Top brokers at Legg Mason Inc. are facing a seemingly enviable predicament: Change their business cards to Smith Barney and get cash and stock worth at least $1 million, or take their clients to some other brokerage for as much as twice that amount.
As part of its deal to swap its money management business for Legg Mason's brokerage unit, Citigroup Inc. is offering hefty retention packages to ensure that most of Legg's 1,540 brokers join its Smith Barney brokerage and aren't snapped up by competitors.
At the high end, Legg Mason brokers who brought in more than $2 million in fees and commissions in the past year would get 50 percent of that amount in a loan that would be forgiven over four years and in Citigroup restricted stock that vests over the same timeframe.
Even those who bring in less than $250,000 a year, considered the lowest tier, would get 10 percent of their annual take, according to Legg Mason brokers and headhunters familiar with the arrangements.
"That certainly seems to be on the generous side, particularly for the highest producers," said Andy Tasnady, a compensation consultant to Wall Street firms. "Even for those who produce less, it's not bad. Not bad at all."
Even more generous are the offers from other firms - up to 100 percent of their annual take as signing bonuses, said Michael King, a corporate recruiter in New York. The offers from competitors are typically paid out over a longer period of time and could depend on performance.
"They're going to look at their options and compare other opportunities," King said of the brokers. "They could get a lot better deal if they decide to move, but it depends on the person and how the companies handle the integration."
Brokers typically make six-figure salaries at larger companies such as Legg Mason, but this decision isn't simply about money, observers said.
Benefits and risks
The Legg brokers would be going to a much larger corporation with Smith Barney, and perhaps a more impersonal environment, whereas they say they could get Legg Chairman Raymond "Chip" Mason on the phone if they had a problem or concern.
There's also the risk that clients might not follow their brokers if they go to a firm other than Smith Barney, especially because shares in some Legg Mason mutual funds can't be transferred to other brokerage accounts and would have to be liquidated. Brokers also said the procedure to move client assets is logistically difficult and requires a lot of paperwork.
For Citigroup, the world's largest financial services company, based in New York, keeping Legg's brokers happy - and their clients on board - is critical to expanding its business of selling financial advice.
The process of hundreds of employees changing bosses is expected to take up to two years. It involves not only Legg Mason brokers but investment bankers, researchers and operations personnel, as well as Citigroup money managers. The prospects for each employee vary and, for some, are still unknown.
The companies have gone on "road shows" in which executives talk up the $3.7 billion deal, which would make Legg Mason the world's fifth-largest money manager, as beneficial to investors, analysts and employees. The traveling presentations were mobilized within days of the June 24 announcement, and Citigroup representatives visited brokerage branches in Maryland last week for meet-and-greet sessions and hourlong presentations intended to sell Legg Mason brokers on working for Smith Barney.
Legg Mason employees say they are trying to stay positive about the future, knowing that other corporate mergers and acquisitions of this size have decimated worker ranks and depressed morale. Many remember when Germany's Deutsche Bank acquired Baltimore's Alex. Brown in 1999 and shifted most jobs to New York, despite promises they would stay.
Details in the works
"Have faith. This has always been a company that takes care of its employees - which is why we love it here and are so sad to see that come to a close," Ellen Brinkley, a Legg Mason vice president, wrote in an e-mail to staff Tuesday. "I really believe that at the bargaining table, everything that could have been done for us was done."
"Lots of details are still being worked out," Brinkley continued, "but I believe our best interests will continue to be carefully considered and addressed."
Apart from Citigroup's efforts to retain Legg Mason brokers, who were courted by headhunters even before the deal was formally announced, few details have emerged about how the division swap will work.
A Citigroup spokeswoman declined to comment on the possibility, first raised by Mason the day the deal was announced, that it would open an operations center in Baltimore. As for the Legg division known as capital markets, which includes investment banking and market research, Citigroup might sell it. That group comprises 115 investment bankers, 80 traders and 50 research analysts.
"When you acquire a group like capital markets, it's almost expected to be pared back substantially or spun off or sold," said Craig Woker, an analyst at Morningstar Inc.
Citigroup spokeswoman Andrea Hurst said, "We're exploring all options, which obviously includes a combination of our franchises or indeed a sale, but we are working with Legg Mason management to make sure we achieve the best outcome."
About 280 operations personnel who process transactions and perform other office services could face layoffs, or the back office could expand, Woker said. Mason said in a previous interview that he expects more people to be hired to do those jobs.
Smith Barney money managers moving to Legg Mason are upbeat about the deal. Harry D. "Hersh" Cohen, for one, gushed about the prospects and about Mason. He said the two had met a couple of times prior to the swap and that they "instantly hit it off."
"Oh, my gosh, I think it's going to be a great combination with so many opportunities for growth. I'm very excited they want us, and we like them," he said. "We're anxious to get going. We're a great shop, and I think they know that."
In contrast, some brokers aren't thrilled about the deal that ends Legg Mason's 106 years in the brokerage business - despite the retention perks.
"I would go from being a big fish in a small pond to being another fish in a big pond," said one Legg Mason broker, who didn't want his name used because of the sensitivity of negotiations. "At Legg Mason, senior people would immediately call me back. You could lose that feel, that family feel."