Sallie Mae Merger Duel Heats Up

The investor group that had agreed to buy the company tries a new tack that would let it out of the deal without having to pay a hefty termination ...
Stephen TaubOctober 15, 2007

The investor group that had agreed to buy Sallie Mae for $25 billion, and then tried to get the company to accept a lower purchase price, has suggested terminating the deal.

The group, consisting of J.C. Flowers & Co., Bank of America, and JPMorgan Chase, made the offer in a letter to the Delaware Chancery Court, where Sallie Mae filed a lawsuit to force the group to adhere to the original deal or pay heavy damages. The buyer group said voiding the agreement would free Sallie Mae from covenants and other restrictions that it is complaining about.

But the offer might not be entirely altruistic. If the agreement were terminated, the investor group would be off the hook for up to $900 million in damages that Sallie May is threatening to pursue through the lawsuit.

The buying group’s reduced offer, valued around $21 billion, came in light of what it said was “the new economic and legislative environment that faces the company.” That was a reference new legislation President Bush signed in September that could cut about $20 billion in government subsidies to banks that make student loans and includes measures designed to increase financial aid to college students.

The buyer group’s letter to judge Leo Strine came in response “Sallie Mae’s assertion that the Merger Agreement is impeding Sallie Mae’s ability to run its business,” made in a letter the company sent to the court on Friday asking for an expedited trial.

Stressing that it has not repudiated the deal and continues to abide by its terms, the investor group nonetheless asked the Court to declare that it is not obligated to proceed with the merger agreement for a number of reasons.

For one, it asserted that in the merger agreement Sallie Mae agreed that any legislative changes relating to the student lending industry more adverse than the President’s budget proposal would count in determining whether there had been a material adverse effect under terms of the agreement.

Since Sallie Mae is the largest education finance company and about 84 percent of its loan portfolio consists of federally subsidized loans, Sallie Mae is the single largest beneficiary of federal subsidies and suffers the largest economic impact as a result of the recent enactment of the College Cost Reduction Act, the letter stated.

Indeed, the investor group projected that the legislation will cut Sallie Mae’s core net income by about 15.2 percent in 2009, and by nearly one-quarter in 2012 compared to what it would have been if no legislation had been enacted.

The letter also claimed that Sallie Mae has been “disproportionately affected” by the recent credit market collapse because, unlike banks that can accept deposits, Sallie Mae is acutely dependent on the wholesale credit markets to finance its operations.

“The buyer’s filings are simply another effort to confuse events,” responded a Sallie Mae spokesman, according to Reuters. “Consistent with our recent statements and court filings, there has been no material adverse effect. The buyer group’s misstatements attempt to mask a simple fact: that the buyer’s group is obligated to honor the contract they signed, and pay $60 per share. If they fail to do so, they will be liable for the termination fee.”