The gloves came off on Thursday in the dispute between Sallie Mae and the consortium of banks and private equity firms that agreed to pay $25 billion for the student lender but now claim closing conditions to the deal may not be met.
The consortium agreed to pay $60 a share for Sallie Mae in April. But since then, legislation slashing subsidies to student lenders and a serious credit squeeze have jeopardized the deal.
Sallie Mae said it expects no change in the terms of the takeover. The buyer group, led by private equity firm J.C. Flowers & Co, responded by saying it stands by its previous statements that conditions to closing the deal might not be met.
Sallie Mae's stock fell below $49 as traders bet that a lower price is struck for the takeover or that the deal ends in litigation.
"They (Sallie Mae) are girding up for a battle," said John Orrico, portfolio manager at the Arbitrage Fund in New York. "I think the market is looking at something in the $50 to $55 (per share) range (for any revised deal)."
The buyout group also includes Bank of America, JPMorgan Chase and private equity firm Friedman, Fleischer & Lowe.
Sallie Mae said its statement on Thursday was in response to a New York Times article suggesting that the buyout group plans to seek a lower price and, failing that, could try to back out of the deal, incurring a $900 million breakup fee.
If the buyers can prove that the legislation has had a material adverse effect on the transaction, they would not have to pay the $900 million fee.
Congress this summer passed legislation to cut subsidies to student lenders, potentially making the buyout less attractive to the consortium.
Clash of the Egos?
Sallie Mae, officially known as SLM Corp., said on Thursday: "Our contract is with Bank of America and JPMorgan Chase, two of America's largest and strongest banks. We expect these banks to honor their commitments under that contract, not breach the contract."
The student lender stood by its previous statements that the College Cost Reduction Act, which is awaiting President Bush's signature, does not and will not constitute a material adverse effect under the merger agreement.
"We disagree with Sallie Mae's characterization of the merger agreement," Flowers said in a statement on Thursday. Sallie Mae said on July 11 that the buyers believed the legislative proposals on student lender subsidies "could result in a failure of the conditions to the closing of the merger to be satisfied." Sallie Mae disagreed. Its shareholders have already voted to accept $60 a share.
Orrico of the Arbitrage Fund said big personalities at all the companies involved now need to make tough decisions.
"It's all posturing -- if egos get in the way here, you could see this thing get ugly and it does go to court," he said.
Sallie Mae Chairman Albert Lord, described by colleagues as a "force of nature," is known as an uncompromising figure who fights hard for his investors.
On the other side of the negotiations are three of the biggest names in the U.S. financial system. Leveraged buyout star Christopher Flowers of J.C. Flowers & Co led the buyer group. Bank of America and JPMorgan Chase are led by tough CEOs Kenneth Lewis and Jamie Dimon, respectively.
Orrico mused: "Does the (Sallie Mae) board want to go through litigation, have their stock price sink -- or will they settle and come to a price that allows Flowers to walk away with a victory?"