Sallie Mae… or May Not Be Taken Over

Filed under: Politics — bmathey on September 27, 2007 @ 4:25 am CEST

CNBC is reporting,

A $25 billion takeover of SLM Corp., commonly known as Sallie Mae, was on the verge of collapse on Wednesday after the student lender said a consortium does not expect to complete its planned acquisition on the agreed terms.If the deal fails, it would be the latest casualty among a series of proposed leveraged buyouts to falter following the meltdown in credit markets over the last couple of months. But it was still unclear whether the deal would unravel entirely, as consortium leader J.C. Flowers suggested the buyer group was willing to renegotiate at a lower price.

Sallie Mae is the largest student loan company in the United States managing around 125 billion in student loan debt. I’m sure many of us have read about the troubles of Sallie Mae over the years. The leveraged buyout by JP Morgan, Chase, and several private equity firms was a direct result of declining confidence in Sallie Mae and unfavorable changes in the regulatory environment. Essentially Sallie Mae is ripe for a takeover bid (student debt is particularly appealing to lenders as it may not be forgiven by a bankruptcy and is often subsidized by the government)

I’m actually quite glad to see this deal fall through. The new fad of ‘going private’ has been gaining steam, culminating with the Cerberus buyout of Chrystler. I fear that we may become caught up in this craze. The truth of the matter is that although a company may ‘go private’ or see a significant amount of its common stock owned by a private equity firm, the basic rules of fundamental analysis still apply.

The suitors of Sallie Mae were offering a whopping $60 per share. Sallie Mae’s most recent woes (death throws?) have seen the share price continue to decline, dipping as low as $41 in late afternoon trading, before closing today around $45 per share. Even the most rudimentary analysis would suggest that paying a $15 premium is foolish.

I am reassured that the leadership team of the suitors is not forging ahead under the belief that because private equity is involved it must be successful. Paying too much is paying too much and they are justified asking for a discount.

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1 mikkel

September 27, 2007 @ 5:50 am CEST

Brian, I have to warn you that I am not involved in the financial industry nor have had much education in it, so I am just grasping for straws and rely on reading what others think, but that said…

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.

2 bmathey

September 27, 2007 @ 5:21 pm CEST

Mikkel,

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.

3 mikkel

September 27, 2007 @ 6:30 pm CEST

Haha thanks, but my disclaimer was less about saying my understanding was bad and more warning you that I don’t necessarily have the foundation to critique the information that other people are giving me.

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.