Legg shares fall as high expenses cut into earnings


Shares of Legg Mason Inc. tumbled more than 7 percent yesterday after the Baltimore-based money manager's quarterly earnings fell short of expectations as it wrestled to absorb assets acquired from financial giant Citigroup Inc.

The company reported a 28 percent increase in fiscal fourth-quarter net income to $150.1 million, or $1.03 per share, compared with year-earlier earnings of $117.6 million, or 98 cents per share. Revenue more than doubled to $1.05 billion, largely a result of acquisitions that helped push assets under management to a record $867.6 billion from $374.5 billion a year ago.

But the results fell well short of analysts' expectations of $1.25 per share and raised concerns about the company's ability in the near term to deliver on promised earnings growth from the $3.7 billion deal with Citigroup that closed late last year.

In December, Legg Mason doubled the amount of money it invests for clients by swapping its brokerage unit for Citigroup Asset Management - an arrangement that gave the company a global footprint with substantial operations in Europe, Australia, Japan, Singapore and elsewhere.

But yesterday's earnings - the first full quarter since the Citigroup deal closed in December - revealed some bumps along the way for what is now the nation's fifth-largest money manager. The company has seen its expenses soar as it continues to operate duplicate systems and pays some workers a premium to keep them from bolting.

Adding to the firm's troubles, star fund manager Bill Miller's Value Trust Fund - the firm's flagship fund that has famously beaten the Standard & Poor's 500 index for 15 straight years - has fallen behind the S&P index by about 8 percent.

Legg Mason Chairman Raymond "Chip" Mason said the company still expects to achieve $80 million to $115 million in cost savings once the transition is complete, but the process "can't be rushed" and those benefits won't be evident until at least September.

"We have made important strides and we are at least as far along as I would have hoped or expected," he said in a conference call with analysts. "This is a large transaction, a massive integration involving lots of people and lots of assets. I'm not sure something of this size and magnitude has happened before."

The company's shares fell $8.46, or 7.3 percent, to close at $108.06 in trading yesterday. The shares have gained 34 percent in the past year, but are well below the $140 per share figure reached briefly in February.

Unexpectedly high expenses defined the quarter, said Matt Snowling, an analyst with Friedman Billings Ramsey, in a research note. He said employee compensation costs - which more than doubled from a year ago to $393.7 million - and an 83 percent increase in distribution-related expenses were key factors.

The company reported $13.1 million in compensation costs related to the Citigroup transaction. Much of the savings realized in the deal will come from reduced compensation costs in later quarters.

"While we expect margins to begin improving meaningfully over the next few quarters, we remain cautious on the stock," Snowling said, pointing to continued risks during the transition and the sluggish performance of Miller's Value Trust Fund, among other factors.

Assets under management increased by about $17 billion during the quarter, with most of the gain - $15.2 billion - coming from market gains. Investors added $1.6 billion to Legg funds during the quarter, with most of the gain coming at units the company owned before the Citigroup acquisition and the November acquisition of hedge-fund firm Permal Group for $800 million.

However, some of that gain was offset as investors in former Citigroup funds withdrew money. Investors also pulled about $11 billion from Citigroup money market funds acquired by Legg.

James W. Hirschmann, who was tapped in March to be president of the firm and Mason's heir apparent, said the outflows from the money market funds were in line with what the company expected. He said that business has since stabilized.


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