June (Bloomberg) -- Prudential Financial Inc., the second- largest U.S. life insurer, will shut down its 420-person stock research and trading unit, one of the last traces of its failed attempt to become a financial supermarket.
Prudential Equity Group, the institutional sales and trading business left behind when Prudential sold its retail brokerage to Wachovia Corp. in 2003, includes about 30 senior analysts and 80 traders in 13 cities including New York, London, and Tokyo, spokeswoman Theresa Miller said today. Closing expenses, including severance payments, will cost about $110 million before taxes.
Prudential Financial, which entered the securities business by purchasing Bache Halsey Stuart Shields in 1981, didn't have the scale to succeed as a one-stop shop for financial services, Chairman Arthur Ryan said at a June 4 conference. A.G. Edwards Inc. agreed last month to be bought by Wachovia, the No. 4 U.S. bank, as regional brokers struggle to remain independent.
``The equity group was forced to survive only from its institutional equity commission flow without any of the side benefits from a retail sales force,'' said George L. Ball, who was chairman of Prudential Bache Securities from 1982 to 1991 and now runs Sanders Morris Harris Group Inc., a Houston-based asset manager. The business was ``largely futureless,'' he said.
Ryan joined Prudential in 1994, when the Newark, New Jersey- based company was the fifth-largest securities brokerage, arranged initial public offerings, advised on mergers and acquisitions and sold products such as mortgages and auto insurance. He's since exited or sold those businesses to focus on tapping aging baby boomers in need of life insurance and retirement savings products.
Keeping Commodities
Prudential got less than 1 percent of its $4.4 billion in pretax operating profit from the equity group last year. It made a market in approximately 1,400 Nasdaq securities last year and will immediately drop coverage of the sectors and companies it covers.
Bache Commodities Ltd., a commodities trading unit based in New York, will be the sole piece of Prudential Securities, the successor to Prudential Bache, remaining at the insurer.
Shares of Prudential Financial fell 97 cents, or 1 percent, to $99.60 at 2:58 p.m. in New York Stock Exchange composite trading. They've gained 16 percent this year, compared with a 1.1 percent gain for the Standard and Poor's 500 Financials Index.
Prudential didn't have any top-ranked analysts in Institutional Investor's annual survey. Ed Keon, Prudential's chief investment strategist, and some members of his team will move to the company's asset management unit, Miller said.
Wachovia's purchase of most of Prudential Securities was a cashless transaction in July 2003. Charlotte, North Carolina-based Wachovia combined the firm with its own retail brokerage, giving Prudential a 38 percent stake in Wachovia Securities LLC.
Regulatory Probes
U.S. Securities and Exchange Commission rules applying to Wachovia's $6.8 billion purchase of A.G. Edwards give Prudential until later this month to decide whether it will sell its stake in Wachovia Securities to the bank, invest more in the joint venture, or stand pat, Miller said. Certain circumstances could push back the deadline to July or later, she said.
Prudential's attempts in brokerage were diverted by regulatory probes. It paid more than $2 billion in the mid-1990s to settle U.S. allegations and investor lawsuits claiming it used fraudulent practices to sell limited partnerships starting in the 1980s. In August, Prudential agreed to pay $600 million to avoid prosecution by the U.S. Justice Department for improper mutual-fund trading through mid-2003.
``The operation has been roughly break-even in recent years,'' said Jeff Schuman, an analyst at Keefe, Bruyette & Woods in Hartford, Connecticut, who rates the stock ``outperform.'' ``Any kind of a brokerage business carries a certain amount of compliance and litigation risk, so if you're not making money you have to think hard about staying in the business.''
`Precious Few'
Equity-trading revenue at the biggest regional brokerages fell during the first quarter even as their larger competitors led by Goldman Sachs Group Inc. earned more money than ever from buying and selling stocks.
Prudential Equity Group traded stocks for institutional money managers such as mutual funds and distributed research reports to clients about 350 stocks. It had revenue of $260 million and pretax profit of $34 million, excluding discontinued operations, the company said in a regulatory filing.
The decision to focus on independent research without investment banking ``suggests to us that precious few will be able to ply these waters,'' said Eric Berg, an analyst at New York-based Lehman Brothers Holdings Inc., in a research note. He has an ``underweight'' rating on Prudential's stock.
In March, Prudential Equity Group lost Michael Mayo, the financial-services analyst known for his coverage of Citigroup Inc. and JPMorgan Chase & Co., when he took his five-person team to Deutsche Bank AG. Mayo, who joined Prudential in 2001, gained a reputation for criticizing investors and companies for trying to curb objective analysis.
Source : www.bloomberg.com
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