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In December 2000, after nearly 20 years as a full-service investment bank, Prudential Securities announced that it would exit the investment banking business and focus exclusively on providing brokerage services to its institutional and retail clients. John Strangfeld, head of the investments division of Prudential Financial, which included Prudential Securities, explained the decision as follows:
Our firm had been a survivor for many years but had never really been a winner. We had a strategy that looked like everyone else's, trying to serve both the issuer and the investor, and we had experienced very erratic results. We were faced with three options: carry on with the existing strategy of looking like a smaller-scale version of everyone else, choose a different path, or divest. Our decision was to choose a different path that played to our strengths, and that resulted in a sustainable, differentiated strategy that was better aligned with the needs and aspirations of Prudential Financial. In essence, we decided to cast our lot entirely with the investor. This change eliminated many of the conflicts of interest that you normally see when firms try to serve both the issuer and the investor. It meant we could tell our clients and our employees that Prudential Financial stands for one thing: the investor. All of our energy and resources, as well as every ounce of capital, would be devoted to the investor.
Prudential’s decision to change direction raised a number of important questions about both its new and former strategies. Why had the company found it so difficult to build prestige in the investment banking industry? Had the initial decision to enter the industry been flawed? Or, had it simply failed to execute on the strategy? Looking ahead, would the new strategy be effective in creating value? If so, what challenges would the company face in its implementation, and how should it manage those challenges?
Investment Banking Industry
Investment banks serve as intermediaries between issuers (buyers of capital) and investors (providers of capital) by matching issuers and investors, providing advice on a fair price for the transaction, and committing to create a liquid market in the new security following the issue. “Full- service” investment banks offer clients a wide range of services including:
________________________________________________________________________________________________________________ Professors Boris Groysberg and Paul Healy and Doctoral Candidate Amanda Cowen prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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