Citigroup, the world's largest financial holding company, has announced a $3.4 billion deal with Legg Mason, under which it will swap its asset management wing for the Baltimore-based investment firm's broker-dealer unit.

According to the agreement, Legg Mason will pay $1.5 billion of its common and non-voting convertible proffered shares in exchange for Citigroup's global asset management business, a total of $437 billion in assets, and a five-year loan of $550 million from Citigroup's corporate and investment bank. In return, Citigroup will get Legg Mason's private brokerage and capital markets business.

In transferring the brokerage operations of Legg Mason, Citigroup tacks on more than 1,300 brokers to raise its total to 13,800, which will allow it to nip at the heels of rival Merrill Lynch, which houses 14,100 brokers. The deal came in line with CEO Charles Prince's campaign of unloading less-profitable parts of the company and followed the sale of Citigroup's insurance business Travelers Life & Annuity in January.

Moreover, the deal will put an end to Citigroup's presence in mutual fund industry, which was marred by the $208 million in fines it paid to the Securities and Exchange Commission for alleged fund sales abuses.

Separately, Legg Mason will also acquire the Permal Group, one of the world's largest managers of funds-of-hedge-funds. Permal's $20 billion in assets, most of which belong to high net worth individuals, in addition to Citigroup's $437 billion business, will make Legg Mason the fifth largest U.S. both money manager and mutual fund operator. With more than $830 billion in assets under management, Legg Mason can now compete with mutual fund giants Fidelity Investments and Vanguard Group.

"Legg Mason becomes a singularly focused, more profitable and certainly more influential organization within the global asset management community," said the company's CEO Raymond Mason, in a press release.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.