bloggingbuyouts

The U.S. Congress is nervous about sovereign funds from places like China and the Middle East owning too many U.S. banks and financial companies. Some how these firms are "strategic assets" which need to be guarded.

The Chinese may have found a way around this. They are planning to put $3 billion to $4 billion into a new fund being created by J. C. Flowers, an American LBO firm.

Read the whole story at 24/7 Wall St.

The scuttled deal for Sallie Mae (NYSE: SLM) by J.C. Flowers has been one of the more fascinating buyout busts of the last few months. It featured a plummeting stock price for SLM, a restructured (and rejected) offer by J.C. Flowers, the threat of a capital crisis, and even a bizarre phone call in which Albert Lord, Sallie Mae's CEO, cursed at analysts.

The litigation between J.C. Flowers and SLM promised more intrigue and pain, but over the weekend it was announced that the two sides have reached an agreement to bring the conflict to an end. Sallie Mae has given up its claim on a $900 million break-up fee, and both sides have agreed to end litigation.

Aside from the broken deal itself, one of the main problems Sallie Mae was facing was its inability to float new debt backed by student loans. The new agreement solves that problem too, providing $31 billion in financing from various banks for the next year, according to Bloomberg.

So it looks like the loan giant will survive the current credit crisis, and live to be bought out another day.

Yesterday, Sallie Mae -- known more formally as SLM Corp. (NYSE: SLM) -- lost $2.36 a share, closing at $20.53. The cause of this dramatic loss, over 10% on the day, was the failure of the firm's new CEO, Albert Lord, to reassure analysts that he is in control of Sallie Mae and has a plan for turning things around. In fact, during an analyst conference call on Wednesday, Lord was downright bizarre, refusing to provide any income projections and, worse, making bad jokes and cursing audibly.

Yesterday wasn't the first bad day for Sallie Mae, not by a long shot. In the last few weeks, news about Sallie Mae has been universally bad. In October, the private equity firm J. C. Flowers lowered the value of its buyout offer by 20%. The ensuing struggle over the buyout, as well as changes in federal law that may make students loans less profitable, helped send the stock down from the $50 range to the $30s. And it's been all downhill ever since.

In Wednesday's conference call, Lord repeatedly refused to answer analyst questions about 2008, despite the fact that SLM lowered guidance last week. He invited analysts to a meeting in New York next month, saying that they should "get there early because I can assure you, you will be going through a metal detector." Then, to make matters worse, at the end of the call he was heard to say, "There's no questions, let's get the [expletive] out of here."

With leadership like that, it looks like Sallie Mae has a long way to go before investors feel secure enough to jump back in.

The buyout of SLM Corp. (NYSE: SLM) by the private equity firm J.C. Flowers is now officially over. The Wall Street Journal has declared Christopher Flowers and his backers at J.P. Morgan Chase and Bank of America the victors in the struggle over the deal, and no doubt the potential buyers are happy to have escaped with their funds intact.

As Peter Cohan noted, Flowers wanted out of its original offer as the growing crisis in the credit markets made Sallie Mae a less attractive target. In October, Flowers cut its original offer of $60 per share by 10%, to $50 per share. It replaced that $10 per share with warrants to buy shares at a later date. But Sallie Mae rejected the deal.

The outlook looks pretty grim for SLM. It has lost subsidies via the College Cost Reduction Act, and today it cut its earnings forecast by 20%. Its stock is hovering at the $28 level this afternoon, down over 40% for the year. Sounds like a stock in trouble -- which means that a buyout offer is probably just around the corner. Except this time, SLM will be lucky to get half of what J.C. Flowers originally offered. Amazing what a few months and a credit crisis can do.

Wall Street has its own brand of breaking up. There may not be 50 ways but there are at least two -- the easy way and the hard way. According to the New York Times, KKR and The Goldman Sachs Group (NYSE: GS) are splitting with Harman International (NYSE: HAR) the easy way, while J.C . Flowers is taking the hard route to killing its deal with SLM Corp (NYSE: SLM).

The easy way, in the Harman case, is for the buyers to buy $400 million worth of Harman bonds instead of paying $8 billion to own the company. Under the new agreement, the buyout deal struck in April will be dissolved, with no litigation or payment of the $225 million termination fee. Instead, KKR and Goldman will buy bonds that can be exchanged for Harman shares at $104, below the $120-a-share price of the original offer -- but much higher than its current $85.87.

Harman gets some cash and saves face while KKR and Goldman get out of investing in a cratering company -- HAR's earnings of 50 cents a share for the most recent quarter are expected to be less than half of the $1.02 analysts had forecast.

The New York Times [registration required] reports that J.C. Flowers, the private equity firm that announced it was pulling out of its deal to buy SLM Corp. (NYSE: SLM), has changed its mind. Flowers is now offering $50 a share in cash, 10% below its original $60 a share offer for the student lender.

But J.C. Flowers has offered a kicker: warrants to buy SLM shares, which it claims could eventually be worth as much as $10 a share if SLM meets or exceeds its earnings projections. Warrants, which give their owners the right to buy shares at a specific price, are sometimes used in bankruptcy cases as a way to repay creditors. The idea is that if the company fares better than expected, warrant holders can share in the profits by exercising the options. But a few hours ago SLM announced it rejected the offer.

According to its statement, J.C. Flowers wanted out because of a law signed by the president which limited government reimbursement of student loans. But SLM countered with a statement reaffirming its rights under the merger contract. So what does the cash and warrants deal mean? It could be seen as a clever way to tie SLM's sale price to its business prospects. Or it may be an attempt to buy SLM on the cheap while claiming to stand by its previous bid

There have been rumors and press reports for a couple of weeks that the J.C. Flowers deal to buy student loan company SLM Corp. (NYSE: SLM), better known as Sallie Mae, might fall apart. Finding debt to close the purchase of the company was getting tough.

Yesterday, the rumors become news. Flowers backed out of its commitment. The Wall Street Journal writes that, "Mr. Flowers informed a group of UBS bankers that he wasn't prepared to pay the $60-a-share price he had agreed to in April." UBS is Sallie Mae's banker.

Flowers may simply be fishing for a price lower than his first offer. With its stock price at risk, the SLM board might be tempted to take a reduced price.

The buyout firm is arguing that legislation which could hurt the student loan market amounts to a "material adverse effect" to the deal, and that this gives Flowers the legal right to walk away.

The SLM board does not have any good choices. It could sue Flowers to complete the deal, and it probably should. But, as the legal fight drags on, shares in the student loan company are likely to fall. That leaves the board between Scylla and Charybdis.

Douglas A. McIntyre is a partner at 24/7 Wall St.

In the $25 billion buyout of SLM Corp (NYSE: SLM), also known as Sallie Mae, the buyers -- J.C. Flowers, Friedman Fleischer & Lowe, Bank of America (NYSE: BAC) and JP Morgan Chase & Co. (NYSE: JPM) – used the legal services of Wachtell Lipton Rosen & Katz as well as Sullivan & Cromwell LLP.

Well, it looks like it was money well spent. According to a report in The Wall Street Journal, it looks like the SLM deal may come undone because of proposed legislation in Congress that would curtail the school loan industry. The private equity firms believe it would be a violation of the merger agreement. However, SLM disagrees. So, this could lead to even more legal fees and litigation.

SLM's stock is down about 8.65% to $52.80. The current buyout offer is $60 per share.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.