By Eileen Ambrose, The Baltimore Sun
7:06 PM EST, February 13, 2013
Legg Mason Inc. chose an insider as its new CEO, quelling speculation that the Baltimore-based money manager might be headed for a breakup that could have been bad news for the city.
After a worldwide search for a new leader, Legg announced Wednesday that it had appointed Joseph A. Sullivan as president, CEO and a member of its board. Sullivan, 55, who previously led Legg's global distribution efforts, had been interim CEO since October, when Mark R. Fetting stepped down under pressure after less than five years.
Sullivan, a Minneapolis native, joined Legg in 1994, left in 2005 and returned three years later. His roots with the company mean Sullivan is unlikely to break it up, said James Hardesty, chairman of Hardesty Capital Management in Baltimore.
"There is no pressure on him to come in and take a chainsaw and recast the culture of the company … and tear the pieces apart," Hardesty said. "That would have been bad for Baltimore. They would have been a diminished enterprise."
Still Sullivan, like his predecessor Fetting, faces stiff challenges, including boosting the company's languishing stock price and stanching the flow of money out of its mutual funds.
"The other side of challenges are opportunities," Sullivan said in an interview Wednesday morning, noting Legg has products in many asset classes and a worldwide distribution. "We have a foundation that is very, very strong, and I would say, enviable. We need to make it all work better than we have."
Legg's stock slipped 63 cents, or about 2 percent, Wednesday to close at $27.28 a share.
Sullivan said he plans to work with the board and Legg's affiliates to "craft a vision of what needs to happen for Legg Mason to win in the future."
The board will grow in April with the addition of Dennis M. Kass, who retired as CEO last year from asset manager Jennison Associates, an affiliate of Prudential Financial Inc., Legg also announced on Wednesday.
Sullivan added that he remains committed to Legg's unusual structure as a parent company with independent affiliates that manage their own investment funds.
One of Sullivan's goals is to fill gaps in Legg's investment lineup. That includes adding international or emerging-market equity management or alternative investments, such as real estate and natural resources, Sullivan said.
The new CEO said Legg may fill those vacancies by establishing a new stand-alone affiliate or buying another asset manager and folding it into an existing Legg subsidiary.
Legg Chairman W. Allen Reed, who led the board's search for a permanent CEO, said Wednesday the company considered a long list of candidates, looking for an industry veteran who had the management skills to collaborate with Legg's various affiliates and help them grow.
But as months went by with no permanent CEO, analysts and industry experts speculated that no outsider wanted the job of leading Legg and its affiliates. According to reports, some affiliates have been unhappy with the marketing and other support received from headquarters.
It's not difficult to manage the affiliates, but "it's different to manage," Reed said. "That does reduce the number of candidates that really have the experience to do the job."
Ultimately the board chose Sullivan, who did an "excellent job as interim CEO," he said.
Terrence Murphy, CEO of Legg's ClearBridge Investments affiliate in New York, said the affiliates participated in interviews with candidates. Murphy said he wanted a CEO who understood the affiliate model and the company's history, which goes back to 1899.
"Joe is going to be a great leader," he said. "In the four months he has been in the interim role, he has done a solid job."
In recent months, Sullivan oversaw the acquisition of European money manager Fauchier Partners, which will be merged into Legg's Permal Group, as well as the move to merge the Baltimore-based Legg Mason Capital Management unit into ClearBridge. He also restructured the revenue-sharing agreement with Permal, and introduced an equity incentive program at Permal that would allow managers to invest and share in the growth of that subsidiary.
As time went on and Sullivan quickly made changes, analysts concluded he was the front-runner.
"It's not a big surprise," said Jeffrey Hopson, a senior analyst with Stifel, Nicolaus & Co. in St. Louis.
Hopson said there are pros and cons to naming an insider as CEO.
"Some outside observers would have thought that this company, given its challenges, might have needed a fresh set of eyes to reassess and potentially make significant changes," Hopson said.
On the positive side, he said, "the company has been through a period of uncertainty," and an insider provides immediate stability. This way, he said, Legg employees can "continue on without these major uncertainties hanging over them."
Still Sullivan's active tenure as interim CEO sent a message to employees that changes are coming, Hopson said.
"He has been working hard, suggesting to the organization that while he has been a Legg Mason employee, the status quo is not acceptable," he said.
Michael Kim, an analyst with Sandler O'Neill & Partners in New York, said the widely anticipated appointment of Sullivan removes an "overhang" from the stock.
"The board and senior management can now really fully focus on the task at hand, which is obviously to shift into more of a growth mode," Kim said.
Brian Rogers, chairman and chief investment officer of Baltimore-based T. Rowe Price, issued a statement supporting Sullivan's appointment.
"Joe Sullivan is a seasoned executive who knows his way around the Legg Mason organization and can work well with its investment groups," Rogers said. "We are confident that he will continue to stay focused on taking actions to build shareholder value."
T. Rowe Price, through its funds and other portfolios, is Legg's largest shareholder, with a 10.4 percent stake in the company as of the end of last year.
Analysts say Fetting resigned under pressure from Legg director and activist shareholder Nelson Peltz, whose Trian Fund Management LLP is the second-largest shareholder, with 9.78 percent of Legg as of September. Peltz hasn't publicly weighed in since Fetting's departure, but he has a track record of pushing companies to take steps to raise their shareholder value.
In a statement Wednesday, Trian said, "We believe Joe brings the leadership skills required to strengthen and expand the capabilities of Legg Mason to create long-term value for Legg Mason shareholders."
Legg's stock price has fallen nearly 80 percent since peaking in 2006. And it continues to see money flow out of its funds. At the end of January, Legg had $654.1 billion in assets under management, compared with more than $1 trillion six years ago.
Legg's investment offerings are heavily weighted in fixed-income and money-market funds, said Greggory Warren, a senior stock analyst with Morningstar Inc. Though risk-averse investors have been pouring money into such conservative investments in recent years, Legg has seen an outflow because of poor performance in some of its funds, he said.
Legg also recently reported a third-quarter loss of $454 million — the largest in five years — following a writedown of assets at one of its affiliates.
After Fetting's departure last fall, speculation mounted about whether the company would remain intact or sell some of its affiliates. Legg will have eight major affiliates after it combines Capital Management with ClearBridge this year. Legg employs 2,984 people, including 425 at its headquarters in Harbor East.
Analysts said Sullivan's appointment signaled that Legg will continue in its current form.
"I don't think you will see any sort of a breakup of the franchise," Sandler O'Neill's Kim said.
Joseph A. Sullivan
Education: Bachelor's degree in economics from St. John's University; graduate of the Securities Industry Institute at the Wharton School of Business, University of Pennsylvania
Employment: Worked at Legg Mason from 1994 to 2005, then joined Stifel, Nicolaus & Co., serving as executive vice president and head of fixed-income capital markets. Rejoined Legg in 2008 as senior executive vice president and chief administrative officer; served as head of global distribution before being named interim CEO in October.
Outside associations: Current trustee and former chair of the Securities Industry Institute; former chair of the fixed-income committee of the National Association of Securities Dealers; former board member of the Bond Market Association. Served as a trustee for Catholic Charities, St. Ignatius Loyola Academy; chair of the board of trustees for Loyola Blakefield School; former president of the Baltimore Youth Hockey Association.
Source: Legg Mason Inc
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