Legg Mason, Inc. president and CEO Mark R. Fetting

Legg Mason, Inc. president and CEO Mark R. Fetting (Amy Davis, Baltimore Sun / July 22, 2008)

The second CEO in Legg Mason's history announced last week he was stepping down, raising the question: What's next for the Baltimore-based money manager?

Only the board — or more precisely, activist shareholder and Legg director Nelson Peltz — may know. And for now, Peltz isn't talking, at least publicly.

But the abrupt resignation of CEO Mark R. Fetting after fewer than five years at the helm has fueled speculation that Legg is headed for a breakup.

Legg has nine major money-management affiliates, some of which would be attractive acquisitions for other asset managers needing to fill out their lineup, analysts said. And the sale or spinoff of some of those affiliates would be a way for Peltz to quickly boost shareholders' value.

"He's certainly a major decision maker," said Richard Cripps, chief investment officer of EquityCompass Strategies in Baltimore, who previously worked 26 years at Legg. "He no doubt will have to consider the alternatives, which includes the breakup."

Legg has struggled to recover from the 2008 financial crisis. Compounding its difficulties were its ill-fated takeover of Citigroup's asset-management business in 2005 and weak performances by some of its funds. Its stock has languished, down more than 60 percent from when Fetting became CEO in early 2008.

The company also has been unable to stem withdrawals from its funds, largely by institutional investors. In early 2008, Legg managed nearly $1 trillion of clients' money. According to the latest figures released Thursday, assets under management rose by $3.4 billion in August to $639.2 billion.

A report by Stifel, Nicolaus & Co., however, said the August asset growth was below expectations, and money has continued to flow out.

Typically, the CEO and other top executives set the company's strategy and direction, and the board signs off on that, said Greggory Warren, senior stock analyst with Morningstar. But Fetting's resignation, which takes effect Oct. 1, signals that the board is steering the company now, he said.

At the wheel, some analysts say, is 70-year-old Peltz, a founding partner of the Trian Fund Management. The New York-based company owns 10.9 percent of Legg, making it the largest shareholder. A spokesman said Trian declines to comment on Legg.

Peltz took a big stake in Legg in 2009, when the stock market was down along with the shares of many financial services companies, said James Hardesty, chairman of Hardesty Capital Management in Baltimore. Peltz likely figured the hard-hit financial sector would rebound the most once the markets improved, which historically has been the case, he said. But that didn't happen.

Fetting had been making progress, Hardesty said, likening the CEO's job to undertaking a major construction project.

"A lot of work has to be done on the foundation before you see the results come to the surface," he said.

But the rebuilding of Legg's fortunes might not have been fast enough for Peltz or the board.

In exchange for a board seat in 2009, Peltz agreed to not amass more shares, gripe publicly or push for the sale of Legg's affiliates for about three years. That promise expires at the end of November. And, Hardesty said, Peltz isn't afraid to step in if he thinks he can unlock value.

"I think he lost patience right before the sun was coming up," Hardesty said. "He wants to exercise more control. I don't know what he wants to do with that control — and he may not."

Morningstar's Warren said Peltz is not a corporate raider who strips down a company and lays off employees. Peltz is an activist shareholder — and not a shy one, he said.

"He has a sense of how things should be done," Warren said. "He's not going to sit back quietly if things aren't going the way he thinks" they should.

The billionaire investor, who never finished college, has agitated for change at many companies that Trian has bought into, including Kraft Foods and Tiffany & Co. He is the non-executive chairman of Wendy's Co. and has muscled his way into director seats on the boards of H. J. Heinz Co. and, just last month, Ingersoll-Rand.

Many analysts speculate that what Peltz has in mind at Legg is to sell or spin off some of the money-management subsidiaries it acquired over the years. Rather than absorbing them, Legg has allowed the affiliates to operate largely independent of the parent company.