Legg Mason Inc.'s capital markets division, which the Baltimore firm agreed to sell along with its brokers to the financial powerhouse Citigroup Inc., has been stung by a string of defections to competitors as employees speculate that their division will soon be sold again.
Citigroup and Legg Mason agreed in June to swap portions of the companies to focus on their most profitable businesses. The $3.7 billion deal enables Citigroup to expand its broker network and turns Legg Mason, which will get the Smith Barney unit, into the fifth-largest money manager in the world. It was less clear what Citigroup would do with the capital markets division.
The division, which employs about 575 people in Baltimore and across the country, handles investment banking and market research and has two trading floors for stocks and bonds. Analysts say Citigroup, which employs some of the top investment bankers in the business, might not have a use for Legg Mason's smaller operation.
Citigroup officials have acknowledged that they would consider selling the Legg Mason division. Sources familiar with the situation said the company is deep in negotiations with Stifel Nicolaus & Co., a brokerage and investment banking firm headquartered in St. Louis.
But until a deal is reached, the uncertainty that dogged Legg Mason while the Citigroup talks were under wraps continues to hang over the capital markets division. The Legg Mason-Citigroup swap, negotiated by a handful of high-level executives, was the subject of weeks of speculation until the details were announced publicly.
"The longer this drags on in the capital markets group, the more uncertainty comes up, and the more good talent will find another place of employment," said Matt Snowling, an analyst at Friedman Billings Ramsey & Co. "Citigroup is obviously a motivated seller. They either sell those assets or shut down all or parts of the division. There's just too much redundancy."
Revenue generated by the capital markets division declined in the most recent quarter. Legg's Chairman and Chief Executive Officer Raymond A. "Chip" Mason said in a conference call about earnings that those employees have been "distracted."
More departures in the division, which relies heavily on the abilities of its work force, could lower the selling price, analysts said. Citigroup could sell the division piecemeal or all at once, with the total price tag estimated in the range of $350 million.
"The price goes down the more people walk out the door," said Franklin L. Morton, who supervises research on the financial services industry at Ariel Capital Management.
One of the most notable departures was that of William Bass, who was a managing director at Legg Mason and had been with the firm for more than a decade. Bass, who declined to comment, joined Wachovia Securities in Baltimore this month. Others have left for the East Coast offices of RBC Dain Rauscher, a securities firm based in Minneapolis, and Stone & Youngberg, a San Francisco-based underwriter.
A Citigroup spokeswoman declined to comment yesterday on the potential sale of the capital markets division. Officials with Stifel Nicolaus couldn't be reached to comment.
Meanwhile, Legg Mason and Citigroup are hammering out the logistics of their swap, including employment agreements. Smith Barney announced this week that David S. Penn agreed to join the firm as director of investment products after a 21-year career with Legg Mason, and Citigroup is offering retention bonuses to Legg's brokers. At the high end, brokers who bring in more than $2 million in fees and commissions a year would get at least $1 million in a forgivable loan and stock.
The Citigroup-Legg Mason deal is expected to close this year.
"It still looks as if the marriage is going OK," said Andrew Clark, an analyst at Lipper Inc. "If the defections continue after a year, that's a sign that something else is going on."