Prudential IPO Update - long article

[aNoNo]

Prudential Prices IPO at $27.50;
Some Managers Call Stock Pricey

As Prudential Financial's initial public offerring was pricing Wednesday night,investors expressed wariness about how much a piece of the rock would cost.

Late Wednesday, Prudential shares were valued at $27.50, the middle of the intended $25 to $30 range -- uncomfortably high for some fund managers.

"This has to be priced right or people would wait until January to buy the stock," said Margaret Jacobsen, a money manager at Renaissance Fund Advisors, before the pricing. Renaissance specializes in insurance stocks and has asked the underwriters for an allocation of stock. "You don't want to buy a stock in mid-December that's going to damage your annual performance numbers."

Slated to raise about $3 billion, Prudential's IPO is expected to be the third-largest of the year, behind Agere Systems Inc. and Kraft Foods Inc. The company intends to use the proceeds of the deal to make cash payments to insurance policyholders and for general corporate needs.

Prudential Financial, formerly Prudential Insurance Co. of America, is slated to begin New York Stock Exchange trading Thursday under the symbol PRU. Goldman Sachs Group Inc. and Prudential Securities Inc. are underwriting the offering.

Money managers say that despite their confidence in Prudential Chairman Arthur Ryan and his management team, the company faces a number of challenges, from the need to make dramatic cost cuts to the onus of overcoming a series of scandals within the past decade, most notably a fiasco in which Prudential brokers misled investors on the risks and rewards of millions of dollars of limited
partnerships.

In terms of bad news, "the laundry list for Prudential is longer than for most firms, and it gets to be disturbing," said Doug Edler, a money manager at Fox Asset Management. Although Mr. Edler's company invests in John Hancock Financial Services Inc., one of the comparables to Prudential, he doesn't have plans to invest in Prudential right away. "Prudential's just a longer-term story," he said.

Some investors who are expecting to get allocations of Prudential's pre-IPO stock said they have concerns about a handful of the mother company's many subsidiary businesses, notably the property-and-casualty insurance division and the securities division.

The company's ambitious plans for its securities arm, which is losing money, may be tough to pull off, acknowledged Patrick Schott, a financial-services analyst for Strong Capital Management. Still, he said, "It would be a home run if they pulled it off."

Considering the recent stock-market
performance of Prudential's competitors, John Hancock and MetLife Inc., there is reason for
optimism. Both of those companies demutualized and went public last year, and have since seen significant percentage gains in the price of their shares.

One reason is that John Hancock and MetLife were able to quickly cut costs as they shifted their focus from solely serving policyholders to trying to make money for shareholders.

"You are going to see dramatic expense cuts as Prudential moves expenses in line with its peer group," said Lanny Thorndike, manager of the Century Shares Trust mutual fund, which specializes in financial-services stocks. Mr. Thorndike said Prudential could cut less-profitable units, such as its property and casualty business.

He said he expects Prudential, based in Newark, N.J., to settle at a slight discount to MetLife, which currently trades at about 1.25 times its book value. MetLife closed Wednesday at $28.81, down 31 cents as of 4 p.m. in New York Stock Exchange composite trading. At $27.50, he noted, Prudential
would trade at a discount to its book value of $32.75.

As part of a demutualization plan approved by New Jersey insurance regulators, Prudential's top executives agreed not to receive stock options until one year after the IPO. But in its meetings with investors during the past few weeks, Prudential's top executives have indicated that they will buy Prudential shares with their own money once they are legally able to. Mr. Ryan, in fact, has committed to buy $1 million worth of stock.

Ultimately, said Strong's Mr. Schott, "Prudential is a more complex story to invest in than some of the other demutualizations have been, because there are so many moving parts. ... But I believe this management has a good chance of pulling off what they are articulating."