Legg Mason Inc. shares plunged 8.5 percent yesterday as the Baltimore-based investment company reported that some clients fled mutual funds and accounts took a drubbing in the stock market, causing only the second quarterly decline in 15 years in its assets under management.
Net income rose 38 percent in the fiscal first quarter that ended in June -- to $156 million, or $1.08 per share. In a conference call yesterday morning before markets opened, Legg Mason Chief Executive Officer Raymond A. "Chip" Mason said it was the best quarter in company history, apart from the quarter in which Legg recorded a gain from the sale of its brokerage unit to Citigroup Inc.
But the results fell short of Wall Street expectations of $1.13 per share, according to analysts polled by Thomson Financial. It was the second quarter in a row that Legg missed analyst estimates. Assets under management fell $13 billion, or 1.5 percent, during the quarter to $855 billion.
Mason has been working to absorb the asset-management business acquired from Citigroup last year in a $3.7 billion deal that remade his company into the world's fifth-largest money manager. He has been under pressure to deliver promised savings from eliminated jobs and operations.
Mason compared the integration process with a road. "The road has had bumps in it," he said. "But we've seen no road closures or major potholes."
Legg executives have stressed the magnitude of their undertaking, which at once doubled the company's size and expanded its footprint worldwide. President James Hirschmann, who was named chief operating officer recently, said employees have booked more than 630 round-trip plane tickets as they race around the globe to finish the integration before the end of this year.
"I'm confident we'll be able to complete that goal," Hirschmann said during the conference call.
Despite the optimism, Legg Mason shares fell 6.7 percent at the opening of the New York Stock Exchange yesterday and slipped another 1.8 percentage points before the close of trading at $86.32. The shares have dropped 28 percent this year.
Merrill Lynch analyst Guy Moszkowski, in a recent research note, summed up the market angst this way: "Clearly management is trying to keep shareholders more informed, but skepticism will probably remain until Legg reports much larger cost savings."
With its acquisition, Legg's operating revenue has jumped 137 percent year-over-year to $1 billion, while expenses increased 163 percent to $781 million.
Compensation and benefit expenses declined $25 million from the previous quarter, as the company eliminated jobs and duplicate operations. Since the transaction closed, the work force has been cut by 410 people to about 3,800.
F. Barry Bilson, senior vice president of finance, said the work force reduction is largely done. The company expects to realize $90 million in cost savings this year from the job cuts and the end of technology support and other service agreements, he said.
In the last quarter, the assets Legg Mason invests in stocks fell 4 percent as the Standard & Poor's 500 stock index shaved 2 percent and clients pulled money from managed funds. Assets invested in bonds increased, while clients withdrew money from money market funds.
Star fund manager Bill Miller, known for beating the S&P; 500 for 15 straight years, has seen his flagship Value Trust fund fall 7 percent in 2006, while the index is up almost 2 percent. Chip Mason said clients continue to put money in the fund and understand that "sooner or later the streak will be broken."
Nonetheless, Mason said what Miller and the company really need is a market rally.
"We still believe, barring something of major consequence, that sometime in the third or fourth quarter we're going to see a much better equity market, and we think that helps us a lot," Mason said. "If you dig down into our earnings situation, that's a lot bigger factor than people realize."