Marblehead 'Mispricing' Clarified: Gee, Thanks!

Remember back in April, when word of the J.C. Flowers-BofA-Chase acquisition of Sallie Mae came out, how First Marblehead's (FMD) stock got the stuffing knocked out of it? Well, I do. Investors were concerned that JPMorgan Chase (JPM) and Bank of America (BAC), two big Marblehead customers, would shift their private loan business to Sallie once they became owners of the company. The analyst at Prudential put his finger on the problem:

One . . . side issue [of the deal] for investors in other education-finance companies [read: First Marblehead] is whether two bank owners (Bank of America and JP Morgan) plan to use SLM more intensively for both loan originations but perhaps also for private loan securitizations. [Emph. added]

Pow! Off 20% in a day! In any event, I mention all this now because, as things have turned out, people needn't have been concerned. Not only did BofA and Chase not plan to switch their business to Sallie, they couldn't have switched even if they'd wanted to. Reason: it would have been an antitrust violation. Take a look at this snippet from the latest letter Flowers has written to Sallie in the midst of their current brawl. [My emph. added]:

The third claim [that Sallie makes in insisting the deal go through] is that Sallie Mae faces prospective harm because it is obligated to provide sensitive financial information to JPMorgan Chase and Bank of America, both of which have business units that compete with Sallie Mae in the student lending market. Again, the claim is false. Both banks have in place strict protocols to "firewall" off such information from their student lending businesses. Moreover, under the Sherman Act, JPMorgan Chase and Bank of America are barred from using confidential information that they acquired from Sallie Mae for anticompetitive purposes. Finally, as Sallie Mae knows, in order to obtain antitrust clearance from the United States Department of Justice, Sallie Mae, JC Flowers, JPMorgan Chase and Bank of America entered into a written agreement requiring the banks to erect comprehensive "firewalls" that would ensure that any confidential information provided by Sallie Mae would not be misused.

So contrary to investors' fears, Chase and BofA never even considered switching their Marblehead business to Sallie Mae. The Justice Department wouldn't let them. I scarcely need to add that Marblehead's stock has yet to fully recover from that selloff that occurred when the Street was sure the opposite was true--even as the fundamentals of its business have moved from strength to strength.

If this were a case study in stock market school, the professors would call it a "mispricing."

Disclosure: We have a position in First Marblehead.

Comments

[User 124966:]

Your anti-trust argument doesn't seem to be supported by the quote you included. It merely states that in order for the banks to do business legally with Sally their loan division can't know sensitive information the acquisition team would learn. The letter argues that there is appropriate seperation.
Am I missing something?

2007 Nov 25 02:50 AM