Mason holds $830 billion of investors' money in his hands

Success of the Citigroup deal depends on Legg Mason chief

June 26, 2005|By Robert Little | Robert Little,SUN NATIONAL STAFF

After the conference call to his employees, after he briefed the stock analysts and the media and watched Wall Street exult over the prospect of Legg Mason Inc. morphing into the world's fifth-largest money manager, Raymond A. "Chip" Mason sat down and pondered the hard part, which hasn't happened yet.

The new clients must stay happy, he said. They have to trust that shifting their investments from Citigroup Inc., the largest financial services firm on the planet, to a home-grown operation in Baltimore will be seamless. It's the riskiest element of Legg Mason's deal, in which it will shed the brokerage business upon which it was founded and acquire Citigroup's money management business, Mason said.

"I have no idea if this bridge is a real bridge or not," Mason said. "And I'm walking across this ravine."

Yet there's a safety net, installed at the demand of other executives who negotiated the $3.7 billion deal. Chip Mason is it.

The 68-year-old chief executive will work at least two more years from his office atop the Legg Mason tower on Light Street, carrying out the deal that will leave his company managing some $830 billion in investors' money. The gray-haired engine behind Legg Mason's extraordinary growth preached about ethics before it was vogue and rooted out conflicts of interest before it was law. Such is his reputation for dependable and respectable oversight, analysts say if he weren't staying the deal might not survive.

Mason's insistence that brokers and asset managers not commingle was considered stodgy back before such things spawned industry scandals, they say. His line about employees never getting close enough to ethical lines to even get chalk on their shoes sometimes seemed tired. But as Legg Mason stands to become an international powerhouse in the business of managing mutual funds and bond portfolios, the prescience of the firm's surviving namesake seems apparent.

"I know it sounds kind of breathless, but in his case I think it's true. He was a visionary," said Ben Phillips, managing director of Cerulli Associates, a financial services consulting firm in Boston. "He realized, when it now seems like no one else did, that brokers and asset managers have different skills - that if you kept them autonomous they were better equipped to succeed. Well, today everyone knows he was right."

Mason wasn't cheering Friday. Associates said he seemed more relaxed than normal after the deal's announcement, perhaps relieved to have the marathon negotiations behind him. But as he sat for a moment to discuss the deal, in the glow of his office's postcard view of the city, he was cautious about sounding gleeful. There would be no pictures taken down on the company's trading floor, where brokerage employees were still assessing their fates. "It's too soon," he said.

So wrenching was the decision to trade away Legg Mason's brokerage - an evolved version of the trading operation Mason & Co. that he founded in Newport News, Va., in 1962, at age 25 - that it nearly scuttled the deal, he said. One reason the negotiations dragged on, why the company didn't announce the deal for weeks even after details leaked to the media, was his emotional attachment to the business that was his life for so long.

"I would get cold feet and say, `I can't do this,'" he said. "To call it traumatic is an understatement.

"This is something that I've built for the last 40 years, and for me to more or less say, `I'm walking away'? It was not easy. It's where I started."

Still, he and others say they knew the deal was inevitable - if not with Citigroup, then with one of the countless other firms that have knocked on his door in recent years. And the roots of that impending future can be traced at least back to 1986, when Legg Mason acquired the Los Angeles-based bond firm Western Asset Management Co., getting one of its first tastes of a business where revenue doesn't rise and fall on the market's whims.

The brokerage was still Legg Mason's main business - as it was in 1970 when Mason merged with Legg & Co., whose Baltimore brokerage business dates to 1899 - but the future had been cast.

The asset-management business grew precipitously in the years that followed, accounting for 33 percent of the company by 1995. Then Legg Mason went on a buying bender - Brandywine Asset Management, Perigee Inc., Private Capital Management, Royce & Associates, among others - and its managed assets skyrocketed. By 2004, asset management was 69 percent of Legg Mason's business.

The growth and acquisitions garnered some attention from the industry's observers, but so did another remarkable development: Executives at the acquired companies tended not to leave. And when they investigated why, they often found the same answer: Chip Mason.

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