Legg closes deal, looks ahead

Baltimore firm manages $830 billion after swap with Citigroup


Legg Mason Inc.'s stock charged to eye-popping levels in the months before yesterday's close of the deal with Citigroup Inc. that makes it the world's fifth-largest money manager, reaching an all-time peak of nearly $127 last week.

According to filings with the Securities and Exchange Commission, Legg Chairman and Chief Executive Officer Raymond A. "Chip" Mason would reap a stock option grant that could be worth more than $8 million if the stock ends the trading day at $127.50 or higher for 30 straight days during the next four years. Before the deal, Legg stock traded at about $85.

As the Baltimore investment firm and Citigroup, a New York financial services company, officially completed their $3.7 billion asset swap yesterday, the grant illustrates how much Legg Mason and its founding chief executive are counting on the deal to advance the company's fortunes - and how closely the fortunes of Mason and his company are tied. Another caveat to the grant requires that Mason, 69, stay in his post for two more years and provide services for two years after that.

"If he's successful, Chip goes out as one of the better managers in financial services history. ... Look at where the stock has gone," said Matt Snowling, an analyst at Friedman Billings Ramsey & Co. "If this process somehow melts down, it would be unfortunate that he would end his career on a sour note, but I think he'll make it work over time."

The closing of the deal, in which Legg Mason swapped its brokerage unit for Citigroup's money management business, means the companies have obtained go-aheads from regulatory agencies, mutual fund shareholders and other investors moving to Legg Mason, and from brokerage clients whose accounts are moving to Citigroup's Smith Barney financial adviser group.

Still, more remains to be done. Legg Mason is absorbing about $400 billion of assets in mutual funds and in accounts managed for clients such as pension funds and wealthy families. Computer systems must be able to handle the changes, and personnel needs must be re-evaluated. A legion of consultants has been hired to help Legg tackle the transition.

"We have worked exhaustively over the last several months to establish the proper structure and strategy for our integrated global operations," Mason said in a statement. "We're delighted now to be able to direct our energies toward making our vision for the future a practical reality."

While most Wall Street analysts have cheered the deal, several have downgraded Legg Mason's stock, arguing that the company faces too many uncertainties and that its stock price already reflects the deal's upside.

"We believe much of the good news is now being priced into the stock," wrote Keefe Bruyette & Woods analysts Robert Lee and Jim Johnson in a report this week. They downgraded the stock to "market perform," or hold, from "outperform," or buy. "We expect that it may not be all smooth sailing over the next several quarters."

Analysts raised concerns yesterday that Legg Mason is taking $37 billion less in assets than originally planned. Legg said some clients left and that certain assets ended up being excluded from the transaction.

Legg shares faltered before gaining 82 cents for the day, or less than 1 percent, to close at $123.47 on the New York Stock Exchange. Citigroup shares rose 30 cents to $48.85.

Legg Mason and Citigroup officials have said they designed the deal to play to each company's strengths and avoid regulatory minefields. Legg will focus exclusively on managing money while Citigroup will rely on its force of brokers, and both avoid potential conflicts of interest that arise when brokers recommend their own firm's investment products.

Separately, Legg acquired a majority stake in Permal Group, which manages hedge funds and has offices from New York to Singapore. Legg now has about $830 billion in assets under management.

In addition to Legg Mason Wood Walker, the brokerage unit, Citigroup received 5.4 million Legg shares, convertible preferred stock for another 13.3 million shares and $500 million in cash. The rise in Legg's stock price contributed to a $2.1 billion gain that Citigroup plans to record in the fourth quarter.

Legg Mason's capital markets business also was part of the initial deal, but Citigroup sold the unit to Stifel Financial Corp. of St. Louis and announced the closing of that deal yesterday. Nearly 500 employees will join Stifel, and many of them will form the company's first branch in Baltimore.

Charles D. Johnston, president and CEO of the Smith Barney brokerage group, said the firm does not have a "grand plan" to consolidate operations, and in the near term plans to keep Legg's roughly 1,500 brokers in their current branch offices.

Legg's flagship brokerage branch will remain in Baltimore and sublease two floors from its former parent company while scouting other downtown locations. Johnston said Citigroup would maintain Legg's brokerage operations center in Owings Mills.

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