- The Washington Times - Monday, June 4, 2001

Baltimore investment firm Legg Mason Inc.'s decision last week to buy fund manager Private Capital Management (PCM) is its latest effort to expand in the Southeast and grow its wealth-management business.

"PCM's base in Florida and the Southeast is a natural extension for the [Legg Mason] brand name," says Amy Butte, an analyst with Bear, Stearns in New York.

Based in Naples, Fla., PCM, manages about $8 billion in assets for some 1,500 wealthy individuals. Since December 1986, the private firm has earned 24 percent per year, Legg Mason says.

Legg Mason, a holdings firm that provides securities, brokerage, investment advice and banking and commercial mortgages, will pay up to $1.38 billion for the purchase.

The transaction will include a $682 million cash payment upon closing, and two "earn-out" payments based on the growth of PCM over the next three and five years, respectively, Legg Mason says.

Analysts expect the deal to double Legg Mason's high net-worth assets under management, which currently are at about $7 billion, out of total assets of $140 billion as of the end of March.

"The demographics of the wealth-management segment clearly made the high net-worth area very attractive," says Lauren Smith, analyst with Keefe Bruyette & Woods Inc. in New York.

Ms. Smith, too, approves of the transaction.

"But it's not at a discounted price," she points out. "They are paying a premium price for a premium entity … Today nothing is going to come cheap. So there is going to have to be a tradeoff of growth and acquisition."

The deal, struck last Wednesday, is expected to close in the second half of July.

Legg Mason last week also found a buyer for $454 million of debt, through the sale of convertible securities. This announcement caused shares of Legg Mason to drop slightly on the New York Stock Exchange.

The stock closed Friday at $46.28, down $2.47 from a week before.

"But that, in my view, is more of a technical issue and really, it's more important to look at the fundamentals of the company," says Ms. Smith. "What that means is that investors and hedge funds often short the stock in advance of the convertible bond being issued."

"But given the technical pressures of the stock, which do not mirror at all the fundamentals and growth potential of the company, I think it represents a good buying opportunity," Ms. Smith says.

Both Ms. Smith and Ms. Butte rate the stock a buy.

"While there may be short-term volatility surrounding the upcoming financing, we reiterate our buy rating," Ms. Butte says.

Although it mostly markets itself as a regional brokerage firm, Legg Mason is more of an asset manager, Ms. Smith says. About three-fourths of the investment firm's earnings stem from asset management.

"Their asset management complex is ranked as penetrating the top 30 firms ranked by worldwide assets," Ms. Smith says.


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