Updated from 11:24 a.m.
are joining forces to create the nation's third-largest brokerage firm, after months off on-and-off talks.
Under the deal, the two financial firms will team up to create a new company based in Virginia, which will manage more than $537 billion in client assets. The new firm, with more than 3,500 brokerage locations across the country, eventually will operate under the Wachovia Securities banner.
Wachovia will have a 62% ownership stake in the brokerage business, with Prudential owning the remainder. The brokerage division legally will be a subsidiary of Wachovia, and the bank estimates the venture ultimately will save more than $200 million a year.
Both firms say the deal should boost their earnings next year, excluding a one-time $681 million after-tax restructuring charge. Wachovia officials said they expect the benefits of the new firm to extend beyond the brokerage business, providing a larger customer base for Prudential and Wachovia to market other financial-services products.
The deal comes in the third year of a brutal bear market, which has led to thousands of layoffs on Wall Street. But Wachovia and Prudential obviously are banking on a rebound in stock trading by joining forces.
It's somewhat of a low-risk gamble for both firms because no cash is changing hands. If the firms can blend their cultures, while avoiding any defections of key brokers, it could lead to the creation of a powerful retail brokerage operation to rival other top Wall Street firms. Brad Hintz, a brokerage analyst at Bernstein, said the deal reminds him of the old
, the retail brokerage firm that merged in the late 1990s with the white shoe investment bank
In light of the deal, Prudential said its 2003 earnings would be lower than previously estimated because of the restructuring charges the New Jersey-based financial services firm will incur. The firm is now predicting full-year earnings of $2.25 to $2.40 a share, compared with an earlier estimate $2.50 to $2.65.
In midday trading, shares of Prudential were down 64 cents, or 2%, at $30.28. Charlotte, N.C.-based Wachovia, one of the nation's largest regional banks, experienced a similar decline. The bank's shares were down 35 cents, or 1%, at $35.30.
Prudential's brokerage business has been the weak link in the financial services operation. Prudential is one of the nation's largest life insurers. The deal will permit Prudential, which exited the investment banking business several years ago, to continue to its stock research operation. Prudential was one of the first mainstream brokerages to adopt a simplified "buy, hold or sell" recommendation system.
Wachovia, meanwhile, has been advertising heavily the past several months for its investment banking division.
The new firm will offer stock research from a variety of firms, including Prudential. It will employ about 12,400 brokers and have nearly 6 million customer accounts. Based on last year's figures, the combined firm generated $4.2 billion in revenue.
Prior to the deal, which is expected to close in the third quarter, Prudential and Wachovia were the sixth- and seventh-largest brokerages, based on client assets. After the deal, only
Smith Barney brokerage business will manage more client assets.
The deal has been structured to permit Prudential to exit the new brokerage division at either two or five years down the road.