UPDATE 5-New Legg Mason CEO outlines plans for a turnaround

Wed Feb 13, 2013 3:38pm EST

By Ross Kerber

BOSTON Feb 13 (Reuters) - Newly-named Legg Mason Inc chief executive Joseph Sullivan on Wednesday vowed to staunch the outflow of investor money from its funds and to renew relations with its investment units - two critical steps to rebuilding the Baltimore-based asset manager.

Sullivan, in a telephone interview shortly after he was officially named CEO, said he remains committed to Legg Mason's traditional structure of semi-autonomous investment units and is in talks with executives at the units about offering them equity. He did something similar for its Permal unit in December where executives now may receive equity in their own firm, as they could not previously.

Giving managers their own equity "gives them real ownership," Sullivan said. Similar deals for other affiliates could help them recruit and retain executives, he said, and could make Legg Mason more like its more successful rival Affiliated Managers Group.

Among Legg Mason's eight main affiliates are the Western Asset Management bond shop and its Royce & Associates division that invests in smaller companies.

Relations between some affiliates and the parent have been strained over finances and marketing issues, a problem Legg Mason could not afford during nearly five years of outflows of investor funds from the company overall, amid mixed fund performance.

Many funds are recovering however, and Sullivan said improving investment performance will bring investors back into the company's wide range of mutual funds and other products.

"We are proof of the fact that this doesn't happen overnight," Sullivan said.

Sullivan had been the company's sales chief and interim CEO. Legg Mason had been seeking a new CEO since Mark Fetting stepped down under pressure last fall. Sullivan was also named president and a board member on Wednesday.

Reuters first reported Sullivan's appointment late Tuesday.

In addition, Legg Mason on Wednesday named a new board member, Dennis Kass, who retired last year as CEO of Prudential Financial Inc's Jennison Associates money management unit.

SIGNALING FEWER CHANGES

Choosing Sullivan signals that Legg Mason's board is less inclined to make the sweeping changes that an outside candidate might have begun, analysts said.

"Instead of disrupting the apple cart too much, they went with the guy that they knew, but brought in an outsider to the board," fund industry consultant Roland Meerdter said.

Legg Mason board chairman Allen Reed said Sullivan has the background and management skills that Legg Mason needs. Reed also said Sullivan has good relations with other company leaders, a point supported by Terrence Murphy, CEO of Legg Mason's ClearBridge equity unit in New York.

Murphy acknowledged tensions among the units but said that Sullivan "is definitely the right guy to solve them" because he is well-respected by division leaders.

One challenge, Murphy said, is that affiliates want more help from the parent selling their funds, like food suppliers looking for more display at a supermarket. "It's not a perfect model because everyone is always looking for more shelf space," Murphy said.

Sullivan, 55 years old, has worked at Legg Mason for most of the last 19 years, with a break between 2005 and 2008 after Legg Mason sold the broker-dealer subsidiary where he worked to Stifel Financial Corp.

"I viewed it as being exiled. I finally paid my dues and they let me come back," Sullivan said.

The decision follows a five-month search process led by recruiting firm Korn/Ferry International.

Sullivan's appointment removes an overhang on the shares and allows the company to focus on improving flow trends, Sandler O'Neill analyst Michael Kim wrote in a note to investors.

But the decision also lessens the likelihood of a private-equity buyout of the company, Kim wrote, as some of the affiliates had discussed.

Given ongoing declines in assets and uneven performance track records, "we see more limited upside for the shares," said Kim, who kept his "hold" rating on the stock.

Legg Mason shares were down 2.19 percent at $27.30 in midday trading after the news was announced.

AFFILIATE INPUT

Sullivan was seen as the inside favorite for the job by some employees and had already made changes during his interim tenure that could foreshadow more to come.

In December, for instance, Legg Mason agreed to buy London-based hedge fund firm Fauchier Partners and renegotiated the terms with Permal.

With $654 billion under management at the end of January, Legg Mason is one of the largest publicly traded U.S. asset managers, but its shares have lagged those of its peers. Sullivan's predecessor, Fetting, took over Legg Mason from founder Raymond "Chip" Mason in early 2008.

Fetting restructured Legg Mason and slashed its workforce to cut costs. Both moves were in keeping with the usual agenda of activist shareholder Nelson Peltz, who joined Legg Mason's board in 2009 and holds about 10 percent of its shares.

A spokesman for Peltz's investment firm Trian Fund Management said in a statement on Wednesday that the firm is "enthusiastic" about Sullivan's appointment.