Legg is reportedly in no hurry for deal


Legg Mason Inc., reported to be in talks with Citigroup Inc. to shed its brokerage business and expand its investment management portfolio, might not be in a hurry to do a deal, according to industry watchers.

News leaked last week that the two companies were negotiating a potential swap in which Legg Mason's 1,540 brokers would switch to Citigroup. In return, Legg Mason would get up to $460 billion in assets that Citigroup invests on behalf of clients.

Such a deal would catapult the Baltimore company from a medium-sized money manager to one of the biggest in the nation.

But analysts note that Chairman and Chief Executive Officer Raymond A. "Chip" Mason doesn't need Citigroup's assets to expand the company. Mason has attracted billions of dollars in investor money in recent years by building a stable of funds with higher returns than those of their peers.

Legg Mason and Citigroup, the world's biggest financial-services company, have declined to publicly discuss the negotiations since the news broke Wednesday. The silence has fueled speculation on Wall Street that the deal might be off, although some analysts say it could mean that the talks are taking longer because of the complexity of the deal.

"There are a lot of details that have to be worked out before a deal like this is inked. This would involve the movement of thousands of employees from one place to the next," said David Haas, an analyst at Fox-Pitt, Kelton in New York. "That said, I don't feel like they have their backs against the wall."

Three weeks ago, Mason and other company executives told analysts that they were not under pressure to make an acquisition, even though they expected other investment management firms to merge this year.

Legg Mason's management "emphasized that they do not feel they have to do anything" and that they "can afford to be deliberate about any potential deal," wrote Robert Lee, an analyst with Keefe, Bruyette & Woods Inc., the New York investment bank. The meeting with Keefe, Bruyette took place over several hours at Legg Mason's Baltimore headquarters.

Mason also told Lee that the company was taking a hard look at the brokerage business and that managers frequently discuss its "strategic role" in the company, according to Lee's report on the meeting.

Lee concluded that there was "little pressure or desire over the near-to-immediate term to do anything" with the brokerage business, which accounts for a smaller percentage of profits than the asset-management side.

Legg Mason has been in a position to expand since the company raised more than $300 million through a stock sale in December. The company had reportedly tried to buy part of Merrill Lynch & Co. Inc. last year, but that didn't happen and neither side would confirm the talks.

A Citigroup-Legg Mason deal would probably take one of two forms, said Eric Fitzwater of SNL Financial Corp., a financial-services data provider.

Legg Mason could evenly swap its brokerage for Citigroup's more than $50 billion in mutual funds, or the brokerage could be traded for Citigroup's entire asset management business with Citi getting a nearly 20 percent ownership stake in Legg Mason.

Fitzwater said the longer the companies remain silent, the more likely it is that the deal is doomed. "If there's a lag," he said, "it's not because good things are going on within the talks."

And, he noted, companies sometimes plant stories in the media about deals under consideration to get a sense of how the market would react to them.

Legg Mason stock soared to an all-time high of $88.42 Thursday, when articles first appeared in the media, then slipped Friday before gaining $1.29 yesterday to close at $87.11. Citigroup stock remained stable, closing at $47.69 yesterday, 2 cents below Thursday's close.

With the added mutual fund assets, Legg Mason would move from the 40th-largest manager of stock and bond funds to the ninth-largest, according to Financial Research Corp.

The larger deal would make Legg Mason the fifth-largest money manager for institutional clients, such as pension systems and foundations.

A swap with Citigroup could also eliminate potential conflicts of interest at both companies, which seek to attract investor money while dispensing financial advice through brokers who sell mutual funds.

Legg Mason appeared to acknowledged the risks inherent in the two roles in its annual report Friday.

"If we fail, or appear to fail, to deal appropriately with conflicts of interest," management said in the report, "we could face reputational damage, litigation or regulatory proceedings or penalties, any of which may adversely affect our revenue or earnings."

One downside for Legg Mason would be that Citigroup's mutual funds "have a very mixed record," said Rachel Barnard, an analyst at Morningstar Inc., which tracks mutual funds.

Over the past decade, about 80 percent of Legg Mason funds had returns that beat more than half of their peers. At Citigroup's Smith Barney, by comparison, only one-third did as well.

Among standout mutual fund managers at Smith Barney are Richard A. "Richie" Freeman and Harry D. "Hersh" Cohen, both of whom invest in larger companies. That's also the area where Legg Mason's star fund manager William H. Miller III shines.

Barnard said Legg Mason could depart from the style of past acquisitions, in which the company buys a firm and then allows it to operate as an individual business through revenue-sharing agreements.

Another option would be for Legg Mason to put Citigroup assets into its own funds, while taking only some of Citigroup's employees.

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