Legg Mason, Inc.

1899–1981

Legg Mason, Inc. is the holding company for several subsidiaries that provide a wide range of financial services for private, public, and corporate clients. The chief subsidiaries are Legg Mason Wood Walker, Inc.; Howard, Weil, Labouisee, Friedrichs; Gray, Siefert & Co.; and The Fairfield Group. Among other services, these and other companies owned by Legg Mason broker securities; manage assets; offer investment advising; broker public and corporate finance, insurance, and annuity product sales and purchases; and provide mortgage banking services for commercial interests. It is one of the most successful financial service holding companies in the United States and one of the few to remain independent through the 1990s, when many regional brokerages were absorbed by finance service industry giants. At the close of the century, the company operated more than 120 domestic and overseas offices, staffed by 1,200 financial advisors and more than 4,200 total employees, and was managing individual and institutional assets of $82 billion. Its revenue also had reached the $1 billion mark for the first time in its history.

A Complex History: 1899-1981

Although Legg Mason can trace its origins back to 1899, when its grandparent company, George Mackubin & Co. was founded in Baltimore, it began taking its present shape under the tutelage of its current CEO, Raymond A. (Chip) Mason, when, in 1981, it was incorporated as a holding company to manage a group of subsidiaries that had evolved through an intricate history of growth and changes in firm partnerships. Its most immediate predecessor was Legg Mason & Company, formed in 1970 through the merger of two brokerage firms--Mason & Company and Legg & Company.

Chip Mason and some associates had formed Mason & Company in 1962, in Newport News, when Mason was only 25. He had entered the world of securities in his hometown of Lynchburg, Virginia, where his great uncle and uncle ran Mason & Lee, a small brokerage firm. In 1959, after graduating from the College of William and Mary, he entered that family business as a trainee, but, anxious to start up his own firm, he left after two years. With $200,000 borrowed from local businesses and the help of close college friends, most of whom were his Sigma Alpha Epsilon fraternity brothers, Mason was able to open his own company. Among his friends was James Brinkley, who would later run Legg Mason's expansive retail brokerage operation.

Mason guided his young business through a successful beginning and healthy early growth. Among other things, the firm avoided the devastating 'back-office crisis' that afflicted many other investment firms in the 1960s. By 1970, Mason & Co., with 60 brokers, was operating six offices, including four branch offices in Virginia and Washington, D.C. It also had drawn the attention of Legg & Co., which was looking to expand into the South, and the two firms negotiated a merger to establish Legg Mason Co.

Rowe Price Associates, an industry giant that by the end of the 1990s had more than $140 billion in assets under its management.

1899–1983

It was Legg, a solidly capitalized, long-established company, that was the surviving successor to Mackubin & Goodrich, a firm with business roots set down in Baltimore in 1899. It had started as George Mackubin & Co., as a broker-dealer firm, but went through several permutations before emerging as Legg & Co. It became Mackubin & Goodrich within the first year, when Mackubin took on co-founder G. Clem Goodrich as a partner. In the next year it hired John Legg, whose first principal task was to chalk up stock prices on a blackboard. Five years later, in 1905, he became a partner.

The firm had to weather difficult years. First during World War I, when there was a moratorium on stock trading and the company's business was reduced to financing real estate mortgages. Then in the aftermath of the 1929 stock market debacle, when the partners had to keep the firm solvent by selling off their own stock. The company nearly floundered completely, in part as a result of the defection of T. Rowe Price, who, at the time, was a growth-stock portfolio manager for Mackubin & Goodrich. He left to form T. Rowe Price Associates, an industry giant that by the end of the 1990s had more than $140 billion in assets under its management.

In 1932, after Goodrich died, the firm became Mackubin, Legg & Co., and finally, in 1942, John C. Legg & Co., after Mackubin and Legg had a falling out and Mackubin left to join a competing firm. Under Legg's leadership, the firm prospered in the post-World War II boom and was in a favorable position to enter the new partnership with Chip Mason's company.

In 1973, three years after the merger, a second major change occurred when Legg Mason merged with Wood Walker & Co., a New York-based investment firm. The resulting company, Legg Mason Wood Walker, Inc., added a 20 percent growth in revenue in that year. With its headquarters in Baltimore, and Chip Mason as chairman, the company's rapid expansion continued. Over the 13-year period from 1970 to 1983, when the Legg Mason holding company went public, the firm acquired six brokerages, significantly increasing its volume.

In the same period, under Chip Mason's tutelage, Legg Mason Wood Walker & Co. was broadening its investment markets. A major step was taken in 1979, when the company set up its first mutual, money-market fund, the Legg Mason Cash Reserve Trust.

1981–1988

The growth also encouraged Legg Mason Wood Walker to create a new corporate entity as a holding company for its various subsidiaries. The company did so in 1981, forming Legg Mason, Inc. All the firms owned by Legg Mason Wood Walker, and the parent company itself, were at that time placed under the Legg Mason corporate umbrella.

Going Public and Rapid Growth Through Acquisitions: 1982--90

The year after it created the Legg Mason Fund Adviser, Inc., formed in 1982 to manage the retail funds of its growing family of subsidiaries, Legg Mason went public and was listed on the New York Stock Exchange. It was also in 1982 that Chip Mason convinced his research associates to set up an equity mutual fund to complement its existing mutual, money-market fund. The resulting Legg Mason Value Trust, having no front- or back-end sales load, was a slow starter, in part because of the sluggish economy, but by the end of 1985 the fund had drawn $422 million in investments.

Encouraged by its performance, Legg Mason thereafter inaugurated two additional mutual funds. These helped give Legg Mason a desired noncyclical revenue and encouraged Chip Mason and his associates to acquire asset-managing firms. In 1986, despite serious reservations voiced by his staff, and using Merrill Lynch & Co. as broker, Legg Mason acquired Western Asset, a California-based bond-managing firm that had been placed on the auction block by First Interstate Bancorp. Mason's colleagues were dubious, in part because the $20 million price tag represented about half of Legg Mason's liquid capital, and in part because fixed-income managers had performed badly during the previous two decades. In just more than a year, however, the bond manager increased its asset management load by $1 billion, and by 1988 it was providing most of a $10 million increase in Legg Mason's revenue from its investment advising services.

Although not always with the same success, Western's performance encouraged Chip Mason and his fellow executives to continue an aggressive expansion through acquisitions. One of these, the Howard Weil Financial Corp., a New Orleans-based broker-dealer specializing in the energy field, acquired in 1987, imposed considerable risk because the Tax Reform Act of 1986 had undermined its municipal bond underwriting business. In addition, Legg Mason subsidiaries took some bottom line setbacks in 1988 when post-Black Monday uncertainties depressed brokerage commissions by 13 percent.

1990–2000

Western's success compensated for these problems, however, and after a three-year cooling-off period, Legg Mason began to purchase and expand again, widening the circle of its subsidiaries, both in their kind and geographical reach. In 1990 it ventured into the commercial mortgage banking field, purchasing Latimer & Buck, the base company in what would become Legg Mason Real Estate Services, an operation run by Chip Mason's close friend, James Brinkley.

Continued Growth and Diversification: 1990-2000

By 1993, Legg Mason had 870 brokers in 83 offices, primarily located in middle-Atlantic and southern states. In that year it continued its acquisitions, buying Horsham, a Pennsylvania-based Fairfield Group, and in the next year, Gray, Siefert & Co., a New York-based, high-net-worth money manager. Its acquisitions continued in 1995, when it purchased Boston's Batterymarch Financial Management, a company that specialized in equity management on a global scale. A year later it also bought Cincinnati-based Bartlett & Co., a domestic equity manager, and Lehman Brothers Global Asset Management's London-based international fund management branch. The latter was turned over to Western Asset and renamed Western Asset Global Management. Another major acquisition, Brandywine Asset Management, Inc., a 'deep value' equity manager based in Wilmington, Delaware, was made in 1998, the year in which Legg Mason also moved its headquarters to 100 Light Street in downtown Baltimore.

Legg Mason's ability to compete successfully in the mergers and acquisitions arena, sometimes beating out higher bidders, is explained in large part by the fact that Chip Mason has consistently granted the firm's subsidiaries real operating independence, allowing them a latitude seldom permitted by larger money-managing firms. That can, of course, cause some problems, but of the acquisitions made in the 1990s, only Batterymarch proved troublesome. When Legg Mason bought it, the company's sole proprietor, Dean LeBaron, and his staff were offered earn-out incentives if they could meet certain revenue targets over a three-year period. These were not met, however, in part because the firm lost a lucrative subadvisory contract with the Vanguard Group. That loss alone was not enough to explain why, in 1997, Batterymarch managed only $4.3 billion in assets, $700 million less than it managed when acquired by Legg Mason.

Despite such occasional problems, Legg Mason has had a history of solid investments in its growth and has gained a reputation for stability in a volatile industry. One reason for this is its refusal to put its capital at risk. In 1993, for example, its debt was only 36 percent of its capital, whereas that of Merrill Lynch was 68 percent. It also has a history of conservative underwriting, preferring safer municipal financing to such risky investments as initial public offerings. In 1992 the company underwrote 263 municipal bond issues with a value of $11.7 billion. Still, it was through diversification that Legg Mason gained its solid performance record and continued growth. By broadening the scope of its services, especially by moving more deeply into asset management, Legg Mason was able to log impressive gains. At the end of 1999, the firm had $85 billion under management, an increase of $16 billion over 1994. Moreover, between 1994 and 1998, the company's investment advisory fees increased by nearly 300 percent, moving up from $91 million to $365 million. That sort of performance predictably led to much speculation about Legg Mason's inevitable absorption through the leverage of a larger firm, something that Chip Mason has deflected throughout his tenure as the firm's CEO. In 1998, however, Mason announced his plans to retire within five years, and that decision prompted some speculation that his successor might be less reluctant to guide Legg Mason into a larger corporate fold through the company's acquisition or merger.