Prudential and Wachovia Deal at Hand

Joint venture would create third-largest brokerage in U.S. in a deal to be announced today, says a source with knowledge of the negotiations

Wachovia Corp. and Prudential Financial are set to announce their long-rumored joint venture, a partnership that would combine the two firms' brokerage units and clearing operations to create the third-largest brokerage (by number of reps) in the United States after Merrill Lynch and Morgan Stanley.

"This is the largest domestic retail brokerage combination in history," says a source familiar with the talks, "by anyway you want to slice it."

According to this source, Wachovia would be the majority partner, controlling more than half of the combined brokerage (perhaps around 60 percent); the new entity, to operate under the Wachovia Securities name, would have a sales force of around 12,000 reps. The deal is a commingling of assets, and would provide each company with a strategic partner; for Wachovia, it would mean a larger distribution force to help sell its banking and lending operations, and, for Prudential, the new entity would provide a conduit for its insurance business.

"They are 99 percent there [to closing the deal]," said the source. "They’ll be announcing it first thing [this] morning or the next." In addition to both firms' private client groups, the joint venture also combines the firms’ clearing firms. Contrary to published reports, the deal signifies Prudential Financial's "long-term commitment" to the brokerage industry, according to the source, and not an exit from that business, which had been a drag on the parent company’s performance. "Otherwise, Art Ryan [Prudential Financial’s CEO] could have sold it a while ago," according to the source. Prudential has been slashing costs at its brokerage, including the number of reps, but the deal may not result in any more wholesale layoffs of registered reps at either firm.

The deal creates a "crop of the top, with great distribution, trust and lending services balanced by an insurance force," the source says. "It really does create a powerhouse in product platform and distribution." Wachovia, born when First Union purchased Wachovia in 2001, is now the fourth-largest bank, with around 2,700 retail and corporate branches from Connecticut to Florida. It also owns mutual fund manager Evergreen Investments.

While it might be improving (Prudential has gained market share and improved productivity), Prudential Securities still needs some help--and Wachovia still needs "a real secruties firm," says one industry consultant.

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