As Legg Mason Inc. approaches the acquisition of Batterymarch Financial Management, one thing becomes clear: the two participants in this arranged marriage have nothing in common - and that may be their main advantage.
Batterymarch comes into this union with institutional and equity business, international equity in particular, while Legg Mason has a well-developed mutual fund business and fixed-income asset base.
Thanks to the lack of redundancies between the two, Batterymarch likely will stay whole and independent - its management's aim when it sought an acquirer - while Legg Mason will enter the equity market with a pre-built base of more than $6 billion in mainly institutional assets it didn't have before.
Officials at neither firm would speculate on when an agreement could be finalized, but at press time, a deal was expected before the second week of October.
Reports of a $100 million price tag have been confirmed as both reasonably accurate and downplayed as slightly inflated by officials in both companies.
For Batterymarch, the deal entails more than just a solution to the question of founder Dean LeBaron's succession. The acquisition is the final step in a process the Boston-based institutional manager had begun four years ago, seeking to prepare for Mr. LeBaron's eventual retirement. He is expected to stay on after the acquisition and continue his work on complex systems and analysis.
Mr. LeBaron, a 61-year-old investment pioneer who once was described by one of his own competitors as having the mind of Christopher Columbus, also owns the bulk of the firm's equity. Observers repeatedly have pointed out that providing for his succession would be key in the firm's continuing operations.
Batterymarch four years ago began to make the transition from a founder-led company to an institution that could continue in its founder's absence, said Tania Zouikin, chief executive officer. The firm put in place a phantom stock program to compensate key employees and aid in retention; currently, 16 key employees participate. Batterymarch has managed to retain its investment talent, she said, adding the only recent departure among high-level investment staff was portfolio manager Lawrence Speidell, who joined Nicholas-Applegate Capital Management, San Diego, in March.
But the firm had suffered some reversals during the past five years, such as sharp underperformance in 1989 and 1990 and the loss of nearly half of its assets during that period.
Ms. Zouikin admitted 1989 was possibly the firm's worst year, with assets bottoming out in 1990. But she forecasts when the 1989 performance numbers are dropped from the firm's five-year returns, Batterymarch will move up sharply in the rankings.
Batterymarch's U.S. equity composite returned 7.1% for the five-year period ended Aug. 31, compared with 9.6% for the Standard & Poor's 500 Stock Index. Its annual return for 1989 was 13.7%, compared with 31.5% for the S&P 500. But the composite has outperformed the S&P in the past two years and for the year-to-date figures for 1994, it is outperforming it, 6.1% vs. 3.8%.
Batterymarch has overhauled its domestic equity management to address the performance questions, said Ms. Zouikin. A nearly two-year analysis of portfolio management in 1991-'92 resulted in changes in portfolio construction to shorten time horizons and increase the growth orientation. Batterymarch also overhauled trading to reflect the shorter horizons and added strategic themes such as insider trading data, which have been effective in improving performance.
After working so hard on improving performance on the U.S. equity side, Ms. Zouikin said she wanted to avoid seeing Batterymarch cannibalized by its partner for its international investments and its domestic investment functions scrapped in the acquisition.
It was important to find a match with a firm that would allow Batterymarch to remain autonomous and retain its products, she said.
"It would have been easy to go out and find a partner that just wants global - everybody wants global," said Ms. Zouikin. "I didn't want to be acquired for our global stock."
The two firms have talked - and Ms. Zouikin quickly stressed it was "only talk" so far - about areas and products they could develop jointly, such as mutual funds. She noted Legg Mason has an established mutual fund distribution network that would allow Batterymarch to enter that arena.
Legg Mason usually arranges to use its subsidiaries as subadvisers for its mutual funds, and it anticipates forming the same relationship with Batterymarch, said Edward Taber, executive vice president for asset management for Legg Mason. He noted Batterymarch already acts as a subadviser to several mutual funds, and he expects those relationships to continue after the acquisition.
"We would look forward very much to working in an arrangement where they could act as a subadviser on an international equity portfolio, and probably with an emerging market basket, which we think would be a cutting-edge product," said Mr. Taber.
"We've always looked at it as a hand-in-glove thing. We need an international equity fund for our Legg Mason family of funds."
It was no secret that Legg Mason - a Baltimore holding company with brokerage, mutual funds and investment banking subsidiaries - wanted to acquire another money manager, particularly one with an institutional bent. The company has acquired several money management operations, including Western Asset Management Co., a fixed-income specialist; The Fairfield Group, a provider of investment management services to small and midsized bank trust departments; and Gray & Seifert, a manager of assets for wealthy individuals.
The firm also had raised approximately $70 million in convertible debentures in April 1993 specifically to fund acquisitions in the investment management area.
Legg Mason has sought to acquire firms in order to add products and to reach its goal of increasing its investment advisory fee revenue to 25% of total revenue, said Elisabeth Spector, senior vice president. The percent of revenue derived from investment management was 16.5% during the fiscal year ended March 31.
"We, like any brokerage firm, can see a lot of volatility at times in our revenue stream and our earnings stream," said Mr. Taber. "What we sought to do over the years was to cushion that."
By acquiring Batterymarch, Legg Mason would enter areas in which it is not currently well represented, said Mr. Taber. Besides Batterymarch's international and emerging markets capabilities, he noted it also has a presence in the domestic equity area in the institutional marketplace.
"It seemed just about everything they had, we didn't, and everything we had, they didn't," he said.
Batterymarch's equity management would be a good complement for Western's fixed-income offerings, said Mr. Taber. Having the two firms under one roof would allow Legg Mason to offer both equity and fixed-income products to a growing list of institutional clients, he said.
Legg Mason has $18 billion in assets, of which approximately $11 billion are institutional, said Mr. Taber. He added the lion's share of those are fixed-income assets managed by Western Asset. The addition of Batterymarch adds a higher-fee stream of revenue derived from equity and international assets, he said.
Legg Mason had been searching for an acquisition in the institutional equity arena but found most prospects in early 1994 overvalued, said Mr. Taber. Halfway through the first quarter, valuations began to fall to more reasonable levels, he noted.
"Ever since the first week of February of this year, we found there seems to be more reason in the deal flow talks. There's been a closure between the bid and the ask (prices)," he said.
If the $100 million price tag is correct, the deal is priced at approximately 1.5% of assets, a full, but not exaggerated valuation, according to analysts.
"I think it's reasonably priced, given the fact that is an institution that's not on the upward trend in terms of gaining clients and assets," said Glen Casey, analyst with Cerulli Associates, Boston. "It's a firm that may have plateaued and may be settling down."
The $100 million figure would seem a bit high, said Brad Hearsh, managing director of PaineWebber Inc., New York. Using 50 basis points as a guess on Batterymarch's fees and the $100 million figure as a proxy for the final purchase price, he calculated the valuation at about three times fees. That is a full, although not overpriced, valuation for an institutional equity manager, he said.
For Legg Mason, the acquisition made strategic sense, said Mr. Casey.
The firm earns nearly half of its profits from asset management and, like most brokerage firms, that is an area it wants to develop, he said.
