"If they take an underperforming fund and fold that into a better performer, you need less people, you need less office space, and that all goes to the bottom line," Sterling said.

Legg is doing some of that already.

Last month it announced that it would merge Legg Mason Capital Management, the Baltimore unit that rose to prominence under Miller, into a much larger affiliate in New York. The company said a small number of employees would lose their jobs.

As part of that merger, too, the company plans to sublease 78,000 square feet at the Legg Mason tower in Harbor East, reducing its real estate costs there.

Dick O'Brien, senior executive vice president of Folger Nolan Fleming Douglas brokerage in Hunt Valley and a Legg shareholder, said the next leader needs to cultivate greater harmony among the affiliates.

Once Legg merges Capital Management into ClearBridge Investments in June, the company will have eight major affiliates. Each operates as a separate business with a different revenue-sharing agreement with the parent company.

"They still need to have their autonomy," O'Brien said. "But at the same time, there must be some areas of mutual cooperation that could exist."

For instance, Legg could leverage its affiliates' client relationships, perhaps by introducing fixed-income customers to its equity products, O'Brien suggested. That doesn't seem to be happening now, he said.

That might be easier said than done. Senior managers at the affiliates are used to operating independently — which can make the CEO's job difficult.

"They're smart and know they're smart," Hardesty said. "It is like herding mountain lions."

Even though its affiliates operate under a crazy quilt of revenue-sharing agreements with Legg, the interim CEO Sullivan told analysts this month that the company remains committed to the affiliate model.

Some affiliates complain privately about the inequity of the agreements and about Legg's marketing of their funds, according to published reports. Legg does not disclose details about its revenue-sharing agreements with affiliates.

Legg might be open to altering those agreements as it recently did with New York affiliate Permal Group.

In December, Legg agreed to acquire London-based fund manager Fauchier Partners for up to $136 million — $80 million upfront and up to $56 million within four years if financial targets are met — and merge it into Permal.

As part of that deal it came to terms on a new revenue-sharing deal with Permal. The new agreement reduces the amount of revenue sharing from the affiliate, although Legg would get a bigger slice if assets under management and revenues go up.

Legg also is introducing an incentive program that will let Permal managers invest in an equity plan and own a piece of the affiliate, depending on how well Permal grows its business. This could serve as a model for other affiliates, Sullivan said during a recent conference call with analysts about Legg's third-quarter earnings.

Legg faces two futures, Hardesty said. It could either rebuild its investment performance and return to prominence under the Legg Mason brand or the company could unwind, selling off some jewels — its affiliates — to their senior managers and others, he said.

If it unwinds, Hardesty said, "Baltimore would be the big loser."

Macrae Sykes, an analyst with Gabelli & Co. in Rye, N.Y., said the new CEO needs to be an industry veteran with the "financial engineering" experience to boost value by spinning off affiliates or acquiring other companies as it did with Fauchier.

Whatever tack the new CEO takes, analysts and industry experts agree that a turnaround for Legg will take time.

One of the biggest believers in a Legg's prospects is the company's largest shareholder — T. Rowe Price. The Baltimore-based investment company, through its funds and other portfolios, owns 10.4 percent of Legg as of Dec. 31.

Brian Rogers, Price chairman and chief investment officer, told Barron's last month that Legg is inexpensive at $26 a share, recalling six years ago when it was a $140 stock.

"Everything that could go possibly wrong at Legg has gone wrong in the past few years. The company had performance problems in key mutual funds. It had disgruntled affiliates," Rogers said. "We see little downside and significant upside, and we are eagerly awaiting the naming of a new CEO."

Rogers added, "Everything might fall into place at Legg Mason."



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