Sallie Mae / J.C Flowers Quagmire Deepens

The SLM Corp. (SLM) / J.C Flowers situation continues to develop into more of a quagmire than could have possibly been imagined, making any predictions for an outcome highly tenuous. This was made more so Monday when the J.C. Flowers group waived the "no shop" condition of the merger agreement, thereby allowing SLM to seek third parties for a potential alternative transaction.

This is a critical development not only in that it will presumably prevent an expedited trial schedule with the Delaware Chancery Court, it will also force SLM to back up its claims that it received "expressions of interest" from multiple entities regarding a possible combination. It also places the burden of establishing SLM's value in the open market on the company itself. Even if there are other potential buyers, it is extremely unlikely that the company will be able to secure an offer approaching the original J.C. Flowers $60/share deal, and it would be surprising if any third party offers even $50 per share at this point. In other words, SLM's current value will be exposed if the company actually seeks offers from third parties. This can not be viewed as a positive development for SLM under the current circumstances.

With respect to the Delaware Chancery Court proceedings, quite a lot of analysis has been focused on the presiding Judge, Leo Strine, who is remembered vividly for forcing Tyson to complete it acquisition of IBP in 2001. Naturally, the circumstances between that case in this case are highly dissimilar, yet it appears many analysts believe Judge Stines will simply view this as another "buyers remorse" situation and side with SLM.

This publication does not currently perceive this to an accurate assessment of this particular case. While it was at one point in this deal speculated (see June 12 entry) that the buyout consortium did not have much legal standing under the MAC clause, developments since that time have essentially reversed that opinion. Regardless of claims to the contrary, the major federal cuts in student lending funding definitely presents a long term, negative impact on SLM's core business. This is without a doubt a material adverse development which can not be reversed in the near future. For some reason, the MAC clause in this case seems to have been confused with the "force majeure" clause that became prominent in virtually every merger agreement following the events of September 11, 2001. To be sure, a federal act is not an act of nature or extraordinary event under the letter or spirit of force majeure. And it is highly unlikely J.C. Flowers will attempt to use this in its legal strategy as, again, SLM's long-term viability has clearly been compromised by federal law.

For the time being, it remains perceived that the J.C. Flowers group has the upper hand and this will only be enhanced when and if SLM fails to secure an alternative transaction. Since SLM obviously has no intention of waiving the large termination fee in this deal, and J.C. Flowers has no intention of paying the fee unless so ordered by the Chancery Court, SLM is still best served to re-negotiate a deal with J.C. Flowers before the the trial phase of this case begins in several months.

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