Sallie Drops Lawsuit Over Disputed Fee For Breakup

A bitter battle between Sallie Mae and New York investment firms ended with a whimper yesterday.

The student loan company dropped its effort to get a $900 million penalty from J.C. Flowers and the other firms that last year walked away from a planned $25.3 billion buyout of the Reston company.

Giving up any claim to the $900 million was part of the price Sallie Mae paid to secure billions of dollars of credit needed to sustain its operations.

The action ended a drama that began months ago on a giddy note.

Last spring, SLM Corp., as Sallie Mae is formally known, announced that it was being acquired by Flowers, Bank of America and J.P. Morgan Chase for $60 per share, nearly 50 percent more than the price at which the stock was trading before news of the deal was reported. To tide Sallie Mae over until the buyout was completed, Bank of America and J.P. Morgan provided $30 billion of credit.

Before the deal was concluded, the buyers had second thoughts. A global credit crunch made it harder and costlier for private investors to buy big companies using borrowed money. The federal government, meanwhile, cut the loan subsidies that have been a mainstay of Sallie Mae's business.

Flowers and its partners abandoned their bid, saying the subsidy cuts changed the picture and entitled them to scrap the deal without paying the $900 million termination fee set forth in the buyout agreement. Sallie Mae sued to collect the money.

For Sallie Mae's Albert L. Lord, then chairman and now chief executive, the slow unraveling of the buyout became personal. He contrasted his "land-grant" education as "a Penn State guy" to billionaire investor J. Christopher Flowers's Harvard background and said at one point that he would not accept a reduced price. Later, he urged Flowers to reopen negotiations, but Flowers refused.

The settlement yesterday apparently allows Flowers to walk away without penalty, except for any loss of credibility he might have suffered for scuttling a deal.

The $900 million penalty would have been small consolation for Sallie Mae's travails. The collapse of the deal left the lender's stock reeling even as the subsidy cuts and credit crunch clouded its financial outlook.

Sallie Mae's stock closed at $20.45 yesterday, up 57 cents or nearly 3 percent.

Sallie Mae was facing a May deadline to replace the $30 billion credit line extended by its allies-turned-adversaries Bank of America and J.P. Morgan. The company was aiming to refinance the debt by Feb. 15, when the cost of maintaining it would have increased substantially. Last week, Chief Financial Officer John F. Remondi told investors that Sallie Mae was close to lining up new financing but added, "We expect to pay dearly."