Legg Mason Inc. (LM:US) named Joseph A. Sullivan as chief executive officer, ending a five-month search for a leader to reverse five years of client redemptions and calm restive fund affiliates.
Sullivan, 55, served as interim CEO since Oct. 1, when Mark Fetting stepped down amid pressure from activist investor Nelson Peltz to improve the company’s performance. Dennis M. Kass, who retired in 2012 as head of Jennison Associates LLC and previously spent more than a decade at JPMorgan Chase & Co.’s investment management unit, will join the board of directors, Baltimore-based Legg Mason said today in a statement.
In picking Sullivan, Legg Mason (LM:US) turned down an opportunity to reach outside its ranks, which may reduce the chances of dramatic changes to the firm’s strategy. Raymond A. “Chip” Mason, who in 1970 merged his company with a regional brokerage to form Legg Mason, led the firm until 2008. He was succeeded by Fetting, who had previously headed the mutual fund and managed- accounts businesses.
“It’s just status quo,” said Greggory Warren, a senior stock analyst at Morningstar Inc. in Chicago. “It’s going to be difficult for these guys to effect a turnaround as long as they continue to run the affiliate model because it doesn’t allow them to be as nimble as they need to be.”
Legg Mason declined 2.3 percent to close at $27.28 in New York. The shares have fallen 1 percent in the past 12 months, compared with a 29 percent increase in the 20-company Standard & Poor’s index of asset managers and custody banks. The stock (LM:US) has fallen 80 percent since reaching a high of $136.40 in February 2006.
The firm, whose assets swelled to a peak of $1 trillion in 2007 as investors flocked to funds managed by top-ranked managers such as Bill Miller, slumped to $654 billion at the end of January as performance declined and investors pulled money. Since the fourth quarter of 2007, the firm has had investor withdrawals of $368 billion, most recently suffering redemptions of $7.5 billion in the quarter ended Dec. 31.
Sullivan’s pick was endorsed by Peltz’s Trian Fund Management LP, which held 9.99 percent of Legg Mason shares as of Sept. 30, according to data compiled by Bloomberg.
“We believe Joe brings the leadership skills required to strengthen and expand the capabilities of Legg Mason to create long-term value for Legg Mason shareholders,” New York-based Trian said today in an e-mailed statement. “Dennis Kass will bring valuable insights and leadership skills to Legg Mason’s board as it works closely with Joe to unlock Legg Mason’s potential.”
The CEO choice was also backed by Mario Gabelli, head of Gamco Investors Inc., which is the seventh-largest shareholder with 3.91 percent of shares, according to data compiled by Bloomberg. Sullivan may continue to use the majority of cash flow to buy back stock, which means Gamco’s clients will own more of Legg Mason without putting up more cash, Gabelli said today in a telephone interview.
S&P Capital IQ maintained its hold rating on Legg Mason shares based on Sullivan’s understanding of the firm’s corporate culture, wrote analyst Sonia Parechanian.
Sullivan worked for 12 years at Legg Mason Wood Walker, a brokerage formerly owned by Legg Mason, before leaving then rejoining the firm in 2008 as chief administrative officer. He was later named head of global distribution at Legg Mason. From 2005 to 2008, he worked at Stifel Nicolaus & Co. as head of fixed-income capital markets, after it bought Legg Mason’s capital markets business
“The thing that I’m laserlike focused on is really working more closely with our affiliates on the various challenges and issues that we have,” Sullivan said in a telephone interview today. “We’re not going to sit in an ivory tower on an isolated basis and make decisions.”
Sullivan faces a push for greater independence by some of Legg Mason’s eight investment affiliates. Sullivan has indicated he’s more open to working with the units, which include bond manager Western Asset Management Co. and equity managers such as ClearBridge Investments and Royce & Associates. Legg Mason’s affiliates operate independently and have separate revenue- sharing agreements.
During the quarter ended Dec. 31, Legg Mason completed restructuring agreements (LM:US) with its Permal hedge-fund unit, which include a management equity plan, a revised revenue-sharing agreement and new multiyear employment contracts with key employees.
Western Asset, the company’s biggest investment unit, is seeking more control of its fund sales by trying to negotiate a move away from the centralized distribution model in which sales of retail products go through Legg Mason, a person familiar with the matter said in November.
Sullivan said today he’s had “constructive conversations” with Western regarding its distribution and is having discussions with affiliates on equity plans. He said he wouldn’t forecast any additional revisions to revenue-sharing agreements.
In May, Western said it was removing the Legg Mason name from its U.S. mutual funds as part of a rebranding to increase sales to individual investors. ClearBridge, which is Legg Mason’s largest stock-fund affiliate, said in October it was dropping the Legg Mason name from its mutual funds as part of a push to make its brand better known. In January, Legg Mason said it was folding Miller’s Legg Mason Capital Management division into ClearBridge as assets tumbled.
Each of the affiliate CEOs had the opportunity to interview Joe as well as the external candidates being considered, said Terrence Murphy, CEO of ClearBridge. Murphy said he was supportive of Sullivan in part because he was successful in saving Legg Mason more than $100 million by moving shared operations and technology groups back to the affiliates.
Chuck Royce, president of small-cap stock manager Royce & Associates, said in an e-mailed statement that Sullivan is “a smart, focused leader who knows the company well, is highly supportive of the affiliate model, and has considerable industry and distribution experience.”
Legg Mason this month reported a loss (LM:US) of $453.9 million, or $3.45 a share, for the three months ended Dec. 31, the biggest quarterly shortfall since it posted a $1.5 billion loss at the end of 2008. Earnings were hurt as redemptions and declining assets forced the company to write down assets tied to the 2005 takeover of Citigroup Inc.’s asset-management business and to Permal.
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