Analysis - Legg Mason to ask a lot of new CEO, as search begins

NEW YORK/BOSTON Tue Nov 6, 2012 9:49pm GMT

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NEW YORK/BOSTON (Reuters) - Legg Mason's (LM.N) search for a new chief executive is going to be no easy task.

The company, the fourth-largest publicly traded U.S. fund manager with about $650 billion (406.2 billion pounds) in assets, needs to find a leader who will be able to get eight independent investment arms to work together, while at the same time coming to terms with outspoken activist shareholder Nelson Peltz.

Legg Mason's board has finalized a job description and is looking for an executive "who can align the affiliates toward the common goal of growth," said a person familiar with the search process, who spoke on condition of anonymity because of the sensitivity of the situation.

Head-hunters say they are concerned the challenges may be enough to deter some more obvious candidates. Names they raise as possibilities include Brian Murdock, CEO of TD Asset Management, John Hailer, CEO of Natixis Global Asset Management, and Sallie Krawcheck, former head of Bank of America's wealth and funds arm.

One big hurdle for a new CEO will be the way the company is structured. Legg Mason was created from a patchwork of deals, with the acquired arms often operating independently with separate revenue-sharing agreements. Some affiliates get a bigger piece of the pie than others, according to analysts and people who have worked with the company.

It all means that the business lacks some cohesion, with incentives sometimes muddled. This leaves some units feeling resentful that they are not getting a fair share of resources or complaining about not having enough control, said people familiar with the firm.

Legg Mason does have some big brand names among the eight businesses, including the Western Asset Management bonds operation, with $460 billion under management as of September 30; its ClearBridge Advisors equity unit, with $59 billion, and its Brandywine Global equity and bonds shop, with $41.4 billion.

But Legg Mason's structure and varied revenue agreements pose specific challenges that few CEOs in asset management world have experience dealing with, executive recruiters said.

Feeding into this will be concerns about what Peltz, who sits on the board and has a 9.5 percent stake, wants to do with the company. He has in the past pushed for splitting up some companies - he did as much at Cadbury Schweppes Plc, which in 2008 spun off its Dr. Pepper Snapple Group. In late 2011 his investment firm suggested that State Street Corp spin off its investment management business. It has not.

Peltz has said little about his intentions since becoming a large Legg Mason shareholder in 2009.

DISSATISFACTION

Gripes about revenue-sharing and distribution agreements are a key source of dissatisfaction among some affiliates, according to people familiar with Legg. Some, including Western, have sought more control over how their funds are sold and marketed, according to a person who has done business with Legg Mason.

Meanwhile other business partners have complained of a lack of coordination among the various divisions.

Legg Mason's previous CEO, Mark Fetting, stepped down in early October after almost five years overseeing deep cuts and restructuring debt. But those efforts nudged profits only marginally higher and failed to stop the outflow of investor cash from critical areas.

Industry executives, former employees and analysts say Legg Mason's board needs to find a leader quickly to give direction to the Baltimore-based company.

Despite recent signs of improvement - Legg Mason last month reported its first quarterly inflows in five years - the company's shares are worth about one-quarter of what they were in 2007. The new money went into low-margin money funds, not the higher-margin equity and bond funds that Legg Mason needs to turn around.

"Too much time has been wasted on them talking about what they should do and the bottom line is the affiliates have got to perform better and get flows," said Douglas Sipkin, an analyst with Susquehanna Financial Group LLP.

Bill Smead, chief executive of Smead Capital Management, said to get Legg's business and its share price back on track, the new CEO is "going to have to tear up those (revenue sharing) contracts and write new ones" that put affiliates on similar terms. Smead sold his Legg stock in May 2011 because he felt the revenue sharing agreements diluted shareholder value by putting a bigger premium on certain managers over others.

Legg Mason traces its roots to a Baltimore broker-dealer started in 1899. It grew through a series of acquisitions over the past few decades by founder Raymond "Chip" Mason, who retired in 2008 and negotiated separate contracts with each affiliate. Reworking those would require agreement from each affiliate, said Mary Athridge, a Legg Mason spokeswoman.

Legg Mason executives, including board Chairman W. Allen Reed, declined to comment for this story.

On a conference call on October 26 with analysts to discuss quarterly results, sales chief and interim CEO Joseph Sullivan said the search for a new CEO could take several months. Sullivan also said the company was "committed to the affiliate model" but has sold affiliates and made structural changes in the past and is open to doing so again.

TOUGH RECRUITING MARKET

Recruiters interviewed by Reuters say there are several executives who could be right for the job of CEO, partly because they have successfully managed large companies with affiliates.

A handful of recruiters mentioned Murdock, who is also former chief executive of New York Life Investment Management, as well as Hailer, of Natixis, a $711 billion global multi-boutique firm, as candidates who have the asset management experience needed to lead Legg Mason.

Other names mentioned: Peter Bain, chief executive of Old Mutual Asset Management and a former Legg Mason executive; Peter Cieszko, an executive at Kansas City-based American Century Investments who previously worked at Legg Mason, and Krawcheck.

Hailer, Murdock, Krawcheck and Bain declined to comment.

In a statement sent by an American Century spokesman, Cieszko said he "he has no plans to pursue the Legg Mason position and remains proud to be part of the American Century Investments' leadership team."

The search comes at a time when hiring a CEO for financial services companies has become more difficult, recruiters said.

The pool of proven leaders with top reputations has become smaller, said Deb Brown, a senior member of the asset and wealth management practice of Russell Reynolds, a New York-based recruiter. A number of executives who would have fit the bill stumbled during the financial crisis, making them harder to place as CEO candidates now.

What's more, stock options vest and bonuses are typically paid between December and March. "It is an expensive time of the year to recruit," said Joseph McCabe, vice chairman of CTPartners, a Boston-based recruiting firm.

Legg Mason will also likely need to provide a hefty golden parachute, recruiters said, because the new CEO takes on not just righting the firm, but also managing under the watch of activist Peltz. Any executive going into such a sensitive and difficult situation would want to make sure he or she gets paid well if things do not work out, recruiters said.

An agreement capping Peltz's ownership around 10 percent ends this month.

"I think Nelson Peltz is a problem for Legg Mason," said Sipkin, the Susquehanna analyst. "They've done things with a short-term bent because of Peltz." For example, instead of buying back more than $1 billion in shares last spring, he said, Legg Mason could have invested more in the business.

A spokeswoman for Peltz and his investment firm declined to comment, citing Peltz's role as a Legg Mason board member.

(Reporting By Jessica Toonkel and Ross Kerber; Editing by Jennifer Merritt, Martin Howell and Steve Orlofsky)

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