BALTIMORE Two years after Legg Mason Inc.s transformational deal swapping its brokerage arm for Citigroup Asset Management, the money management giant is facing the need for another round of change this time under the withering glare of stock market investors.
The Baltimore-based companys agenda includes finding a successor to 71-year-old founder and Chairman Raymond A. Chip Mason, strengthening distribution, expanding in Europe and bolstering its brand all at a time when performance woes and succession issues have left Legg the odd man out in a market enthusiastically embracing money managers.
Some investors are hopeful that time and a return to form by Bill Miller, Legg Mason Capital Management Inc.s legendary chief investment officer will heal all wounds.
The firm is facing a number of issues, but disappointing performance of Leggs equity funds and concerns about potential problems with its money market operation are the primary focus now, said James Albers, an analyst with Cleveland-based Victory Asset Management. Victory funds hold more than 1 million shares of Legg Mason stock.
Others say bolstering the holding companys management structure, and adjusting its role following the loss of Leggs brokerage operations, are just as important.
Part of Leggs management challenge is a response to short-term pressures.
In the space of six weeks this spring, Mr. Mason had to assume the responsibilities of two top lieutenants: James W. Hirschmann, who relinquished his roles as president and chief operating officer to reclaim the chief executive officer position at Legg subsidiary Western Asset Management Co., Pasadena, Calif., and Timothy C. Scheve, who resigned as chief administrative officer to become CEO of brokerage at Janney Montgomery Scott LLC, Philadelphia.
The lack of management depth at the company now is stunning, noted one ex-Legg veteran, who declined to be named.
While respect for Mr. Mason is pretty much universal, some observers question how well positioned the holding companys leadership is to respond to Leggs challenges. The leadership (situation) is worse than the stock price would suggest, agreed one investment banker who likewise declined to be named, adding shareholders are not getting the degree of aggressive management they have a right to expect.
Several Legg Mason watchers depict the coming transition to new management as unfinished business in the companys emergence as a pure money manager.
When the group had a big brokerage operation, it was clearer that Leggs subsidiaries were benefiting from the holding companys distribution, said another former Legg executive, who declined to be named. With the brokerage gone, theres more room for those subsidiaries to question what theyre getting in return for the 50% of their revenue going to the holding company, he said.
The cold shoulder that stock market investors are giving to Leggs shares in the wake of occasional earnings disappointments over the past two years are adding to the pressures facing the firm.
Leggs Oct. 24 announcement of its third-quarter results accelerated the downward momentum of its shares. With continued weak results by Mr. Miller and others contributing to net equity outflows of just under $10 billion, and another $1 billion in money market outflows, Leggs stock price tumbled 13% from its pre-announcement close of $83.45 to a close of $72.39 on Nov. 9. Over the same time span, the S&P 500 index slipped 4.3%.
Even at less than $75 a share, many sell-side houses analysts including ones at Goldman Sachs & Co., Merrill Lynch & Co. and Deutsche Bank Securities Inc.. remain neutral on Leggs stock.
One analyst, Wachovias Doug Sipkin, downgraded his recommendation to a sell, partly because of concerns that Citigroup, facing losses of up to $11 billion from recent market volatility, could move to unload the $750 million stake in Legg it still holds following the two firms business swap. Mr. Sipkin also cited concerns about the exposure of Leggs liquidity business to structured investment vehicles, which have faced downgrades recently from ratings agencies.
Trading 30% below
According to Putnam Lovell, the New York-based investment bank division of Jefferies & Co., after money managers reported their third-quarter results in October, Leggs shares were trading 30% below their 52-week high, compared with a median drop of 7% for diversified, listed fund managers. Leggs enterprise value, meanwhile, was a mere 7.1 times the firms earnings before interest, taxes, depreciation and amortization, compared with a median multiple of 12.7 times.
That kind of market reception has to create some pressure on Mr. Mason, even if theres a limit to what he can do in the short term to address the firms performance woes, said Robert Lee, an analyst with Keefe, Bruyette & Woods Inc., New York.
One money manager consultant, who declined to be named, said investment bankers eager for another big deal involving Legg have been pushing the idea of a merger with INVESCO PLC, London. INVESCO CEO Martin Flanagan could succeed Mr. Mason, while its international operations and retail distribution would complement areas Legg has been looking to strengthen, the consultant said.
Sources, who declined to be named, believe Mr. Mason and Mr. Flanagan met more than once earlier this year, although nothing came of those meetings. One executive recruiter speculated that Mr. Flanagans command and control approach to managing his own far-flung organization wouldnt fit well with Mr. Masons relatively hands-off style. Still, with Leggs market position worsening considerably in recent months, pressure to reconsider a deal may be growing, he said.
An industry executive familiar with INVESCO, who declined to be named, insisted no meetings between the two companies took place. INVESCO spokesman Bill Hensel said his company wont comment on speculation.
There would be a number of hurdles to doing a merger with another money management firm, including the need to get Leggs bevy of subsidiaries, led by WAMCO and Legg Mason Capital Management Inc., Baltimore, to buy into a deal.
An investment banker with a European bank, who declined to be named, said if Leggs share price continues to drift lower, taking the firm private would probably rank higher as a strategy than going through another major integration exercise so soon after the Citigroup deal.
Legg spokeswoman Mary Athridge said Legg company officials wont comment on speculation about the firms plans.
(updated with correction)