Citigroup deal also surprised 'Chip' Mason


I DIDN'T BELIEVE "Chip" Mason would do it.

Neither did he.

For weeks, Mason said Friday, he had "cold feet" before pulling the trigger on by far the biggest deal of his life and for Legg Mason Inc. - swapping 1,540 brokers for $437 billion in assets managed by Citigroup.

Even he seemed surprised to be talking about the deal in his office, hours after it was announced. He acknowledged that the transaction was out of character for Legg. "Totally," he said. "It is a big execution."

Mason, 68, has been a careful steward of the company that bears his name. I argued in a prior column that he wouldn't risk making such a huge deal with a company like Citi that has had its share of regulatory run-ins. Mason goes for quality, not bulk, I said.

Now I see the logic, even though there are risks.

Some have worried that the monster transaction could make the Baltimore asset manager prime takeover bait, partly because it gives Citi a 14.3 percent ownership stake.

But Legg isn't about to go the way of Alex. Brown, MNC Financial, USF&G; or Jiffy Lube. Mason is building, not prepping for a sale, and is sinking the pilings even deeper into the city. And Citigroup's stake won't remain at 14.3 percent for long; there are covenants in place that keep Citi from adding to the stake, and Federal Reserve regulations will require the bank to reduce its position over time.

"I would think Baltimore would be ecstatic," Mason said in an interview on the top floor of the company's headquarters - once the home of USF&G;, the troubled Baltimore insurer that eventually was sold. "Baltimore can interpret this as something that is pretty good."

Mason caught everybody by surprise with a second deal: acquiring 80 percent of Permal Group, which manages $20 billion.

When these two deals are completed by year's end, Mason will have in effect created a new Legg Mason, a global juggernaut with $832 billion in assets under management. It will rank as the fifth-largest mutual fund manager in the United States and the fifth-largest asset manager in the world.

Not only will Legg have picked up a slug of assets from Citi, but its stake in Permal, which has its roots in France, gives it access to people whose "pockets go to the ankles," Mason said. These rich folks aren't U.S. citizens, either. They live in Asia, South America, the Middle East and Europe, giving Legg diversity and access to new markets.

"This is truly a world platform," Mason said. "It puts us in position to play against ... the Swiss banks. All the world players in the asset management world - we are right there with them."

The deal also could turn a fire hose of money on Bill Miller, Legg's star mutual fund manager.

Before the deal, Legg's 1,540 brokers were pretty much the only ones who could sell Legg Mason funds. When the deal is completed, 14,000 Citi brokers around the world will be able to sell Miller's Value Trust fund, the only one ever to beat the Standard & Poor's 500 stock index for 14 consecutive years.

Dumping the brokerage unit is something the sentimental Mason hated to do. Brokers built his company. But today they are seen as a liability. Regulators are cracking down on conflicts of interest between brokers who stand to gain by selling their own mutual funds and Mason, above all, would prefer to avoid getting subpoenas.

Still, there are plenty of other risks in doing a deal this size. Legg has been a conservative, cautious grower. It has bought smaller, top-performing niche companies over the years and has left them alone.

Here, cultures will have to be melded and systems will have to be changed. Execution will have to be quick and smooth, or morale will suffer and customers and portfolio managers will leave.

Mason knows there is a lot riding on this for Baltimore, and for him. No matter what he has accomplished in his life, he will be judged by his deal with Citi.

"It is always the last time at bat that matters," Mason said.

Bill Atkinson's column runs Tuesdays and Fridays. Contact him at 410-332-6961 or by e-mail at bill.atkinson@balt

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