Investors End Deal To Buy Sallie Mae
Thursday, September 27, 2007
One of the largest private takeovers in history -- the $25.3 billion buyout for college loan giant Sallie Mae -- unraveled yesterday after its buyers balked at the price, citing turmoil in the credit markets and federal legislation to cut subsidies to student lenders.
The buyers, headed by fund manager J.C. Flowers, left open the possibility of acquiring Sallie Mae at a lower price. Sallie Mae vowed, however, that it would fight to keep the deal intact "to the fullest extent permitted by law."
If it fails completely, the deal for the Reston lender, known formally as SLM Corp., would be the biggest casualty so far in a trend of mega-buyouts that were negotiated in happier times only months ago, when money was easier to borrow. Last week, Harman International, which is based in the District, saw its $8 billion agreement come apart when the would-be buyers walked away.
"Several deals have collapsed under their own weight. There will be more," said Frederic V. Malek, chairman of Thayer Capital, a private-equity firm in the District.
When it was announced in April, the Sallie Mae buyout was hailed on Wall Street as a watershed for private equity, which had never been able to acquire a major financial firm. Some student loan specialists denounced the deal as evidence of just how large a profit machine Sallie had become providing government-backed loans to cash-strapped students, and they worried that the sale price would lead dealmakers to squeeze borrowers.
The buyers included two of Sallie's largest competitors, Bank of America and J.P. Morgan Chase, and they claimed the deal would have increased the availability of student loans at a lower cost. Others worried that the deal was anticompetitive and would do just the opposite.
The buyers originally agreed to pay Sallie Mae $900 million if they walked away from the deal, one of the largest breakup fees ever. Instead, they now are invoking an "escape" clause that would allow them to cancel the purchase without paying a dime, which Sallie Mae says it will fight in court.
Sallie Mae's stock dropped almost 10 percent, to $41.73, late in the afternoon after news broke that the buyout was off. The stock quickly recovered to close down 3 percent, at $45.01, as investors speculated that a new deal could be negotiated. After hours, the stock rose about 5 percent to $47.30. Sallie Mae had agreed to sell itself for $60 a share.
Sallie Mae has been guided the past decade by Albert L. Lord, who took over the company in 1997 after a nasty proxy fight and threw out management.
Lord engineered Sallie Mae's transformation from a government-sponsored enterprise to a private business, making himself and other executives among the most highly paid business leaders in the Washington area. In 2005, when he stepped down as chief executive, Lord became wealthy enough to build his own 244-acre golf course outside Washington and to mount a serious, though unsuccessful, bid to buy the Washington Nationals baseball team.
The "winds of politics" were blowing against Sallie Mae, and Lord said in an April interview that he expected them to blow harder. Politicians were taking aim at federal subsidies for Sallie Mae and other lenders, accusing them of getting rich from government programs meant to aid students. Lord said he sought the buyout partly because "I didn't see our share price rebounding anytime soon."
Lord's options and stock awards would have been cashed out at a gain of $224.9 million.