Legg Mason Inc. is discussing a deal with Citigroup Inc. that could complete its transformation from a company that sells stocks into a pure money manager, according to a source familiar with the negotiations.
The Baltimore investment firm's stock price -- already up 47 percent in the past year -- climbed 3 percent to $86.92 yesterday as investors reacted favorably to a report that Legg Mason was considering swapping its 1,500-person stock brokerage to Citigroup in exchange for Citigroup's asset-management business.
According to the source, who spoke on condition of anonymity because the talks are continuing, Legg Mason chief executive Raymond A. "Chip" Mason is negotiating with Citigroup. He is a cautious negotiator when it comes to mergers and acquisitions, and the source said the deal under consideration now could be altered or dropped altogether. The New York Times reported yesterday that the deal would transfer Legg Mason's chain of 135 East Coast brokerage offices to Citigroup. In return, Citigroup would take a significant equity stake in Legg and turn over its $460 billion in asset-management accounts -- more than doubling the $373 billion that Legg now has under management and making it one of the top five money managers in the country. The Citigroup Asset Management unit employs 2,600 and manages mutual funds and a number of other investment services for individuals and institutions.
"It would be a very big deal to get done," said David Haas, who follows Legg Mason for Fox-Pitt, Kelton in New York. "But it has its merits."
It would also complete Mason's vision of creating a firm to sell only one thing: advice. The company was formed in 1970, when Mason merged his Virginia-based stock brokerage with Baltimore's Legg & Co. Until the early 1990s, Mason built the firm as a traditional regional brokerage and investment bank that sold stocks and bonds to investors and advised companies on mergers and stock and bond offerings.
But in 1991 Mason began to move his company away from the commission-based, cyclical nature of those businesses into the more steady asset-management game. Asset managers -- which include stand-alone companies such as Baltimore's T. Rowe Price Group Inc. -- charge a fee based on a percentage of the total assets under management. Legg's assets under management have grown on average more than 30 percent a year for the past 10 years, mostly through acquisition but also because of cash from new clients. In the most recent quarter, 69 percent of Legg's revenue came from its asset-management business. About 14 percent came from brokerage commissions. The shift away from Legg's legacy brokerage business clearly left Mason wondering what to do about the trade in which he started more than 40 years ago. At a meeting with Washington Post editors and reporters earlier this year, he called the brokerage unit "kind of the odd man out." He said, "You have to wonder what it's doing there at a certain point."
While allowing Legg Mason to focus on what has become its dominant business, a swap would also help Citigroup pare down its complicated "supermarket" of financial services. Before stepping down last year, Citigroup chairman and chief executive Sanford I. Weill assembled a sprawling variety of businesses such as insurance, investment banking, commercial and consumer banking, mutual funds, and investment advising.
But managing such a diverse set of risks -- especially the legal and regulatory complexities -- proved problematic for the New York company. For example, the Securities and Exchange Commission has taken a dim view of firms that give brokers financial incentives to sell clients their own mutual funds. Citigroup owns the retail brokerage Smith Barney.
Legg Mason's asset-management business is a collection of companies assembled over the past 10 years, most of which operate with a high level of autonomy. The largest is Western Asset Management, a California-based specialist in bonds that manages $211 billion, mostly for corporations, pension funds, insurance companies and mutual fund advisers. More than two-thirds of Legg's 5,300 employees work on the asset-management side. The trade would provide a wider distribution for the products of some of the company's key money managers, such as star investor William H. Miller III, whose mutual funds are now offered only through Legg's brokerage. Analysts expect that Citigroup would strike a favorable distribution pact for Legg products.
Mason "has really taken Legg and transformed it from a regional brokerage firm to almost -- but not quite -- a full-service asset manager," said Matthew Snowling, who follows Legg for Friedman, Billings, Ramsey Group Inc. in Arlington. "This would be a way for him to complete that transformation.
"There's a big opportunity here from Legg's standpoint," he said. "You'll still have a sales force that you can rely on, but also you'd be able to open the Legg funds to all different brokers."