The Baltimore-based money manager's stock rose by more than 3 percent Thursday, but Friday the stock dropped 32 cents to close at $26.52 per share.
The decline was driven largely by newly released figures Friday showing that money continued to flow out of Legg funds in the last quarter, said Jeffrey Hopson, a senior analyst with Stifel, Nicolaus & Co. in St. Louis.
At the end of last year, Legg had $648 billion in assets under management, down nearly $3 billion from the end of September.
Rumors have circulated about the fate of the Baltimore-based money manager ever since Mark R. Fetting stepped down as CEO and chairman on Oct. 1. Industry analysts speculated that Fetting, unable to stem an outflow of money from Legg funds, had been nudged to leave by Legg director and activist shareholder Nelson Peltz. The company has yet to name a permanent replacement.
Earlier this week, Reuters reported that two Legg executives — interim CEO Joseph A. Sullivan and Ronald R. Dewhurst, head of Global Investment Managers — are among a half-dozen in the running to be the next CEO.
But it was a Reuters article on Thursday that triggered a jump in Legg's stock price. Citing unnamed sources, Reuters reported that at least two private equity investors were willing to back senior managers at Legg's largest affiliates in a buyout. The board declined to consider this, at least while the company still was looking for a CEO, according to the Reuters article.
The news agency said it could not uncover the identity of the private equity firms or the senior managers, and had no information on how such a deal would be structured.
Legg declined to comment. "We do not comment on rumors from unnamed sources without specifics," said Legg spokeswoman Mary Athridge in an email.
Some analysts raised doubts about whether the publicly traded company would go private.
Hopson said rumors have circulated for months that investment bankers and private equity firms approached Legg's largest affiliate, Western Asset, about separating from the rest of the company and going private. It would be similar to other subsidiaries in the investment world that have spun off or distanced themselves from their parent companies, he said.
"It's certainly not surprising that Western may have at least come up with an idea of potentially buying itself away from Legg Mason," Hopson said.
It's less likely, he added, that the entire company would go private.
Nomura analyst Glenn Schorr wrote in a report Friday that he didn't see a private equity buyout of Legg Mason in the cards. Legg has a high debt level, and a leveraged buyout would only add to that burden, Schorr wrote.
Schorr added that he didn't see how spinning off Legg's largest affiliates would create value.
"With high debt levels and weak fundamentals, we believe a buyout of [Legg Mason] is unlikely," Schorr wrote.
A sign of what lies in store for Legg will be the choice of CEO, Hopson said.
"If they bring in someone with a history of fixing things up and selling, that would give you a clue," the analyst said.