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Investors End Deal To Buy Sallie Mae

Peter Fitzgerald, longtime banker and former U.S. senator who partnered with Lord in the bid for the Nationals, said Lord would likely fight hard to keep the deal alive.

"He is a real scrappy fighter, very smart," Fitzgerald said. "Nobody is going to be able to push him around without getting a fight back."

Talks between the two sides have turned nasty.

The buyers have "tried to keep the temperature down," said a person familiar with their thinking who spoke on condition of anonymity because of the private nature of the discussions. But many of the negotiations were "acerbic" and little got done, the source said. The sides have not been talking actively in recent weeks.

"There's a lot of hardball going on," said another person familiar with Sallie Mae's thinking. "But it's in everyone's interest to get a deal done. I'm bullish a deal is going to get done."

The buyers are citing a "material adverse change" clause, which is included in nearly every buyout agreement but rarely invoked. It defines what changes that significantly alter the value of a company would allow its buyers to back out.

Flowers yesterday told Sallie Mae that changes in credit markets, which raises the cost of financing the buyout as well as college loan legislation that President Bush is expected to sign today, triggered this clause, giving it the right to get out of the deal. The College Cost Reduction and Access Act cuts subsidies to lenders while increasing the maximum size of Pell Grants for low-income students and cutting rates on subsidized student loans.

"We have told representatives of the Sallie Mae Board that we are open to discussing a revision of the transaction that reflects this new environment," the group said.

Sallie Mae contends the subsidy cuts are not enough to trigger the escape clause.

Invoking the material adverse change clause is often used as a negotiating tactic by buyers seeking a lower price, several private-equity analysts said. Since 2003, no deal has been canceled because of such a clause, the research firm FactSet MergerMetrics said.

The buyout of Sallie Mae, the 11th largest in history, was negotiated when the credit markets were booming and financing big deals was easier. At the time, other related stocks, such as the Bank of America and Student Loan Corp., rose on the news as traders speculated the Sallie acquisition would lead to a frenzy of new acquisitions in the financial sector.

That never happened. And a credit crunch in August shook confidence in the financial system, making money far more expensive to borrow.

That has left many private buyers feeling remorse for agreeing to pay high prices for companies. Several private-equity firms are fighting to get out of major deals or renegotiate the price. Carlyle Group of the District and two other private-equity firms, for example, recently got the struggling retailer Home Depot to reduce the price of its wholesale business by $1.8 billion.

While buyouts may not stop altogether, the Sallie Mae fight is demonstrating that this era of the mega-deal has all but ended, several analysts said.

"We haven't seen deals anywhere near the deals we saw in the spring," said Richard J. Peterson, director of capital markets for Thomson Financial. "For now, the time of the big deal is taking an extended vacation."

Staff writer David S. Hilzenrath and staff researcher Richard Drezen contributed to this report.

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