Prudential 2007 Annual Report Download - page 131

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
6. INVESTMENTS IN OPERATING JOINT VENTURES
The Company has made investments in certain joint ventures that are strategic in nature and made other than for the sole purpose of
generating investment income. These investments are accounted for under the equity method of accounting and are included in “Other
assets” in the Company’s Consolidated Statements of Financial Position. The earnings from these investments are included on an after-tax
basis in “Equity in earnings of operating joint ventures, net of taxes” in the Company’s Consolidated Statements of Operations.
Investments in operating joint ventures include the Company’s investment in Wachovia Securities, as well as investments in other
operating joint ventures as part of its international insurance and international investment businesses. The summarized financial
information for the Company’s operating joint ventures has been included in the summarized combined financial information for all
significant equity method investments shown in Note 4.
Investment in Wachovia Securities
On July 1, 2003, the Company combined its retail securities brokerage and clearing operations with those of Wachovia Corporation
(“Wachovia”) and formed Wachovia Securities, a joint venture now headquartered in St. Louis, Missouri. As of December 31, 2007, the
Company had a 38% ownership interest in the joint venture with Wachovia owning the remaining 62%. The transaction included certain
assets and liabilities of the Company’s securities brokerage operations; however, the Company retained certain assets and liabilities related
to the contributed businesses, including liabilities for certain litigation and regulatory matters. The Company and Wachovia have each
agreed to indemnify the other for certain losses, including losses resulting from litigation and regulatory matters relating to certain events
arising from the operations of their respective contributed businesses prior to March 31, 2004.
On October 1, 2007, Wachovia completed the acquisition of A.G. Edwards, Inc. (“A.G. Edwards”) for $6.8 billion and on January 1,
2008 combined the retail securities brokerage business of A.G. Edwards with Wachovia Securities.
On July 6, 2007, the Board of Directors of the Company approved the election by the Company of the “lookback” option under the
terms of the agreements relating to the joint venture. The “lookback” option permits the Company to delay for approximately two years
following the combination of the A.G. Edwards business with Wachovia Securities the Company’s decision to make or not to make
payments to avoid or limit dilution of its ownership interest in the joint venture. During this “lookback” period, the Company’s share in the
earnings of the joint venture and one-time costs associated with the combination of the A.G. Edwards business with Wachovia Securities
will be based on the Company’s diluted ownership level, which is in the process of being determined. Any payment at the end of the
“lookback” period to restore all or part of the Company’s ownership interest in the joint venture would be based on the appraised or agreed
value of the existing joint venture and the A.G. Edwards business. In such event, the Company would also need to make a true-up payment
of one-time costs associated with the combination to reflect the incremental increase in its ownership interest in the joint venture.
Alternatively, the Company may at the end of the “lookback” period “put” its joint venture interests to Wachovia based on the appraised
value of the joint venture, excluding the A.G. Edwards business, as of the date of the combination of the A.G. Edwards business with
Wachovia Securities.
The Company will adjust the carrying value of its ownership interest in the joint venture effective as of January 1, 2008, the date of
the combination of the A.G. Edwards business with Wachovia Securities, to reflect the addition of that business and the initial dilution of
its ownership level and to record the initial value of the above described rights under the “lookback” option. The Company expects that the
value to be recognized for the foregoing items will be credited net of tax directly to “Additional paid-in capital.”
The Company also retains its separate right to “put” its joint venture interests to Wachovia at any time after July 1, 2008 based on the
appraised value of the joint venture, including the A.G. Edwards business, determined as if it were a public company and including a
control premium such as would apply in the case of a sale of 100% of its common equity. However, if in connection with the “lookback”
option the Company elects at the end of the “lookback” period to make payments to avoid or limit dilution, the Company may not exercise
this “put” option prior to the first anniversary of the end of the “lookback” period. The agreement between Prudential Financial and
Wachovia also gives the Company put rights, and Wachovia call rights, in certain other specified circumstances, at prices determined in
accordance with the agreement.
The Company’s investment in Wachovia Securities was $1.220 billion and $1.217 billion as of December 31, 2007 and 2006,
respectively. The Company recognized pre-tax equity earnings from Wachovia Securities of $370 million, $294 million and $192 million
for the years ended December 31, 2007, 2006 and 2005, respectively. The income tax expense associated with these earnings was $146
million, $117 million and $76 million for the years ended December 31, 2007, 2006 and 2005, respectively. Dividends received from the
investment in Wachovia Securities were $366 million, $277 million and $154 million for the years ended December 31, 2007, 2006 and
2005, respectively.
In connection with the combination of the Company’s retail securities brokerage and clearing operations with those of Wachovia, the
Company entered into various agreements with Wachovia and Wachovia Securities, including one associated with certain money market
mutual fund balances of brokerage clients of Wachovia Securities. These balances were essentially eliminated as of September 30, 2004
due to the replacement of those funds with other investment alternatives for those brokerage clients. The resulting reduction in asset
management fees has been offset by payments from Wachovia under an agreement dated as of July 30, 2004 implementing arrangements
with respect to money market mutual funds in connection with the combination. The agreement extends for ten years after termination of
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