In its largest deal since its founding 102 years ago, Legg Mason Inc. has agreed to buy a top-performing Florida money management firm for as much as $1.38 billion in cash.
The acquisition of Private Capital Management L.P. of Naples, Fla., will double the size of Legg Mason's business that manages money for wealthy individuals to $14.2 billion from $7.1 billion and more than triple its revenue from that business to $106.2 million from $31 million.
"Our hopes are very high as to what can happen with this," Raymond A. "Chip" Mason, chairman and chief executive of Baltimore-based Legg Mason, told analysts in a telephone conference yesterday. "This will accelerate our growth in wealth management, obviously without question."
Legg Mason, which has $140 billion in assets under management, has been on a mission to build its wealthy-client money manager business, which it views as critical as huge amounts of money are passed on to baby boomers from their parents.
Private Capital manages $8.2 billion for about 1,500 wealthy individuals, families, endowments, foundations and institutions.
Legg Mason said it would pay $682 million for Private Capital. The deal also provides for two cash payments totaling no more than $700 million if certain growth targets are met after the third and fifth anniversaries of closing. The deal is expected to close in July.
Shares of Legg Mason lost $1.25 yesterday to close at $46.32.
Legg Mason, which announced the deal late Tuesday night, is buying a money management firm that has had exceptional returns.
Over the past 10 years, Private Capital, which invests in the beaten-down stocks of small and medium-sized businesses, has had a 28.3 percent compound annual rate of return, compared with 17.4 percent for the Standard & Poor's 500 stock index. Its revenue has grown at a compound annual rate of 48 percent over the five years that ended in December 2000; its assets under management have grown at a 50 percent compound annual rate.
"This is a high-quality franchise," said Lauren Smith, an equity analyst at Keefe, Bruyette & Woods Inc. in New York. "The growth numbers in terms of their assets, in terms of their ... performance are just stunning. I think it fits into what they [Legg Mason] have talked about. I think it helps them gain scale. The size is eye-catching."
Private Capital is performing at such a high level that Mason plans to make no changes to the company, which employs about 30, he said.
Mason called Private Capital's performance "unbelievable" in an interview after the meeting: "This is certainly one of the best high-net worth managers in the country."
Mason's biggest challenge "will be not to mess up what they are doing because it is working so well," he said. "Why would you change anything when it is working like that?"
Mason said he might offer a mutual fund managed in the Private Capital investment style that could be marketed to the broader public, or use the firm's success and investment technique to attract new clients through brokers.
"There are all kinds of things we could do," Mason said.
Like other Legg Mason purchases, Private Capital will keep its name, management and employees.
Bruce S. Sherman, chairman and chief executive of Private Capital, called the deal "an absolute win-win."
"We wanted to partner with - but only if it was the right partner - somebody who would achieve our objectives and give us an ability to keep the investment process totally in tact," he said.
Private Capital was founded in 1985 by Miles Collier and Sherman to manage money for the wealthy Collier family. The family pioneered Florida and bought vast amounts of land in the state beginning in 1911, according to Forbes. Collier County, where Naples is located, is named after the family.
The two companies began talking about three months ago after Private Capital hired Goldman Sachs Group Inc. to find a buyer, Mason said.
"They ultimately saw the need for a partner," Mason said. Private Capital "fit where we were going and we fit them beautifully."
Legg Mason plans to pay for part of the deal with $150 million in cash that it has on its balance sheet. It also expects to raise $250 million in a zero coupon convertible security and the rest by issuing bonds.
The Private Capital deal is Legg Mason's fourth acquisition of a wealth management company in about 20 months, but most of them have been small.
In September 1999, it acquired Berkshire Asset Management Inc., based in Wilkes-Barre, Pa., which then had $600 million under management. A month later, it bought a 50 percent stake in a trust company owned by Bingham Dana LLP, a large Boston law firm. The joint venture firm, called Bingham Legg Advisers LLC, then managed about $1.3 billion in assets for wealthy clients of the law firm.
In December, it agreed to buy New York-based Barrett Associates Inc. for an undisclosed price. The firm managed about $2 billion for wealthy individuals, families, endowments and foundations at the time of the deal.
Mason said he doesn't see any more acquisitions of wealth managers soon.