- The Washington Times - Monday, May 29, 2006

Shares of Legg Mason Inc. have fallen 15 percent since the Baltimore money-management firm announced May 10 that its fourth-quarter earnings fell short of Wall Street estimates.

The company posted a $150.1 million profit for the quarter ended March 31 — the first period to include full results of the acquisition of Citigroup Asset Management in December. Though up 28 percent from net income of $117.6 million a year ago, fourth-quarter earnings per share of $1.03 were lower than analyst expectations of $1.25 per share, according to Thomson Financial.

“We have made meaningful progress during the last three months in integrating former [Citigroup Asset Management] businesses — assets, employees and systems — into Legg Mason,” Chief Executive Officer Raymond A. “Chip” Mason said when the earnings were announced May 10.

“Financial results will continue to be confusing as we go through the process of employee reductions, redundancy, dual systems, stay bonuses and adjusting to our new size.”

As part of the $3.7 billion purchase of Citigroup’s asset management business, Legg Mason gave up its private client brokerage and capital markets business. With $868 billion under management, Legg Mason is the fifth-largest asset management firm in the U.S.

Analysts say the transaction, finalized Dec. 1, is responsible for the company’s underperformance.

“Because of the generally unpredictable revenue stream and relatively high return on equity relationships, asset management companies are often mentioned as potential targets by the management of financial service companies, especially banks. However, these deals are tricky to price and difficult to execute,” said Chris Spahr, a senior asset management analyst for Prudential Equity Group LLC in the District.

Aside from the logistics of combining two companies, there is no guarantee that the firm being acquired will retain its assets, he said.

“A change in ownership may give institutional investors an incentive to review the relationship with that asset manager,” added Mr. Spahr, who rates the company at “overweight” relative to its competitors.

Prudential does not have an investment banking relationship with Legg Mason.

On Friday, Legg Mason stock closed at $98.95, up from $98.49 the day before. U.S. markets were closed yesterday in observance of Memorial Day. Shares were at $116.52 on May 9 — one day before earnings were announced and the price fell to $108.06.

Despite the short-term lag, analysts expect the transaction to pay off over time.

“We still think the Citi transaction is a home run for Legg in the long run, giving it more scale and distribution, and a more global footprint,” said Merrill Lynch’s Guy Moszkowski.

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