Legg Mason’s Fetting Steps Down as Peltz Standstill Ends
Legg Mason Inc. (LM), the money manager under pressure from activist investor Nelson Peltz, said Mark R. Fetting will step down as chairman and chief executive officer after failing to end almost five years of client redemptions.
Fetting will leave on Oct. 1, two months before a standstill agreement with Peltz expires. Joseph A. Sullivan, head of global distribution, will become interim CEO while the board searches for a permanent successor and lead independent director W. Allen Reed will become non-executive chairman, the Baltimore-based company said today.
Fetting, 56, has struggled to end client withdrawals and reverse a 65 percent decline in the company’s share price since he was named CEO in 2008. Fetting has cut jobs, restructured expenses at investment units and bought back shares since the 2009 investment in Legg Mason by Peltz, who is known for pushing companies to increase their value by reducing costs or splitting up. While looking for a new CEO, Legg Mason may explore selling some of its investment units, Jeffrey Hopson, an analyst at Stifel, Nicolaus & Co. in St. Louis, said in an interview.
“Peltz is a big shareholder and I just think this reflects him thinking there is a lack of underlying progress,” Hopson said. “A more likely scenario is to consider a breakup of the company.”
Legg Mason rose 5.4 percent to close at $26.85 in New York. The stock has increased 3.2 percent in the past 12 months, compared with a gain of 24 percent for the Standard & Poor’s 20- member index of custody banks and asset managers.
Peltz, whose Trian Fund Management LP is Legg Mason’s biggest shareholder, joined the company’s board in October 2009 under an accord that prohibits him from increasing his voting stake or forcing a sale or merger of any investment affiliates. That agreement ends Nov. 30. Peltz helped spur Cadbury Plc’s 2008 spinoff of Dr Pepper Snapple Group Inc. (DPS)
“We have a constructive relationship with Trian that we expect to continue,” said Mary Athridge, a spokeswoman for Legg Mason.
Legg Mason, which shot to prominence in the previous decade as home to famed stock-picker Bill Miller, has seen assets fall from a peak of $1 trillion in 2007 to $636 billion at the end of July because of market losses and investor redemptions.
The asset manager owns multiple investment units with different strategies, including fixed-income manager Western Asset Management and equity managers such as ClearBridge Advisors, Legg Mason Capital Management and Royce & Associates. The company also owns hedge fund-of-funds manager Permal Group. Each affiliate operates independently and has revenue-sharing agreements with the corporate parent.
Legg Mason posted its first quarterly loss in the three months ended June 30 since 2009 because of expenses to restructure debt. While long-term redemptions slowed to the weakest pace in five years amid deposits into bond funds, clients continued to pull money from higher-fee stock funds, pushing investment advisory fees down 11 percent.
Fetting completed a plan in the quarter ended March 31 designed to save $130 million to $150 million a year through a combination of job cuts and moving certain technology functions to investment units. Since January 2008, he’s cut almost 500 jobs.
“A lot of the heavy lifting in terms of balance sheet restructuring and improving the cost structure of the holding company has already been done,” Robert Lee, an analyst at Keefe, Bruyette & Woods Inc. in New York, wrote in a note today. “A fundamental restructuring of the company is problematic at best and not so easily achieved” because of the firm’s revenue- sharing agreements.
Last year, Fetting’s disclosure that some costs tied to sharing revenues with the Western Asset bond unit would delay his goal of lifting profitability disappointed board members including Peltz, people familiar with the firm said at the time.
Fetting and Chief Financial Officer Pete Nachtwey told analysts and shareholders in May 2011 that Legg Mason’s bond unit will keep a larger portion of its revenue, as performance rebounded and redemptions abated. The unit previously paid some of its quarterly revenue to the parent company to cover costs from a bailout of money-market funds it inherited through the December 2005 acquisition of Citigroup Inc.’s investment unit, which was integrated into the bond division.
Nachtwey said today at the Barclays 2012 Global Financial Services Conference that Legg Mason may have the opportunity to revisit revenue-sharing agreements it has in place with its investment units and to ensure “perfect alignment” between the parent and possible new affiliates by allowing them to share in the equity.
“It’s possible that with some restructuring of the revenue shares with our existing affiliates we can do something there as well,” he said.
Discussions about Fetting stepping down had been going on for “a while,” and he and the board came to a mutual decision, Nachtwey said today. The company is in no rush to start the search for a successor and will press ahead with its strategy under Sullivan, he said.
“This is not a caretaker” leadership, Nachtwey said. “Having said that, sometimes fresh blood is helpful.”
Fetting took over from Legg Mason’s founder, Raymond “Chip” Mason, in January 2008, after stock funds managed byMiller trailed rivals for two years in a row and money funds acquired from Citigroup suffered losses on mortgage-related investments. The funds had invested as much as $10 billion in structured investment vehicles that plunged as investors shunned mortgage-linked debt in 2008.
Mason started Mason & Co. in 1962 and eight years later merged it with Legg & Co., whose predecessor firm was founded as a regional brokerage in 1899. Mason expanded the asset- management side of the business by making acquisitions such as the 1986 purchase of bond investor Western Asset, the 2001 deal for small-cap manager Royce & Associates and the 2005 pickup of hedge-fund manager Permal Group Ltd.
Mason led the firm’s largest deal by swapping Legg Mason’s brokerage business for Citigroup’s investment unit. Citigroup’s bond and money funds were folded into Western Asset, while its stock funds were organized into a new unit called ClearBridge Advisors.
Fetting, who was previously responsible for Legg Mason’s mutual funds and managed accounts, spent his first year as CEO bolstering the money funds, booking $1.69 billion in after-tax costs to remove the securities from the portfolios.
“He’s done a phenomenal job leading us through an incredible crisis,” Nachtwey said today.
After ridding the funds of the troubled debt in early 2009, Fetting said he would turn to reversing the redemptions that started in late 2007 and intensified with stock and bond fund losses amid the collapse of Lehman Brothers Holdings Inc. in September 2008.
That task proved more difficult as woes at the firm’s money funds coincided with sub-par performance at stock funds, including those led by famed stock-picker Miller. Bond funds managed by the Western Asset Management unit also lagged behind peers after investing in riskier securities before the 2008 crisis.
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