The deal will send Legg's 1,400 brokers to Citigroup Inc. and Citigroup's $460 billion asset-management group to Legg. After the transaction closes later this year, Legg Mason, based in Baltimore, will oversee roughly $830 billion.
For Mason, the deal also closes a personal door. He got his start as a stockbroker in 1969 at his uncle's Lynchburg, Va., firm. In 1962, Mason struck out on his own, founding Mason and Co., which eventually merged with Legg and Co.
In the 1980s, he got into the money management business, launching the Legg Mason Value Trust fund, managed by William H. Miller, who now holds a record for beating the Standard & Poor's 500-stock index for 14 consecutive years. Soon after, the firm acquired California-based bond manager Western Asset Management.
While Wall Street is littered with failed acquisitions of money managers by brokerage firms, Mason found a formula that worked. With Western and subsequent deals, he bought top-quality money managers that focused on different corners of the market and different types of clients. And in contrast with the approach taken by others, Legg let the firms operate independently. In 2001, for example, Legg acquired small-stock specialists Royce & Associates and Private Capital Management, which caters to wealthy individuals.
The Citigroup deal is a departure. It will require the integration of a substantial portion of the Citigroup operation into Legg's Western Asset Management group. In addition, the performance of Citigroup's mutual funds has been uneven and many funds could be merged into Legg Mason funds.
In an interview, the 68-year old Mason discussed the deal, the challenges his firm faces and the future of the money-management business. Excerpts follow:
WSJ: How did you develop the approach that you eventually came to define as Legg's strategy, beginning with Western Asset Management?
Mason: The acquisition of Western Asset turned out to have been a major decision. The goals at the time were to get the firm into a fee-based business, because except for the revenues coming from Value Trust, we were completely a brokerage firm relying solely on commissions.
This was also the first real step into a bigger league because Western was extremely devoted to the institutional world -- virtually 100 percent of their business -- and that wasn't a business we were in. Secondly, it was a bond manager and we were basically an equities firm so it diversified us two or three ways. When you coupled all that together, it was a pretty big turn, but we had no idea how important.
WSJ: As you did subsequent acquisitions, you left them as bolt-on, largely independent groups. That was sort of unusual.
Mason: Our view was that with Western, we had acquired a very good, institutional fixed-income manager and we really knew nothing about that business. I'm not saying it was impossible for us to interfere but it would have been ridiculous because all we would have done is messed it up. So I took the position with everybody that they were to leave them alone and let them run the business. But again it led us down a path that I had no idea was quite as dramatic as it turned out to be.
WSJ: So from the Western acquisition did you learn things that would be applied to future deals?
Mason: Our knowledge level went up but we didn't realize we were gaining a concept that was going to work as well as it turned out to be. I will say, though, that I was never concerned about our not being directly involved in Western, so maybe I was more understanding than I realized.
Where we would tinker was on the distribution side. We would jointly distribute, but we learned over a period of years, as we did other acquisitions, that really it didn't work. We would try and joint market things, but the one who wasn't getting many new assets was convinced that either the marketing people didn't like them or they were being unfairly treated, whatever it may be. As it turned out, they marketed their own products better even though the cost of having two units was more expensive.
WSJ: Another important element is that the deals were all based on a revenue-sharing arrangement, where the units kept a slice of their profits and Legg took its slice. How did that come about?
Mason: That, too, was somewhat fortuitous. We initially did the Western deal on a revenue-sharing basis somewhat at the suggestion of Western. From our standpoint, it was good because we had an idea how much money we were going to make on any given, day, month or year. And from the standpoint of Western asset or anyone else it was the same. They more or less made their own income because they knew they were getting a percentage of X.
The best part is it kept us out of debating issues that you would really much prefer not to debate. If you have issues that are almost immobile or you've got issues with somebody over silly things, you just don't get into them because they are making that decision with their money. And unless it's really out of line or you feel it's causing a problem of consequence you leave it alone -- even if you don't agree.