For Legg Mason, job cuts cap a tumultuous few years

Baltimore money manager will shift work out of town as it tries to get back on track

May 16, 2010|By Jamie Smith Hopkins, The Baltimore Sun

Legg Mason's plan to cut nearly a third of its local work force is a potent example of how much the financial climate has changed in recent years — and a reminder of how painful it is to be on the outs with Wall Street.

The Baltimore-based company has gone through the boom and bust. Five years ago in good times, it struck a deal with Citigroup Inc. that turned the regional player into the world's fifth-largest money manager. Then the company slammed into the worldwide financial crisis, and losses and layoffs ensued.

But when the economy and its finances turned around in recent months, the stock price was left behind. And Legg Mason executives were put on notice to do something more about costs — something big.

Last week, Chief Executive Officer Mark Fetting decided on a cost-cutting plan for the global company that hits home. Of the 350 back-office jobs Legg Mason will eliminate, 250 are in Owings Mills and Baltimore City. That's more than all its layoffs here during the depths of the recession.

"We continue to face a persistent challenge: disappointing operating margins," Fetting told employees on Monday. "This is increasingly visible as the markets continue to rebound and our competitors benefit. As chairman and CEO of Legg Mason, I have a responsibility to do what's right for our company, starting with our clients and then our shareholders, no matter how difficult the decisions."

The move by Legg Mason to slash its work force even after it had returned to profitability reflects not only the recession's impact but also a new reality for a marquee Baltimore company and the city where it has its headquarters. When the "streamlining" is complete in 18 months, the local work force will add up to about 550 people —half of what it was just two years ago.

The announcement last week could be viewed as "a game changer," Jason Weyeneth, a Sterne Agee analyst, said in a research note.

Dan Fannon, a research analyst with Jefferies & Co. in San Francisco, calls the job cuts "the reality of where their business is today." Despite recent improvement, the $685 billion Legg Mason manages for clients is a far cry from more than $1 trillion in the summer of 2007. When you have less money to manage, Fannon said, you need fewer people.

Legg Mason — which briefly made the Fortune 500 list before the worst of the market turmoil caught up with it — has had good results from its mutual funds in the past year. But they were among the worst performers in the industry in 2008, when times were tough.

Clients fled, taking billions with them. One client, the Massachusetts employee retirement system, decided that year to get out of actively managed U.S. stock funds and stick with passively managed products, such as funds that track stock market indexes. The extra cost to hire a money manager didn't seem worth it.

"We thought incredibly highly of [famed Legg Mason money manager] Bill [Miller]," said Mike Travaglini, executive director of the Massachusetts system, which ran the numbers on more than 20 years of its investments before making the switch. "Once Bill's performance started netting out to being flat in the life of our relationship, we basically said, 'If Bill Miller can't do it on a consistent basis, then nobody can.' "

Legg Mason's stock dove to less than $11 a share last year before fighting its way back up to the high $20s in the summer. And that's more or less where it has stayed.

That is, until the company announced the layoffs, along with a strong earnings report and a $1 billion stock buyback plan, after the markets closed Monday.

The next day, its stock price jumped 11 percent to more than $33 a share. At least two Wall Street analysts upgraded the company's stock from "hold" to "buy" during the week. And some short sellers — investors betting on bad things for Legg Mason — had to rush to purchase shares so they could cover their positions, said Fannon, the research analyst.

Harold L. Adams, a Legg Mason director for 22 years, thinks the downsizing plan will ease much of the pressure coming from investors.

"In today's world, that's what it's all about — satisfy the shareholders," said Adams, chairman emeritus of Baltimore architecture firm RTKL Associates.

Otherwise, a company risks being taken over, he said. Leaving shareholders unhappy "brings on turmoil for a company."

Rumors swirled that billionaire investor Nelson Peltz had a sale or breakup in mind when he rapidly bought up Legg Mason stock last year. Peltz, known for agitating for change at the companies he targets, joined the money manager's board in the fall.

Fetting said Friday that just about every financial services company had to worry about a takeover in 2008. But he's certain Legg Mason is past that danger zone now because it cleaned up its balance sheet — without a government handout, he notes.

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