I guess my counter-question would be that even though it is not because it’s “necessary,” whether the environment would affect that anyway. I mean as long as people are expecting growth and credit expansion, there is a big difference between plopping down all the money at the front end and taking out a loan. I have no idea how much capital these private equity firms have, but my base instinct is that banks should have (relatively) a lot, and the recent quarterly reports show even the major ones have become leveraged 30x.

Wouldn’t using a lot of capital to buy a company up front be really risky if you’re uncertain that your prior commitments will have the cash flow that was originally projected? (I’m assuming that these groups already have several LBOs which I think is reasonable). But yeah, my questions are less in relation to this deal and more in general, especially since housing is spiraling down even faster.

Please don’t belittle yourself, trust me, the understanding you displayed is far more articulate then most. (I am not a big blogger, but one thing I appreciate about MVDG is the throughtful community)

You are correct that banks are increasingly leary of LBO’s. Remember an LBO is nothing more then using debt, often secured with the assets of the company you are acquiring, to finance a buyout. Often an LBO is pursued because the suitor lacks the financial resources to buy the target outright. The suitors of Sallie Mae DO have the assets to buy the company outright, so the LBO is being pursued because the structure offers certain advantages, not because it is necessary.

I think the decline in stock price is the key component here though. When the offer to purchase was mad Sallie Mae (SLT is the ticker) traded around $58 per share. A $2 or roughly 4% premium was being offered. That is a substantial premium and you would expect the market to react and drive the stock price up to $60. However, that did not happen. SLT has continued to fall and the suitors are now paying a $15 dollar or 33% premium. At this point they would be better off pursuing market orders on the exchange because they could buy the necessary shares cheaper.

Do you think that the deal fallout is more a reflection of deciding that they are too expensive or the inability/unwillingness for the banks to back major leveraged buyouts due to credit concerns? Michael said in your intro post that you are “concerned by the global currency market action” and a few sites I’ve read have suggested that even if the Fed cuts interest rates it won’t be reflected as much in long term rates for this reason. Those sites linked that to a decreased willingness to fund LBOs.