A Piece of the Rock You May Not Want

Demutualization is what insurers and other customer-owned "mutuals" do when they become stockholder-owned outfits. John Hancock and MetLife did it last year. Now, if 11 million Prudential Insurance policyholders say "yes" by July 31, they may soon be getting shares they can trade on Wall Street. That's tempting, since their current holdings, while no less ownership than stock, can't be cashed in.

Pru's board, with such luminaries as former Federal Reserve Chairman Paul Volcker and Princeton University economist Burton Malkiel, urges a "yes" vote. "It's a no-brainer," Malkiel told me. "I don't see how anybody could argue that you should vote no." Yet at the risk of confirming myself as a brainless crank, I beg to disagree. For even if Pru's demutualization gives policyholders more liquid wealth, it's hardly clear that it will leave them with the most possible wealth.

DISCIPLINE. Atop Pru's reasons for demutualizing is its wish to sell stock to raise capital to compete against global financial giants. Stock, Pru believes, also could be used in mergers and to pay talented employees. One final reason--the stricter discipline imposed on public companies--hints at Pru's poor performance and long stretch of trouble, notably a scandal over deceptive insurance sales ploys that has cost it $4.4 billion.

Beneath all this is an assumption that Pru should not only persist but should also try to take on dynamos such as American International Group. If you ran an operation with 57,000 employees, you might assume that, too. But from an owner's perspective, you would not be so sure. Pru has hardly proved itself world-class. Since 1996, as revenue ran flat near $27 billion, net income sank 63%, to $398 million, in 2000. And if mutual ownership no longer suits Pru, there's always a second option: liquidation, or an orderly sale of assets, payment of liabilities, and return of what's left over to owners. By selling its giant health-care unit to Aetna in 1999, and also exiting reinsurance, commercial, and home-mortgage lines, it already went part way down this path.

Pru won't say if it mulled more liquidation, but if I were a policyholder I would expect so. Shrinking rather than growing may seem heretical, but it can benefit owners most. For example, arms maker General Dynamics responded to the cold war's end by selling enough divisions to slash revenue 70% in four years. Its stock, meanwhile, soared past rivals' and the indexes, returning 958% for the four years ended in 1994, vs. 57% for the Standard & Poor's 500-stock index.

Do I know that shrinking would leave owners better off than demutualization? No. The problem is that Pru only makes the case for demutualization in the broadest of strokes. It mailed two documents, 408 pages in all, to policyholders laying out their choices: first, whether to demutualize; second, if the demutualization is approved, whether to take cash in exchange for their current ownership interest or stock in a new public company. What's missing in all of this is the information people need to vote knowledgeably.

Pru says its stock could go in an initial public offering at $22 to $38 a share. That's such a wide range it raises as many questions as it answers. What if Pru, as MetLife did, goes public at the low end of the range? It then would sell stock to new investors for one-third off the book value of its current owners' stakes, diluting their interests. Desperate companies do that. In the 15 months since MetLife went public, its shares are up 119%. Operations aren't that much better; the sellers just left a ton of dough on the table.

Here's another question: Is the stock or cash each policyholder would get in a demutualization fair? Peter Robinson, a Chaska (Minn.) retiree, told me Prudential says he would get 47 to 57 shares of stock. "I don't know if that should be 150 or 350 or 20," he said. Robinson is a former accountant. "You almost have to take it on faith," Malkiel said. "But you can take comfort knowing that regulators looking out for the public have been involved every step of the way."

Robinson, like most policyholders, will likely vote "yes." "I may be an owner of the company now, but I don't get anything for it," he said. I'm hoping--quixotically, I suppose--for the plan's defeat. Then maybe Pru will return with a better plan, one whose unmistakable hallmark is this: It leaves owners as wealthy as possible. By Robert Barker

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