Prudential Exercises "Look Back' Option & Stays With Wachovia Securities Joint Venture

Implications: Implications: In 2003 Prudential took a 38% stake in a LLC with Wachovia Securities to merge their brokerage firms and clearing operations together. Wachovia's stake is 62% based on pre-tax earnings contributions and the combined venture has resulted in over $773 billion in client assets under management, compared to $537 billion in 2003 when the joint venture was established and positioned Prudential from the sixth-largest retail brokerage firm to the third-largest firm and resulted in revenue synergies and expense savings of over $220 million in personnel, occupancy, equipment and technology. When Wachovia Securities announced it would acquire A.G. Edwards in May 2007 for $6.8 billion, the move required Prudential to make a decision based on the formation of the LLC, which grants Prudential certain options, including a "lookback" option, put right, dilution of its stake and/or make an additional capital contribution and Prudential has decided to exercise its "lookback" option.

Analysis: Comments/Perspective:

Prudential is exercising its "lookback" option with its joint venture with Wachovia Securities that was established in 2003, when the brokerage firms merged. Prudential exercised the option to not make an additional contribution and reserved the right to make a contribution and "true up" ownership or "put" its interest for two years, which requires valuation of both A.G. Edwards and the existing joint venture between Prudential and Wachovia Securities, and if future contributions are exercised it would be based on current valuation levels, however, Prudential would not receive any "carry" during the "lookback period" and share in earnings and one-time costs during the "lookback" period would be based on diluted  ownership levels.

1.  If Prudential had made an additional capital contribution, that contribution would be based on the "appraised value" of the acquired business and Prudential would also contribute a pro rate share of the qualified one-time costs or if Prudential decides to dilute its stake in the future, it would require valuation of both A.G. Edwards and the joint venture and Prudential's ownership level will be based on the appraised value of the entities

2.  The joint venture has been lucrative for both Wachovia Securities and Prudential and after a thorough assessment of its options, Prudential will continue with the venture at least until July 2008 and if Prudential decides to exercise its "put right," the put consideration will be based on the appraised value of the joint venture, excluding the value of of A.G. Edwards

Prudential has also strengthened its market penetration and share in the 10 fastest growing MSAs (Metropolitan Statistical Areas) in the U.S. and the U.S. market share of brokerage revenue is expected to increase  over the next 3-4 years as retirement and intergenerational transfers are projected to grow and Prudential will assess its options again in 2008 to determine which option is best suited for the enterprise.