Legg Mason, Citigroup agree to swap business

Baltimore-based firm would become world's fifth-largest money manager

$3.7 billion deal crowns founder's career

June 25, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

Legg Mason Inc. agreed yesterday to trade its brokerage unit for the money management business of financial giant Citigroup Inc. in a $3.7 billion deal that transforms the Baltimore-based firm from a regional player into the world's fifth-largest money manager.

The deal remakes Legg Mason into a powerhouse in the business of investing money for wealthy families, institutions, workers and countries. It also frees Legg Mason from its historic moorings as a stock brokerage and the heightened regulatory scrutiny of potential conflicts of interest posed by brokers giving advice to clients while also selling their firm's mutual funds.

Raymond A. "Chip" Mason, Legg Mason's chairman and chief executive, broke the news to employees in an early-morning conference call. The company's offices had been abuzz for weeks about an impending deal that had been leaked to the media but about which Mason, by his own admission yesterday, had been wavering. At Citigroup's headquarters in New York, employees gathered for a town-hall-style meeting about the same time.

"This affords us an opportunity that is quite unique, and we looked at this long and hard," Mason said. "This transaction positions Legg Mason to be a formidable competitor."

The announcement crowned the career of the 68-year-old Mason, who said he will retire after the transaction is complete in two years. Mason founded a brokerage that bore his name in Virginia more than four decades ago, merged it with Legg & Co. a few years later and soon began running the entire firm. He said he thanked employees for helping him build the business.

"This was a very, very personal and difficult decision," he said in a conference call with analysts. "`Traumatic' would almost be an understatement, but it is in the long run probably the way it's going to have to be."

Legg Mason and Citigroup executives said they couldn't predict if any employees would lose their jobs while the two companies integrate their businesses. However, Mason said in an interview that he might expand his work force, as he expects the company to grow even bigger. He said the deal would boost the firm's earnings by 9 percent next year.

For Citigroup, which has been dogged by regulatory problems, the transaction enables it to focus on providing independent investment advice while gaining the ability to sell Legg Mason's mutual funds, many of which have out-performed their competition.

"Frankly, our performance in asset management has not been what we hoped for it to be," Citigroup Chief Executive Charles Prince said. "Devoting the resources needed to make that business a leader for us, we believe, would be better directed to our other franchises."

Possible harbinger

Industry observers said the transaction might be a harbinger of companies abandoning the "financial supermarket" model, in which firms tried to offer a range of services to investors as one-stop-shops. They also said it plays to the strengths of Legg Mason, which gains intellectual capital in addition to the investor accounts, and of Citigroup, whose Smith Barney business prizes brokers who have built personal relationships with clients.

The swap of assets and personnel is a huge and complicated undertaking. It involves Legg Mason's getting $437 billion that Citigroup manages. In return, Citigroup takes Legg Mason's regional network of 1,540 brokers, $1.5 billion in Legg Mason stock - a 14 percent stake - and $550 million through a five-year loan agreement.

Legg Mason also announced yesterday a separate, smaller agreement to buy Permal Group, one of the world's largest managers of funds that invest in hedge funds - private investment pools tailored to wealthy individuals. Legg would acquire an 80 percent stake and have the option to purchase the remaining 20 percent with the total price tag capped at $1.4 billion.

Permal, which has offices in New York, London and Singapore and sells its product mostly outside the United States, would operate independently of the Baltimore headquarters. It manages about $20 billion in assets and represents a new frontier for Legg Mason. Mason had previously said that he would not acquire hedge funds, which aren't regulated, but that he would consider a fund of funds - some of which disclose information to investors and vet the funds they invest in with background investigations.

Wall Street liked both deals, sending Legg Mason shares soaring 15 percent to an all-time high of $98 in trading on the New York Stock Exchange. Citigroup stock gained less than 1 percent to $46.95.

"The markets obviously approved of this from a Legg Mason standpoint," said Eric Fitzwater, an analyst at SNL Financial Corp., a financial services data provider. "As a business plan, it's nearly perfection."

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