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Wachovia-Prudential: For Real This Time?

Prudential Securities and Wachovia Securities are very close to an agreement to join forces, one that was scuttled earlier in the year, reportedly due to differences in who would control the unit.

Can you say Pru-chovia? Prudential Securities and Wachovia Securities are very close to an agreement to join forces, one that was scuttled earlier in the year, reportedly due to differences in who would control the unit. While few details have emerged, the joining of the two brokerage units would rival wirehouses Salomon Smith Barney, UBS Securities and Morgan Stanley.

Of course, at any stage, anything can happen, but sources say the two firms will indeed combine forces to create a group with approximately 12,000 registered reps, which would give the firm an even-larger footprint across the country, and would compete with the likes of the major wirehouses and regional firms in attracting assets.

Originally, the two firms were reported to have been in contact in the fall, only to see a deal fall through. Since Michael Rice was appointed president of retail brokerage at Prudential Securities in December, replacing Jamie Price, who left for UBS Securities, the buzz has grown on a likely deal. The scuttlebutt was that it’s Rice’s job to gussy the brokerage unit up and then dispose of it. "This guy is sharp. This [deal] is his brainchild," said one industry observer. "He’s the one who thought this up. And he even had the financing lined up."

Rice has declined to comment. But with the brokerage industry still struggling and more consolidation expected, it wouldn’t be a surprise. In fact, the main reason the deal didn’t happen with Wachovia, say industry observers, was mostly because the firms’ leaders—Prudential Financial’s Art Ryan and Wachovia’s Ken Thompson—were unable to reach an agreement on who would have majority control of the firm.

Prudential would seem like a likely candidate for a sale—the brokerage arm has been losing money and has been a perennial under-performer. In the last couple of years the firm has cut expenses, consolidated offices and reduced headcount, in some cases as a result of attrition and in some cases due to outright pink slips handed out to brokers who weren’t cutting it. Currently, the firm has around 4,500 brokers, down from about 6,500 two years ago, and $251 billion in customer assets.

And Ryan has said in the past that Prudential Financial will look to sell the brokerage arm if financial results do not improve dramatically. There has been some improvement in performance, but the dormant Wachovia rumors have been rekindled. "If it’s purely an acquisition of retail distribution, I think it’s a 90 percent probability that it happens," said Stephen Winks, a Richmond, Va.-based consultant. "To the extent that Prudential’s management has to be plugged in, I think it’s a zero percent probability."

For the third quarter, the financial advisor division of Prudential Financial lost $16 million, largely due to expense cuts. The loss is an improvement from the year-ago loss of $48 million, although Edward Spehar, an analyst at Merrill Lynch, wrote in a Dec. 9 research note, "We remain skeptical that the Financial Advisory segment [retail brokerage and equity securities sales and trading] will be profitable during the second half of next year, which is management’s goal…We remain concerned that Prudential Securities will disappoint even with a better market environment."

Rice acknowledged that the firm is currently a turnaround story, saying, "As 2003 goes on the story around us will be very different from years past." He points out that in the second quarter of 2002, Pru’s brokers increased productivity and market share, according to Rice, and held those gains in the third quarter, although he didn’t provide specific numbers. Meanwhile, core financial advisor attrition has dropped to 13 percent from more than 21 percent two years ago, Rice says. (Core is described as $300,000 in annual production or being in the first, second or third quintile of producers.)

Cost cutting has helped save money, with the head count down by around 25 percent over the last 18 months, according to Merrill Lynch estimates. While Prudential Sec may be improving, it still needs some help. And Wachovia, which has cobbled together a sales force of 8,000 through several acquisitions of regional broker/dealers, and currently has $270.4 billion in brokerage customer assets, needs "a real securities firm," as one industry consultant put it. Spokesmen for both Prudential and Wachovia declined comment.

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