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Wach-Pru: Rock Steady, or Not Ready?

The combined entity certainly has the numbers.

It finally happened

Wachovia's courtship of Prudential Securities, for months one of the worst kept secrets on the Street, has come to fruition. The resulting joint venture is undeniably big — $537 billion in client assets, No. 3 in brokerage revenue and fourth in number of brokers. But is the new organization capable of competing in the elite league it has entered?

The merged company will have several distribution points for its advisors, including bank branches, the regular broker channel, the independent services group and a quasi-independent arm known as Profit Formula. Once the two firms' operations are combined, advisors will have a wide range of products and channels to offer clients.

“It will be a great distribution franchise,” says Stephen Winks, a Richmond, Va.-based consultant who formerly held positions at Prudential and Wheat First, one of Wachovia's predecessors. “Wachovia has the ability, with the momentum associated with this, to emerge a leader.”

Further, the deal has a number of paradigm-breaking features that could help it succeed. Wachovia's heritage of retail banking (in contrast to the investment banking of the wirehouses) could be a boon to advisors looking for new clients who are wary of the Wall Street research scandals. And its geographic positioning — Richmond, Va., away from the glut of securities firms in New York — could help differentiate Wachovia in the battle for market share.

Still, Wachovia has its share of obstacles to overcome. First, its sales force compares unfavorably to those of the other mega-firms, Merrill Lynch, Salomon Smith Barney and Morgan Stanley. In Wachovia's current sales force of 8,000, only about 4,800 hold Series 7 certification. The balance have Series 6 licenses, which limit a broker to selling mutual funds and unit investment trusts. This could hinder Wachovia in its effort to increase revenues against sales forces offering a full array of securities products.

Further, a look at the firm's assets suggests its clientele is less affluent. “Morgan Stanley, Merrill and Smith Barney are major league powerhouses in terms of investment banking and high-net-worth clients,” says one source. “This firm is a lesser firm.”

Fewer high-net-worth market clients yields lower assets-per-broker figures. The average Wachovia broker has $44.5 million in client assets, versus $75 million at Merrill and $71 million at Smith Barney, based on a straight division of client assets by sales force.

In addition, the joint venture has some cultural issues to address. While two units of Wachovia Securities — the bank and independent channels — will be run by Wachovia vets Dwight Moody and David Monday, the private-client area will be headed by Michael Rice, the former head of Prudential Securities. Rice's presence means Pru's interests are likely to get attention in the venture. But it also could complicate the process of forging a new corporate culture. “The worst thing that could happen is that you have tail wagging the dog in this,” says Winks.

The Waiting Game

Many aspects of this deal won't be finalized until the second half of 2004. That gives the merged entity time to work through its back-office conversions and operational adjustments. But it also means that certain aspects of the merger cannot be completed for some time.

“It will take two years to determine whether Merrill Lynch, Morgan Stanley, Smith Barney and UBS face a credible threat to their business,” wrote Sanford C. Bernstein analyst Brad Hintz.

Meanwhile, the Street is buzzing with talk about retention packages. Sources at Wachovia say the firm is planning to offer bonuses of 10 percent to 30 percent, paid out over four to five years, depending on a broker's level of production. A $1.2 million producer would be eligible for 30 percent; a $300,000 producer would be offered 10 percent. One Pru broker sees that low-end figure as a key sign of what's to be expected of brokers in the future: “If you haven't had $300,000 for the last 10 years, they don't want you,” he says.

Often, experts say, compensatory trial balloons are floated during mergers to see how the largest producers react. Should a commotion ensue from big Pru producers, the packages likely will be sweetened.

As for products, the firm will be using Prudential's platforms for separate account and mutual fund managed money products. A transition plan is in the works to mitigate disruption. The same goes for the back-office functions, which won't be fully merged until the end of 2004. A combined payout grid is expected too, but again, most likely in late 2004.

One thing is clear: Instead of overpaying for a brokerage outfit at the height of the market, Wachovia is laying out just $422 million. Compare that to U.S. Bancorp's $730 million acquisition of Piper Jaffray five years ago. Ironically, a day after the Pru deal was announced, U.S. Bancorp, throwing up its hands, said it will spin off Piper Jaffray.

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