Well, I just finished rambling about video games, and just as soon as I submitted the post, I heard on Bloomberg that Sallie Mae (SLM) has agreed to a $25B cash buyout ($60 per share). I'm interested to see what this means for a two of the portfolio holdings, Student Loan Corp. (STU) and First Marblehead (FMD).
Student Loan is a much closer comp to Sallie, but I would imagine that all companies dealing with student loans, both private and federally funded, would be affected in one way or another. Interestingly, the two largest FMD customers (JP Morgan Chase and Bank of America) are also taking part in this buyout. Probably not a good thing for us FMD holders.
I guess we'll see how the market reacts to this news tomorrow. Also on a different note, over the weekend, Barron's published a letter that FMD's CEO sent to their editor in response to the recent article bashing the company... the same one that Tom Brown slammed after its publication. And, Student Loan reports earnings in the morning.
*** Edit #1 ***
Okay, it's now 5:30am, and FMD has tanked hard (it's down about 20%). I made an impulse buy at 34.95 in the pre-market, which adds roughly 20% to my existing position. I agree that the uncertainty has greatly increased, but I am not convinced that the partial joint ownership of Sallie Mae by both B of A and JP Morgan Chase should necessarily result in a substantial decrease in volume for FMD. I could be very wrong here. Would definitely want to hear others thoughts on this.
4 comments:
I bought more this morning. What a panic...
I need to start buying my initial positions AFTER major panics instead of before. Of course, panics are hard to predict, especially when there is no fundamental reason for them.
Ya, I agree it was a panic selling spree. Too bad for me, I thought I was getting the best of it with my pre-market buy just under $35. I should learn to wait for panic mode to fully set in before I add.
I haven't added much yet, but I probably will if it dips again.
Some questions for you... if we do learn that either of the two biggies does decrease their business significantly. What would your plan be? Would you then think to lighten up and exit in part? Or, by your numbers, do you figure that the price still represents significant undervaluation?
Quick numbers I came up with suggest that earnings growth would have to come to a complete standstill or worse to justify the $30 price that we hit this morning.
If they lose the BAC contract in June, it probably goes back to $30 very quickly.
I'm more concerned today that they will lose a big chunk of business than I was yesterday after sleeping on it. SLM and BAC are sort of tied at the hip now and the BAC private equity bankers will probably put pressure on the BAC student lending officers to at least give SLM serious consideration when the contract bid comes up. The private equity guys want SLM to grow and be as profitable as possible over the next 2 or 3 years so they can IPO it at the highest possible price. It's likely not a coincidence that BAC and JPM were the 2 banks involved here. C has their own internal student lending operation, right? So they wouldn't want any part of this deal. And it doesn't make any sense for BAC or JPM alone to buy SLM, because then other banks wouldn't want to do business with SLM since they would be owned by a competitor. Maybe the grand plan is for BAC to give SLM the contract in June, then JPM give their contract in 2010, then IPO SLM in 2011, after the IPO do the same private equity deal with FMD, give the business back to FMD, IPO FMD a year later and so on. It seems like all of this would be a conflict of interest so who knows. Sorry, didn't mean to ramble so much...I still have conflicting feelings.
mI'm feeling better about FMD today. Private equity buying and selling is relatively short-term oriented thinking. They want a pretty quick exit strategy. Meanwhile, managment of the student lending operations need to do what is best for them, and they have had excellent results with FMD. The stock should have gone down a little because of the increased uncertainty, but not more than probably 5%.
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