Apparently, times are changing. On June 24 Citigroup agreed to a $3.7 billion deal under which it will swap the bulk of its asset-management business for the broker-dealer operations of Baltimore, Maryland-based Legg Mason.
Citigroup also will receive $1.5 billion of Legg Mason stock, while the Baltimore firm will borrow $550 million for five years from Citigroup’s corporate and investment bank. Citigroup kept its asset-management business in Mexico and its retirement-services business in Latin America, as well as its interest in CitiStreet, a global benefits provider that is a joint venture with State Street.
The asset swap will put Citigroup in a neck-and-neck race with Merrill Lynch as the leading US broker. Citigroup will also post an after-tax gain of about $1.6 billion when the deal closes. The New York-based bank will continue offering asset-management products under a three-year global agreement with Legg Mason.
Legg Mason—which in a separate transaction also acquired Permal Group, one of the largest funds-of-hedge-funds managers—will emerge as a leading global money manager, with $830 billion in assets under management.
In a candid comment to analysts, Citigroup CEO Charles Prince said, “Our performance in asset management is not what we had hoped for it to be.” He suggested that the resources would be better directed elsewhere. What’s more important, the swap enabled both firms to extricate themselves from the conflicts of interest that are unavoidable when the same company offers investment advice and sells its own funds. Other Wall Street firms are expected to get the message. “I think this will be widely perceived on the Street over time,” Prince said.