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Cable Guy

Jack Grubman
Salomon Smith Barney

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Not that you can exactly tell by looking at your TV set or dialing up the Internet, but broadband is happening. And one way to track our progress into the fiber-optic future has been to watch the ascendance of 46-year-old Salomon Smith Barney telecom analyst Jack Grubman. "We've always been bandwidth junkies," says Grubman. "You build a fatter pipe, and trust me, people will figure out how to fill it." Lately, a lot of rather distinguished investors have come to share Grubman's philosophy: Forstmann Little, which invested $1 billion in McLeodUSA and $850 million in Nextlink; Paul Allen, who bestowed $1.7 billion on RCN and $355 million on Allegiance; and Microsoft, one of a group of investors that recently signed $900 million over to Winstar Communications. The intelligent money is storming the arena, "and not pre-IPO," says Grubman, "but very often after these stocks are up five- to tenfold from their IPO prices. It tells you that these guys, who have pretty high hurdle rates, are thinking there are still good returns here."

Grubman spent his early career as a mid-level executive at AT&T, a veritable incubator of telecom talent in the seventies and eighties. "I grew up in the industry I follow," he says, "and a lot of the people I knew when I first started at AT&T are now running companies." And Grubman has worked these connections to spectacular effect. Salomon is the banker for Global Crossing, whose CEO, Bob Annunziata, is another AT&T alum. Grubman's twelve-year friendship with MCI WorldCom CEO Bernie Ebbers is widely credited with bringing Salomon the biggest deal in history (that is, until last week's AOL-Time Warner nuptials): MCI WorldCom's $115 billion acquisition of Sprint. Grubman got a big thank-you at bonus time. Last year, he was paid approximately $20 million in cash and Citigroup stock and options.

Living Dangerously Some say that Grubman's desire to win business unduly influences his research. Most recently, he came under fire for doing an about-face on AT&T -- a stock he had kept at "neutral" (the closest most analysts come to saying "sell") since 1995. Grubman suddenly went sweet on AT&T, upgrading it to "buy" just one week before the company announced it would be selling several billion dollars' worth of its wireless business in an IPO. The market's Pavlovian response was to jack AT&T up more than $2 that day; it was the most actively traded stock on the NYSE. "The Wall Street Journal tried to make a big deal out of the upgrade," says Grubman, "but the reality of the world is that analysts are becoming increasingly important in the banking practice of firms, not just for underwriting but also for mergers and acquisitions. It just is what it is; it's part of the business."

Moneymaking Mantra "You have to be brave and realize that this is a brave new world and that telecom's going to be a big part of that in terms of demand for bandwidth, data, and Internet services, and all this good stuff."

Where He's Headed In 2000 "You're going to see an acceleration of M&A activity globally," Grubman affirms. His favorite stock is WorldCom, the $125 billion behemoth he describes as "the only true, fully integrated local-and-long-distance on-Net provider of voice, data, and Internet protocol on a domestic and global basis -- far and away the best-positioned company in this industry." According to Grubman, the company's revenues are increasing 14 percent a year, and its earnings should sustain 20 percent annual growth over the long haul. WorldCom is currently trading at 23 times what it should earn in 2000 (versus a market multiple of 26) -- and only 18 times those earnings if you add back in all the goodwill and amortization subtracted as a result of its many acquisitions. "You can't find many companies this size growing top- and bottom-line this fast and still selling at below a market multiple," says Grubman, before translating to layman's language: "The stock is cheap."


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