Sallie Mae CEO’s Counterattack Against Waffling LBO Buyers

WSJ DealJournal, September 26, 2007:
Sallie Mae is the odds-on favorite to be the next deal after Harman and Genesco where the buyers try to slip away scot-free by arguing that a so-called Material Adverse Change has occurred to the business. The Sallie Mae buyers — private-equity firm J.C. Flowers & Co. as well as Bank of America and J.P. Morgan Chase — already have said education-finance legislation expected to be signed by President Bush may trigger the MAC clause in their merger agreement with SLM, the student lender’s parent.
With SLM saying last week, effectively, that a deal is a deal, if Flowers & Co. call a MAC — as many in the deal community expect they will — the parties could be headed to court (likely the Delaware Chancery Court, according to this post from Steven Davidoff from M&A Law Prof. Blog). That would be the biggest such deal ever to land there.
Here’s the key part: We spoke to someone who is familiar with the thinking of SLM Chairman Albert Lord, who is said by people who know him to be combative and competitive. He is expected to argue the following points: 1) Disclosures in the company’s 10-K annual filing with the SEC about possible legislation prevent the buyers from calling a MAC; and 2) Flowers sung the deal’s praises to potential equity partners after agreeing to the deal, and after it became clear that the legislation would be worse for the company than previously expected. How could he do that and at the same time argue that a material adverse change has occurred, the argument goes.
The Flowers camp won’t comment publicly. Privately they argue that the MAC clause in the deal does allow for an out if legislation for the industry is worse than what’s contemplated in the 10-K.
Of course, the two sides ultimately could settle their differences quietly and agree to a lower price for the deal. BofA chief Ken Lewis signaled that is what his bank wants in this interview published today in the Charlotte Observer.
At stake is the $900 million reverse break-up fee the buyers are on the hook for if they want to walk and can’t prove a MAC — and that will buy a lot of fireworks.