By: Gaurav Bhola, MSM, Managing EditorSallie Mae’s buyout is going through rough waters as its suitor J.C. Flowers wants to walk. The buyout group led by private equity firm J.C. Flowers & Co, includes Bank of America, and JPMorgan Chase & Co. The group had originally agreed to pay $60-a-share cash price for Sallie Mae, approximately $25 billion. The buyers changed their mind about the buyout of Sallie Mae due to the recent student loan scandals, in which Sallie Mae became embroiled; as well as the end of federal subsidies to private college loan lenders caused Sallie Mae’s profits to evaporate.
The student loan scandal was started by an investigation led by New York Attorney General Andrew Cuomo into loan practices of universities and private lenders. The inquiry revealed that some colleges and universities were receiving kickbacks from private lenders, such as Sallie Mae and others in return for steering students to their school loan programs.
It was also revealed many financial aid and other university officials were directly compensated for navigating student loans to certain private school loan lenders. This unholy alliance was never disclosed to college and university students and their families.
The student loan scandal’s negative effects on Sallie Mae’s profits made J.C. Flower re-evaluate its bid for the company. Also, Sallie Mae filed a lawsuit against the Flowers consortium claiming that the buyers had unlawfully breached the merger agreement by refusing to consummate the deal.
Flowers claims that the recently passed federal student loan legislation that was signed into law by President Bush, and frail economic conditions had a substantial negative impact on Sallie Mae that justifies nullifying the deal and making the price agreed upon in April objectionable.
The group did for a brief period offer to pay $50 a share in cash, plus other incentives, but that proposal expired October 9. But Sallie Mae is now looking for full adherence to the agreement in either the buyout of the company or payment to the company part of the mutual termination of the agreement, a $900 million termination fee.
Flowers doesn’t want to pay any termination fee nor buy Sallie Mae. Meanwhile, the student loan lender is talking to other suitors about a possible buyout and changing the strategic direction of the company. At the end of the day, it is all about the money. The Flowers group argues that the recent changes in federal laws regarding student loans allow the group the legal avenue to get out of the deal with no penalty.
Herein, the Delaware Court of Chancery, an internationally recognized legal forum for the determination of disputes involving the internal affairs of thousands of Delaware corporations is the best avenue to resolve the dispute. The judge in the case has directed both parties to reach an accord; if not a January hearing will be set to consider whether to allow Flowers to abandon its bid for Sallie Mae without paying a $900 million breakup fee. Depending on which expert you talk to, each side has a good legal foundation for a win.
