Sallie Mae Takeover Blues

The consortium that was set to take over Sallie Mae, as SLM, the Reston, Va.-based firm specializing in student loans is commonly referred to, may not do so, after all. The reason for the apparently sudden cold feet is possibly pending US legislation that could affect the earning potential of the consortium from the takeover.

The takeover bid was being worked out for a whopping $25 billion. The announcement has come after the involved parties in the takeover bid had already come to an agreement regarding the terms of acquisition as long back as April 15, 2007.

The announcement by the consortium, led by J.C. Flowers and having in its ranks powerhouses like JP Morgan Chase and Bank of America, both listed on the New York Stock Exchange, caused a steep drop in SLM stock value, with a 9.5% or $5.50 slide. It closed at $52.30 per share. This is way below the $60 per share acquisition value. Sallie Mae officials were, however, unfazed with the announcement by the consortium and pledged to work swiftly and close the deal, so investors would not suffer.

A bill that aimed at reducing to 3.4% (from the existing 6.8%) the rate of interest for student loans over the next five years was passed in January 2007 in the House of Representatives. The Democrat senator from Massachusetts, Edward Kennedy, is currently at the head of another campaign, which would reduce, by $15.1 billion, student-lender subsidies. That would mean a 10% to 12% decrease in Sallie Mae’s earnings, as per a research note put out by Prudential.

The legislation in question is currently on the floor of the House of Representatives. It was aimed at reducing by almost 50 percent the rate of interest on student loans backed by the government. While this would be fantastic news for the students, the other parties would suffer, and hence the apparent fizzling of interest. There were other aspects of the legislation to consider as well, apparently, all aimed at benefiting the student, that have been causes for concern among the lending fraternity.

These include a move to protect low-income graduates by ensuring they did not shell out more than they could towards loan repayment. Another cause for concern for the lenders is the move to cap annual repayment amounts, so that it would work out to just a percentage of the individual’s income, and not turn out to be a financial burden.