* CEO Black replaced by Tim Armour on interim basis
* Profit from continuing operations drops 76 pct
* Selling $150 mln stock, $150 mln convertible notes
* Janus approached on mergers, could not agree -- source
* Shares fall 9.2 pct to $10.14 after hours (Recasts, adds details about merger talks)
By Jonathan Stempel and Paritosh Bansal
NEW YORK, July 14 (Reuters) - Janus Capital Group Inc JNS.N abruptly replaced Chief Executive Gary Black on Tuesday, following what sources said were talks in recent months for a sale of the mutual fund company.
Black, who joined Janus from Goldman Sachs Asset Management in 2004 and became chief executive in January 2006, stepped down after he and Janus' board of directors "mutually agreed" on his departure, Janus Chairman Steve Scheid said on a conference call.
Scheid called the circumstances of Black's departure "very amicable," but repeatedly declined to elaborate. Tim Armour, 60, a Janus director and former president of Stein Roe Farnham's mutual fund unit, was named interim chief executive.
Separately, two sources familiar with the situation said Janus talked with multiple parties about a takeover in the past several months.
But Janus' stock is trading at a rich valuation -- some 30 times its estimated 2009 earnings -- which made it hard to do a deal that would add to the buyer's earnings, one source said.
The interested parties included private equity firms and insurance companies, the second source said.
However, the sources did not know if the takeover talks were behind Black's departure. They did not want to be identified because the talks were private.
Scheid said he was "very, very confident" about Janus' ability to stay independent, but will consider alternatives, "if scale is the only way to win."
The company set plans on Tuesday to sell $150 million of common stock and $150 million of five-year convertible notes and use the proceeds plus cash to buy back up to $400 million of debt.
One source said the capital raise was a sign the company was preparing to stay independent.
Janus also reported a 76 percent fall in quarterly profit from continuing operations.
"Black did much of his management from New York and there was always a question of how long he would be there. The stock has also been crushed," said Russel Kinnel, director of fund research at Morningstar Inc in Chicago.
Kinnel also said that while Janus' investment performance has improved in recent quarters, "it hasn't been able to capitalize in terms of large investor inflows."
Janus' stock has fallen about two-thirds since last July, as falling stock prices led to industrywide declines in assets under management, which are the basis for fees.
Several fund managers also have departed since Black took over and, in May, a Colorado jury awarded former fund manager Edward Keely $4.8 million for an alleged contract violation.
Black, 49, could not be reached for comment. Janus spokeswoman Shelley Peterson declined to comment on merger talks or elaborate on his departure.
In a statement, Black said the "time is right for a change."
The company's market value was about $1.8 billion as of Tuesday's close and the offerings will dilute existing shareholders.
The firm's shares fell 9.2 percent to $10.14 in after-hours trading, after rising 42 cents to $11.17 during the day.
Second-quarter operating profit fell to $15.8 million, or 10 cents per share, from $65.6 million, or 40 cents, a year earlier. Revenue fell 34 percent to $200.2 million and assets under management slid 31 percent to $132.6 billion, despite $2.3 billion of net inflows in the second quarter.
Analysts on average expected profit of 7 cents per share on revenue of $181 million, according to Reuters Estimates. Janus reported results nine days earlier than expected.
Janus expects a $12.1 million third-quarter charge to cover various cash, stock and options awards to Black.
Black joined Janus in April 2004 as chief investment officer, after being chief investment officer of global equities at Goldman Sachs Asset Management [GSAMB.UL] (GS.N).
He arrived after Janus' high-growth investment style led to big gains in the late 1990s, only to be followed by heavy losses and outflows in a subsequent three-year bear market.
The fund industry is in flux, with BlackRock Inc (BLK.N) agreeing to buy Barclays Global Investors and American International Group Inc (AIG.N), Bank of America Corp (BAC.N) and Lincoln Financial Group (LNC.N) having also put asset management units up for sale. (Additional reporting by Steve Eder; editing by Gary Hill, Andre Grenon, Carol Bishopric and Muralikumar Anantharaman)