doesn't raise
alarms, he says. "If it's a factual question, I will return the call; if it is something that will get me into a gray
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/grubman1.htm 2/3
6/30/2017 pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/grubman1.htm

area, I won't," he explains. "The mistake you can't make is to say, 'I can't talk to you because I am working on
something.' " Some of Mr. Grubman's feistiness may trace to his upbringing in the rough-and-tumble streets of
South Philadelphia. He was an amateur boxer and the son of civil engineer for the city and a dress-shop
manager. "When your father is in the construction business, CEOs don't really intimidate you and neither do
traders," Mr. Grubman says. With a penchant for math, he did graduate work at Columbia; but after failing to get
into the Ph.D. program, he quit academia for a job at AT&T in 1977. The timing was right. Telecommunications
was on the cusp of change. Mr. Grubman was in the thick of it, working on forecasts of long-distance demand
and on planning for divestitures. "He was extremely bright, analytical and hard to supervise," says Sam Ginn, a
former AT&T executive who now heads Air Touch Communications Inc. Making Waves Mr. Grubman took on
some of AT&T's brass early in his career when he discovered a flaw in an economic model. "Jack basically said
the Emperor has no clothes," says a former colleague still at AT&T. "For a guy to raise his hand and say this
doesn't work was really gutsy." AT&T scrapped the model, and Mr. Grubman's persistence earned him kudos. At
the phone company, Mr. Grubman met not only many key figures in the telecom world but also his future wife.
"What I found most interesting when I met him was really his Jekyll-and-Hyde reputation," says LuAnn
Grubman. Though "probably a very aggressive, outspoken person" at work, at home "he is totally the opposite,"
she says. In 1985 Mr. Grubman left for Wall Street: PaineWebber Inc. Then a bit player in the mergers business,
PaineWebber soon landed a role in GTE Corp.'s $6.2 billion merger with Contel Corp. and its subsequent $1
billion stock offering, a deal that brought Mr. Grubman and GTE chief Chuck Lee close. Mr. Lee recalls
traveling on his private plane with Mr. Grubman in the midst of the offering. Mr. Lee noticed that GTE stock
was dropping and laid into Mr. Grubman and another analyst. When they landed in San Francisco, Mr. Grubman
shot back at the CEO: "Chuck, if you don't give me a break, I am going to fly down to Los Angeles on a
commercial plane." In 1993, Eduardo Mestre, then Salomon's mergers chief, asked Mr. Grubman to meet him at
the Yale Club to talk about joining Salomon. But before Mr. Mestre could make his pitch, Mr. Grubman dressed
him down. "He yelled at me for the wrong address," says Mr. Mestre. --

Steven Lipin contributed to this article. Copyright � 1997 Dow Jones & Company, Inc. All Rights Reserved.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/grubman1.htm 3/3