Merrill Lynch & Co. may be considering a sale of part of its $513 billion asset management unit to Legg Mason Inc., the New York Times reported on its Web site, citing unidentified bankers.

The two firms held exploratory talks, the newspaper said. Merrill spokesman Michael O’Looney and Legg Mason spokeswoman Maura Fox declined to comment to Bloomberg News when reached at their homes Wednesday night.

The firm may be considering the sale in part because recent investigations into improper mutual fund trades and the increased scrutiny of fund marketing by state and federal regulators has made the fund management business riskier for investment banks, the newspaper said.

A partial sale of the fund business may ease regulatory conflicts, the newspaper said, citing comments from Robert Doll Jr., president of Merrill’s investment management division, in a research report by Deutsche Bank analyst Richard Strauss.

Merrill’s asset management division had $513 billion in assets at the end of March. The unit had $7 billion of net inflows in the first quarter. Under former Chief Executive Officer David Komansky, Merrill beefed up its asset management unit, acquiring Mercury Asset Management Plc in 1997 for $5.3 billion.

Beat Benchmarks
In the first quarter, Merrill’s asset management division earned $111 million, almost triple the $39 million it earned in the year-earlier period. More than 70 percent of the unit’s funds outperformed benchmark indexes in the one-, three- and five-year periods that ended in February 2004, the firm said in April.

Year-to-date, Merrill is the No. 5 global stock underwriter and No. 3 in merger advising. The firm is ranked second in U.S. bonds underwriting, data compiled by Bloomberg show.

Merrill Lynch managed stock and bond mutual funds totaling $64.9 billion at the end of March, ranking 20th among U.S. fund managers, according to the Investment Company Institute. Merrill oversaw $196 billion of mutual funds, including money-market funds, the fifth most, the association said.

Merrill CEO Stanley O’Neal has cut costs in asset management and throughout the firm during the past three years. Combined with an increase in revenue, the margins in the business have expanded to 26.9 percent, an increase of 15 percentage points from the year- earlier period.

Cost Cutting
Since becoming president in July 2001 and CEO in December 2002, O’Neal has focused on improving Merrill’s profitability by trying to win the most lucrative assignments and not chasing business just to have the greatest market share.

Merrill’s profit has increased for the past eight quarters. In the first three months of the year, the firm earned a record $1.3 billion, or $1.22 a share, as revenue in all of its businesses rose and cost cutting by O’Neal paid off. He eliminated about a third of Merrill’s staff, shuttered offices and exited businesses that weren’t profitable for the firm.

O’Neal installed new management and closed all but three of the firm’s more than 30 retail brokerage branches in Japan. He sold the firm’s brokerage businesses in Canada and South Africa and ended a partnership with HSBC Holdings Plc that had provided cheap, Internet-based trading for European clients.