By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, January 29, 2008

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."

Sallie Mae said yesterday that Bank of America and J.P. Morgan were among the leaders of the bank consortium that arranged the new $31 billion credit line. The dismissal of Sallie Mae's lawsuit was a condition of the refinancing, Flowers said in a news release.

The interest rate on the new credit line was not disclosed.

"One could argue that Sallie Mae gave up the potential $900 million termination fee just to get the funding, making the true cost of the debt astronomically high," analysts at the Arlington investment firm Friedman, Billings Ramsey said yesterday in a report to clients.

The FBR analysts said Sallie Mae "did the right thing" in accepting that trade-off because the company had little chance of winning the $900 million termination fee in court.

Sallie Mae spokesman Tom Joyce, noting the "turbulent and uncertain time," said in a statement that "a consortium of some of the world's leading financial institutions have given us a vote of confidence in our business plan and our management team. Putting the lawsuit behind us allows us to return 100 percent of our focus to doing what we do best -- serving schools and students."

Staff researcher Richard Drezen contributed to this report.