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Price, Legg Mason funds clean up on IBM-Lotus deal 2 Baltimore firms see shares' value gain $92 million


Making $62 million in a week can perk up your whole morning. Thirty-one million isn't bad either. Just ask Lise J. Buyer or Bill Miller.

The $3.5 billion that International Business Machines Corp. agreed to spend last week to buy Lotus Development Corp. is twice as much as the Massachusetts software company was worth 11 days earlier.

And about $92 million of that booty is coming to Baltimore, at least on paper, since two Baltimore investment firms control about 5 percent of Lotus stock.

T. Rowe Price Associates Inc. controls about 1.8 million shares through its mutual funds, and two Legg Mason Inc. funds control 900,000 more.

A Lotus share worth $29.50 before IBM's initial offer will zoom to $64 a share after Big Blue completes its buyout. That means Price's customers will earn $61 million and Legg Mason's clients $31 million over the pre-takeover value of their stakes.

"This was kind of looking not so pleasant," said Lise Buyer, a Price technology analyst. She laughed recalling how she persuaded fund managers to buy the notoriously up-and-down Lotus shares -- just before a first-quarter earnings report caused the stock to drop to $25 from more than $40 in March.

"Then this wonderful Blue Angel bailed me out. That's the sentiment, really. Thank goodness! Bailed me out!"

Considering that Legg Mason and Price are across Calvert Street from each other in downtown Baltimore, and that they both held stock in the same company, their Lotus stories are about as different as they can be.

Legg Mason has held its Lotus shares for about two years, said William H. Miller III, president of Legg Mason Fund Adviser Inc., the brokerage firm's fund subsidiary.

Mr. Miller said he bought some shares for less than $20 because Legg Mason's "value investing" strategy looks for companies with decent fundamentals whose stocks are so beaten down by short-term events that they can hardly help but rise eventually.

"Ours is a bargain-hunting approach," he said.

The first-quarter earnings report caused Lotus to announce a restructuring that Mr. Miller publicly branded "feeble" in an interview with Bloomberg Business News.

Having ridden the stock price from the teens to the 70s to the 20s to the low 30s before the offer, Legg Mason's Lotus holdings had been through more of an adventure than most.

"We almost round-tripped it," Mr. Miller said. "The stock had been doing so poorly it was weighing on our results. We're having a good year, but this wasn't one of the reasons."

Unlike Legg Mason's value funds, the more aggressive T. Rowe Price Science and Technology Fund and Growth Stock Fund look for companies that have a chance to grow strongly, even if their shares are already highly valued. Those two funds held most of Price's Lotus shares

Ms. Buyer said she talked fund managers into buying Lotus shares because the company's new Notes communications program would make the firm grow fast enough to fit Price's standards.

But Price suffered a paper loss on the stock after the first-quarter report showed Lotus had been steeply discounting Notes to buoy sales and that long-eroding Lotus mainstays like the 1-2-3 spreadsheet program were still crumbling.

"I was certainly losing sleep over this position," Ms. Buyer said. "The quarter wasn't good, the current trends didn't look impressive and it has been a highly volatile stock."

The big winners aren't Legg Mason and Price but the customers who own the mutual funds with Lotus shares. The two firms will content themselves with better yearly returns. Mr. Miller said the deal raised the year-to-date return on a $1.1 billion fund by a full percentage point.

Despite their different approaches, both Mr. Miller and Ms. Buyer guessed Lotus might get bought out some day.

Mr. Miller said he had a meeting with a New York investment banker the Friday before IBM's initial $60-a-share offer came out June 5. They had agreed that Lotus was probably worth about $60 a share to the right buyer.

"We didn't see it coming in a specific way; we've got 100 companies with a possibility of being taken over and 99 percent of them aren't," Mr. Miller said. "But it's always better to look smart than stupid."

Price looked smart again last week, when First Financial Management Corp. agreed to merge with First Data Corp. in a $6.6 billion all-stock deal. Price controls 2 million shares of First Financial, whose stock rose $7 to $83.75. Chip Morris, the manager of Price's Science and Technology Fund, said First Data's offer is too low and a higher bid may emerge.

The Lotus takeover drama, on the other hand, turned out to be short and undramatic. No rival bidder emerged. Lotus management's track record was too spotty for Chief Executive James Manzi to ask institutional shareholders to reject IBM's bid.

"The offer was so big [Mr. Manzi] knew he didn't have a prayer," Ms. Buyer said. "Nobody had a choice."

But reality intrudes. It's a big stock market out there, and tomorrow some stock they own is going to be a dog.

"In some ways, I'm somewhat removed from it," Ms. Buyer said. "It doesn't go in my pocket. And in this business, you have ups and downs."

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