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Legg Mason: The end of an iconic Baltimore company

Legg Mason to be acquired by California firm for $4.5B

Legg Mason CEO Joseph Sullivan. (File)

Legg Mason Chairman and CEO Joseph Sullivan says the sale of the company to Franklin Resources will be good for the companies, their clients and employees, but he acknowledges that some difficult times — and inevitable job losses — lie ahead. (File Photo)

Joseph Sullivan was finally ready for the conversation he dreaded.

After months of meetings with executives from Franklin Resources, the chairman and CEO of Legg Mason, the venerable money manager headquartered in Baltimore, knew he needed to let one other person know that a sale of Legg Mason to the California-based company was being seriously considered.

The person was Raymond A. “Chip” Mason, the retired longtime leader of Legg Mason who had done more than any single person to build the company.

“I wasn’t looking forward to that meeting,” Sullivan said Tuesday in recalling that moment several weeks ago.

After he explained why he thought a sale was the right thing to do – for the company, its clients and its employees – Sullivan waited for a reaction.

“You have to be ready to change, Joe,” Mason replied. “Legg Mason has to be ready to change.”

On Tuesday, Legg Mason changed forever. Franklin Resources announced it was buying Legg Mason for $4.5 billion, a sale that essentially means the end of a company whose roots in Baltimore go back to 1899 and whose presence as a philanthropist and community leader – symbolized by the Harbor East glass tower bearing its name – is prominent and visible.

The deal, which was approved by both companies’ boards, is expected to close no later than 2020’s third quarter. It still needs approval from Legg Mason shareholders.

In an interview Tuesday shortly after he spoke to a town hall of Legg Mason employees, Sullivan said it’s unclear how many of them will remain in Baltimore or even what his own future with the company will be. (“TBD” is how he put it.) He acknowledged that “there will be some job losses” among the 250-plus employees based in Baltimore but said that Franklin “recognizes we have a good number of people who are very talented.”

Sullivan stressed that Franklin, which operates as Franklin Templeton, is a remarkably good fit as a partner for Legg Mason, that it had a similar culture, vision and commitment to its clients.

The seeds of the sale were sown last spring in a phone call to Sullivan from Matthew Nicholls, the newly minted CFO at Franklin who had been hired away from Citigroup. Nicholls, who knew Sullivan from his time at Citi, suggested to his old friend that it might be a good idea to chat with Franklin.

Sullivan said Tuesday that Legg Mason had already been exploring “partnerships” with other firms, but that “at some point we’d always go pencils down.”

A June dinner in New York with Greg Johnson, the executive chairman of Franklin’s board, made it clear to Sullivan that the two men “shared a vision.” Subsequent discussions and meetings of the two companies’ key executives also went well. “Every step we took was comfortable,” Sullivan recalled.

The discussions came at a time of increasing turmoil in the industry as a handful of large index fund managers increasingly dominate the market. Many traditional asset management companies, like Legg Mason, have struggled.

A number of asset managers and brokerage firms have resorted to mergers. In November, Charles Schwab bought TD Ameritrade. In previous years, Invesco bought OppenheimerFunds, and Janus Henderson Group and Standard Life Aberdeen were formed in mergers in 2017.

“I’d been feeling for a number of years – probably three or four years – that the pressures on the industry have been intensifying … but that doesn’t mean you do a stupid deal,” Sullivan said.

What’s known now

Legg Mason

The company’s glass tower in Harbor East became a distinctive part of the Baltimore skyline. (The Daily Record/File Photo)

Under terms announced Tuesday, Franklin will pay $50 for each Legg Mason Inc. share. It will also assume about $2 billion in outstanding debt. The deal will create a financial company with a combined $1.5 trillion in assets under management.

Franklin Templeton said it would  preserve the autonomy of Legg Mason’s affiliates, “ensuring that their investment philosophies, processes and brands remain unchanged.”

The combined company will operate as Franklin Templeton and be headquartered in San Mateo, California. It anticipates approximately $200 million in annual cost savings but did not spell out how those savings would be achieved.

Jenny Johnson will continue to serve as president and CEO, and Greg Johnson will continue to serve as executive chairman of the board of Franklin Resources, Inc. There will be no changes to the senior management teams of Legg Mason’s investment affiliates, the companies said.

One Baltimore regional business leader expressed notes of regret and optimism about the deal’s impact on Baltimore.

“As is often the case in the business world, including in the banking and finance sectors, companies consolidate,” said Donald C. Fry, president and CEO of the Greater Baltimore Committee. “It’s unfortunate that an iconic hometown company such as Legg Mason, which was founded in Baltimore and has been headquartered here for decades, is being acquired. Franklin Templeton has indicated the transition will take some time and that it intends to keep a presence in Baltimore. It’s hopeful that the company’s presence will remain a strong contributor to the state and regional economy.”

From Franklin Templeton’s perspective, the acquisition strengthens its presence in key geographies and creates an investment platform that’s well balanced between institutional and retail client assets under management.

“This is a landmark acquisition for our organization that unlocks substantial value and growth opportunities driven by greater scale, diversity and balance across investment strategies, distribution channels and geographies,” said Greg Johnson, the executive board chairman at Franklin. “Our complementary strengths will enhance our strategic positioning and long-term growth potential, while also delivering on our goal of creating a more balanced and diversified organization that is competitively positioned to serve more clients in more places.”

Trian Fund Management LP, the vehicle controlled by activist investor Nelson Peltz, and funds managed by Trian, own about 4.5% of Legg Mason’s outstanding stock. They have entered into a voting agreement in support of the transaction.

The market responded favorably to the news. Shares of Legg Mason closed up more than 24% Tuesday, while Franklin Resources’ stock went up more than 7%.

Company’s struggles

Sullivan held the top job at Legg Mason since becoming interim CEO in the fall of 2012. He was named CEO in February 2013, taking over from Mark R. Fetting, who had presided over nearly five years of client redemptions and a plummeting stock price.

Sullivan, who spent close to 30 years at Legg Mason, retained the company’s structure of using independent affiliates to focus on specific segments of the asset management industry.

Trian Partners hedge fund manager Nelson Peltz, right, and other attendees walk into the Procter & Gamble headquarters for the annual shareholders meeting, Tuesday, Oct. 10, 2017, in Cincinnati. Initial voting results show Procter & Gamble successfully fending off an attempt by activist investor Peltz to capture a seat on its board. (Kareem Elgazzar/The Cincinnati Enquirer via AP)

Trian Partners hedge fund manager Nelson Peltz, right, and other attendees walk into the Procter & Gamble headquarters for the annual shareholders meeting, Tuesday, Oct. 10, 2017, in Cincinnati. The activist investor stands to make tens of millions of dollars from his investment in Legg Mason if the sale to Franklin Resources goes through. (Kareem Elgazzar/The Cincinnati Enquirer via AP)

Early in his tenure, Legg Mason affiliate Permal Group purchased European funds-of-funds manager Fauchier Partners, and Sullivan orchestrated a merger between Legg Mason Capital Management and ClearBridge Investments, an affiliate based in New York.

Last February, Sullivan announced that the company was launching a cost-cutting and restructuring program that would include centralizing some services among its nine affiliates. Legg Mason reported it had lost $217 million in its fiscal third quarter and seen a drop in assets under management. The company bounced back the following quarter to report a $49.5 million profit.

Sullivan said in February that Legg Mason would be developing a new “global operating platform” among its nine investment affiliates that the company estimated would save $90 million to $100 million a year after initial implementation costs of between $130 million and $150 million.

Then, in May, three days after adding activist investor Peltz to its board, Legg Mason Inc. said it was cutting about 12% of staff and streamlining its executive committee. Roughly 100 of the 120 jobs to be eliminated were to be in the United States.

In 2018, Legg Mason entered into a non-prosecution agreement with the Department of Justice and agreed to pay $64.2 million to resolve an investigation into a Libyan bribery scheme through Permal, one of its affiliates. Justice officials said that the alleged misconduct involved only low- to mid-level Permal employees and that Legg Mason had cooperated fully in the inquiry.

Legg Mason was created in 1970 through the acquisition of Mason & Co. by Legg & Co. George Mackubin & Co., the predecessor to Legg & Co., was founded in Baltimore in 1899.

The company became publicly traded in 1983. Raymond A. “Chip” Mason, who was chairman and CEO of the company from 1975 to 2008, built it into the nation’s fifth-largest asset management company.

It was Mason, Sullivan pointed out Tuesday, who in 2005 made the “excruciating” decision to transfer to Citigroup its private client and capital markets business – once the heart of the company — in exchange for Citigroup’s asset management business.

In the next few weeks, Sullivan said, he plans to devote his energies to helping make the sale go as smoothly as possible. “At this point I don’t have a new title or a new official role,” he said.

“It’s a day when everybody’s trying to absorb things,” he said.

 The Associated Press contributed to this story.

 

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