Chip Mason doesn't buy in bulk, so forget Citi

June 03, 2005|By BILL ATKINSON

THE DATE was June 2. The rumor was a blockbuster: Legg Mason was in secret negotiations to buy a half-trillion dollars in assets from a New York financial behemoth.

This was June 2, 2004. The New York firm was Merrill Lynch. And the deal, if there ever really was one in the works, fizzled out.

Exactly a year later, the Baltimore money manager is reportedly negotiating to swap its brokerage business and its 1,500 financial advisers for Citigroup's money management business and its $460 billion in assets.

Both companies were mum yesterday; the only comment from Raymond A. "Chip" Mason, Legg's chairman and chief executive, on the phone yesterday was, "I have no comment."

Don't take that to mean this deal is any more likely to happen than the Merrill deal.

Maybe on a smaller scale, about $50 billion, but not $460 billion in one gulp.

Why? It just isn't Chip Mason's style.

Mason's success has come from being careful and measured. He buys quality, not bulk.

Two recent Legg Mason deals come to mind. In 2001, the company bought Private Capital Management of Naples, Fla., a high-quality money manager that had $8 billion in assets under management. It was Legg's biggest transaction ever and one that made perfect sense. Weeks later, Legg agreed to buy Royce & Associates Inc., a New York money manager with $5.3 billion in assets and a reputation for stellar small-company stock picking.

Both companies' assets have rocketed along with their performance under Legg Mason.

Mason's genius has been not only picking good companies, but also in leaving them alone.

He has let Private Capital, Royce, Western Asset Management and the other companies that he has acquired do what they do best: manage other people's money.

"Traditionally, they are buying Rolls-Royces and shining them up and letting them grow," said Jeff Arricale, an analyst at T. Rowe Price Group in Baltimore who follows Legg.

A deal with Citi would require Mason to scrap a game plan that has worked.

He'd have to force his culture on Citi's; there is no way he would leave a Citi unit up to its own devices, given Citi's recent close, personal relationship with Eliot Spitzer and friends.

Mason also knows that the financial landscape is littered with deals that have blown up. He witnessed Deutsche Bank's manhandling of Alex. Brown, still a fresh wound in the minds of many people in the Baltimore financial community.

That said, there are reasons that Mason would like to phase out of the brokerage business.

Revenue from brokers fluctuates with the swings in the stock market; revenue from asset management is more stable. Legg's revenue from the brokerage side has dwindled to about 22 percent of the company's total from 48 percent in 1995.

There also are nagging concerns about conflicts of interest with brokers selling mutual fund products.

Mason likes to tell people inside that he wants them to stay clear of the chalk lines on the playing field so there is no hint of impropriety. But, of course, you have Legg brokers selling Legg mutual funds, so getting chalk dust on your shoes is always a worry.

As Mason has recast the company's focus around his star portfolio manager, Bill Miller, and its huge bond investment company, Western Asset Management, Legg's performance has been nothing short of spectacular. Assets are pouring in, and revenue and income have hit record levels.

So why would Mason take a risk like the one supposedly being considered? Maybe it's his age. He is 68, in the twilight of his career and wants to go out with a bang. Maybe a monster deal would give his CEO ego a boost.

But Chip Mason doesn't do deals just to do deals. He's the Mason in Legg Mason; the company reflects 43 years of his careful building.

As long as he's running his house, he won't bet it.

Bill Atkinson's column runs Tuesdays and Fridays. Contact him at 410-332-6961 or by e-mail at bill.atkinson@balt sun.com.

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