UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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SLM CORPORATION

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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12061 Bluemont Way

Reston, Virginia 20190

 

 

[          ], 2007

 

Dear Stockholder:

 

The board of directors of SLM Corporation, acting upon the unanimous recommendation of the transaction committee of the board of directors, has approved a merger agreement providing for the acquisition of SLM Corporation by Mustang Holding Company Inc., an entity owned by an investor group consisting of affiliates of J.C. Flowers & Co. LLC and each of JPMorgan Chase Bank, N.A. and Bank of America, N.A. If the merger contemplated by the merger agreement is completed, you will be entitled to receive $60.00 in cash, without interest and less any applicable withholding taxes, in exchange for each share of common stock owned by you at the effective time of the merger (unless you have exercised your appraisal rights with respect to the merger).

 

At a special meeting of our stockholders, you will be asked to vote on a proposal to approve and adopt the merger agreement. The special meeting will be held on [          ], 2007 at [          ] local time, at [          ]. Notice of the special meeting and the related proxy statement are enclosed.

 

The accompanying proxy statement provides you with detailed information about the special meeting, the merger agreement and the merger. A copy of the merger agreement is attached as Annex A to the proxy statement. We encourage you to read the entire proxy statement and the merger agreement carefully. You may also obtain more information about SLM Corporation from documents we have filed with the Securities and Exchange Commission.

 

Our board of directors has determined that the merger is fair to and in the best interests of SLM Corporation and its stockholders and recommends that you vote “FOR” the approval and adoption of the merger agreement. This recommendation is based, in part, upon the unanimous recommendation of the transaction committee of the board of directors consisting of four independent directors.

 

Your vote is very important. We cannot complete the merger unless a majority of the votes entitled to be cast by the holders of the outstanding shares of common stock are cast in favor of the approval and adoption of the merger agreement. The failure of any stockholder to vote on the proposal to approve and adopt the merger agreement will have the same effect as a vote against the approval and adoption of the merger agreement.

 

Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying reply envelope, or submit your proxy by telephone or the Internet. If you have Internet access, we encourage you to record your vote via the Internet. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted.

 

Thank you in advance for your cooperation and continued support.

 

Sincerely,

 

Albert L. Lord

Chairman of the Board

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

 

The proxy statement is dated [          ], 2007, and is first being mailed to stockholders on or about [          ], 2007.

12061 Bluemont Way

Reston, Virginia 20190

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On [          ], 2007

 

[          ], 2007

 

Dear Stockholder:

 

 

A special meeting of stockholders of SLM Corporation, a Delaware corporation, will be held on [          ], 2007 at [          ] local time, at [          ], for the following purposes:

 

1. To consider and vote on a proposal to approve and adopt the Agreement and Plan of Merger, dated as of April 15, 2007, by and among SLM Corporation, Mustang Holding Company Inc., a Delaware corporation and Mustang Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Mustang Holding Company Inc. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement. Pursuant to the terms of the merger agreement, Mustang Merger Sub, Inc. will merge with and into SLM Corporation and each outstanding share of SLM Corporation’s common stock, par value $0.20 per share (other than shares held by the SLM Corporation as treasury stock or owned by Mustang Holding Company Inc. or Mustang Merger Sub, Inc. and shares held by stockholders, if any, who have properly demanded statutory appraisal rights), will be converted into the right to receive $60.00 in cash, without interest and less any applicable withholding taxes.

 

2. To approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve and adopt the merger agreement.

 

Only stockholders of record on [          ] are entitled to notice of and to vote at the special meeting or at any adjournment or postponement of the special meeting. All stockholders of record are cordially invited to attend the special meeting in person.

 

The approval and adoption of the merger agreement requires the affirmative vote of a majority of the votes entitled to be cast by the holders of SLM Corporation’s common stock. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return the enclosed proxy or submit your proxy by telephone or the Internet prior to the special meeting to ensure that your shares will be represented at the special meeting if you are unable to attend. If you have Internet access, we encourage you to record your vote via the Internet. If you fail to return your proxy card or fail to submit your proxy by telephone or the Internet, your shares will not be counted for purposes of determining whether a quorum is present at the meeting and will have the same effect as a vote against the approval and adoption of the merger agreement, but will not affect the outcome of the vote regarding the adjournment proposal, if necessary. If you are a stockholder of record, voting in person at the meeting will revoke any proxy previously submitted. If you hold your shares through a bank, broker or other custodian, you must obtain a legal proxy from such custodian in order to vote in person at the meeting.

 

If your shares are held by a bank or broker, please bring to the special meeting your statement evidencing your beneficial ownership of SLM Corporation common stock and photo identification.

 

Stockholders of SLM Corporation who do not vote in favor of the approval and adoption of the merger agreement will have the right to seek appraisal of the fair value of their shares of common stock if they deliver a demand for appraisal before the vote is taken on the merger agreement and comply with all requirements of Delaware law, which are summarized in the accompanying proxy statement.

 

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY IN THE ACCOMPANYING REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. IF YOU HAVE INTERNET ACCESS, WE ENCOURAGE YOU TO RECORD YOUR VOTE VIA THE INTERNET. STOCKHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON.

 

 

Mary F. Eure
Corporate Secretary

 

TABLE OF CONTENTS

 

 

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. See “Where You Can Find More Information” beginning on page [  ].

 

The Parties to the Merger (Page [  ])

 

SLM Corporation, a Delaware corporation, which we refer to as the Company, is the nation’s leading provider of saving-and paying-for-college programs. The Company originates education loans and serves nearly 10 million student and parent customers. The Company and its subsidiaries offer debt management services as well as business and technical products to a range of business clients, including higher education institutions, student loan guarantors and state and federal agencies.

 

Mustang Holding Company Inc., which we refer to as Parent, is a newly formed Delaware corporation. Parent was formed solely for the purpose of effecting the merger and the transactions related to the merger. Parent has not engaged in any business except activities incidental to its formation and in connection with the transactions contemplated by the Agreement and Plan of Merger, dated as of April 15, 2007, by and among the Company, Parent and Mustang Merger Sub, Inc., which we refer to as the merger agreement. Following completion of the merger, Parent will be owned 50.2% by investment vehicles affiliated with J.C. Flowers & Co. LLC, which we refer to as J.C. Flowers, and 24.9% by each of JPMorgan Chase Bank, N.A., which we refer to as JPMorgan Chase, and Bank of America, N.A., which we refer to as Bank of America. We refer to each of J.C. Flowers, JPMorgan Chase and Bank of America as an Investor and collectively as the Investor Group.

 

Mustang Merger Sub, Inc., which we refer to as Merger Sub, is a newly formed Delaware corporation and a wholly owned subsidiary of Parent that was formed solely for the purpose of completing the merger. Merger Sub has not engaged in any business except activities incidental to its organization and in connection with the transactions contemplated by the merger agreement.

 

The Merger (Page [  ])

 

The merger agreement provides that Merger Sub will merge with and into the Company at the effective time of the merger, which we refer to as the merger. The Company will be the surviving corporation in the merger and following the merger will continue to do business as “SLM Corporation” or “Sallie Mae”. We refer to the Company after the completion of the merger as the surviving corporation. In the merger, each outstanding share of the Company’s common stock, par value $0.20 per share (other than shares held by the Company as treasury stock or owned by Parent or Merger Sub and shares held by stockholders who have properly demanded statutory appraisal rights), will be converted into the right to receive $60.00 in cash, without interest and less any applicable withholding taxes, which we refer to in this proxy statement as the merger consideration. Prior to completion of the merger, the Company will not pay dividends on the Company’s common stock.

 

Effects of the Merger (Page [  ])

 

If the merger is completed, you will be entitled to receive $60.00 in cash, without interest and less any applicable withholding taxes, for each share of the Company’s common stock owned by you, unless you have exercised your statutory appraisal rights with respect to the merger. As a result of the merger, the Company will cease to be a publicly traded company. You will not own any shares of the surviving corporation.

 

The Special Meeting (Page [  ])

 

Time, Place and Date

 

The special meeting will be held on [          ], 2007 at [          ] local time, at [          ].

 

Purpose

 

At the special meeting, you will be asked to consider and vote upon the approval and adoption of the merger agreement, pursuant to which Merger Sub will merge with and into the Company.

 

Record Date and Quorum

 

You are entitled to vote at the special meeting if you owned shares of the Company’s common stock at the close of business on [          ], 2007, the record date for the special meeting. You will have one vote for each share of the Company’s common stock that you owned on the record date. As of the record date there were [          ] shares of the Company’s common stock outstanding and entitled to vote. A majority of the total voting power of the Company’s common stock issued, outstanding and entitled to vote at the special meeting constitutes a quorum for the purpose of considering the proposals.

 

Vote Required

 

The approval and adoption of the merger agreement requires the affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of the Company’s common stock. Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of a majority of the Company’s common stock represented in person or by proxy at the special meeting and entitled to vote on the matter, whether or not a quorum is present.

 

Common Stock Ownership of Directors and Executive Officers

 

As of the record date, the directors and executive officers of the Company held less than [     ]% in the aggregate of the shares of the Company’s common stock entitled to vote at the special meeting. All of our directors and executive officers have advised the Company that they plan to vote all of their shares in favor of the approval and adoption of the merger agreement.

 

Voting and Proxies

 

Any stockholder of record entitled to vote at the special meeting may submit a proxy by telephone, the Internet, returning the enclosed proxy card by mail or voting in person by appearing at the special meeting. If your shares of the Company’s common stock are held in “street name” by your broker, you should instruct your broker on how to vote your shares of the Company’s common stock using the instructions provided by your broker. If you do not provide your broker with instructions, your shares of the Company’s common stock will not be voted and that will have the same effect as a vote “AGAINST” the approval and adoption of the merger agreement. The persons named in the accompanying proxy will also have discretionary authority to vote on any adjournments or postponements of the special meeting.

 

Revocability of Proxy

 

Any stockholder of record who executes and returns a proxy card (or submits a proxy via telephone or the Internet) may revoke the proxy at any time before it is voted at the special meeting in any one of the following ways:

 

 

 

Treatment of Options and Other Awards (Page [  ])

 

Stock Options.  Upon the completion of the merger, each outstanding option to acquire the Company’s common stock granted under our equity incentive plans, whether or not vested, that remains outstanding as of the closing of the merger will be cancelled and converted into the right to receive a cash payment equal to the number of shares of the Company’s common stock underlying the option multiplied by the amount (if any) by which $60.00 exceeds the applicable exercise price of the option, less any applicable withholding taxes.

 

Restricted Stock Units.  Upon the completion of the merger, all restricted stock units, whether or not vested, will be cancelled and converted into the right to receive a cash payment equal to the number of shares of the Company’s common stock underlying the restricted stock units multiplied by $60.00, less any applicable withholding taxes.

 

Deferred Stock Units.  Upon the completion of the merger, all amounts held in participant accounts under the deferred compensation plans that are denominated in the Company’s common stock will be converted into the right to receive a cash payment equal to the number of shares of the Company’s common stock deemed held in such accounts multiplied by $60.00. This obligation will be payable or distributable in accordance with the terms of our deferred compensation plans, as amended to comply with Section 409A of the Internal Revenue Code.

 

Restricted Stock.  Upon the completion of the merger, each share of restricted stock, whether or not vested, will be cancelled and converted into the right to receive a cash payment equal to the number of shares of the Company’s common stock represented by the share of restricted stock multiplied by $60.00, less any applicable withholding taxes.

 

Employee Stock Purchase Plan.  The Company has taken all action necessary to cause our Employee Stock Purchase Plan to be suspended as of the end of April 2007. The Company has caused the then current offering periods to end and such periods are the final offering periods under the plan. Upon completion of the merger, the Employee Stock Purchase Plan will be terminated.

 

Recommendation of the Transaction Committee and Our Board of Directors (Page [  ])

 

Transaction Committee.  The transaction committee is a committee of independent members of our board of directors that was formed on February 7, 2007, for the purpose of evaluating strategic alternatives of the Company. The transaction committee unanimously determined that the merger is advisable and that it is in the best interests of the Company and its stockholders to effect the transactions contemplated by the merger agreement and unanimously recommended that the board of directors (i) authorize and approve entry by the Company into the merger agreement and the transactions contemplated thereby and (ii) recommend the approval and adoption of the merger agreement and the merger by the Company’s stockholders. For a discussion of the material factors considered by the transaction committee in reaching its conclusions, see “The Merger — Reasons for the Merger; Recommendation of the Transaction Committee and Our Board of Directors” beginning on page [  ].

 

Board of Directors.  The board of directors, acting upon the unanimous recommendation of the transaction committee, (i) determined that the merger agreement and the merger are fair to and in the best interests of the Company and its stockholders and declared the merger to be advisable, (ii) approved the execution, delivery and performance of the merger agreement and the completion of the transactions contemplated thereby, including the merger, and (iii) resolved to recommend that the stockholders approve the adoption of the merger agreement and directed that such matter be submitted to the stockholders for their approval. The board of directors recommends that stockholders vote “FOR” the approval and adoption of the merger agreement and “FOR” the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

If the board of directors withdraws or modifies, in a manner adverse to Parent, its recommendation that the stockholders approve and adopt the merger agreement, Parent may terminate the merger agreement and the Company would be required to pay Parent a $900 million fee upon such termination by Parent.

 

Interests of the Company’s Directors and Executive Officers in the Merger (Page [  ])

 

In considering the recommendation of the board of directors, you should be aware that our directors and executive officers may have interests in the merger that are different from, or in addition to, your interests as a stockholder, that may present actual or potential conflicts of interest.

 

All unvested options and restricted and performance shares will vest in connection with the merger. The Company’s directors will receive an aggregate of $312,306,183 in respect of vested and unvested options as follows: Bates $7,114,311; Daley $10,160,011; Diefenderfer $4,737,178; Gilleland $4,595,391; Goode $3,350,189; Hunt $4,532,269; Lambert $7,280,313; Lord $224,920,802; Munitz $609,509; Porter $25,193,904; Schoellkopf $3,874,610; Shapiro $9,983,250; and Williams $5,954,446.

 

The Company’s executive officers will receive an aggregate of $56,972,302 in respect of their vested options, unvested options and restricted and performance shares as follows: Andrews $16,116,200; Autor $16,022,128; Lavet $9,730,101; Masino $666,165; McCormack $8,975,958; and Moehn $5,461,750.

 

In the event that there are certain terminations of employment following the merger, the executive officers would receive the following approximate severance payments: Andrews $2,250,000; Autor $1,600,000; Lavet $1,360,000; Masino $698,800; McCormack $2,050,000; and Moehn $1,825,000, and will be subject to two-year non-competition and non-solicitation restrictions. The executives are also entitled to tax-equalization payments in the event the executive becomes subject to excise tax under Section 4999 of the Code.

 

In accordance with terms of the merger agreement, the officers of the Company at the effective time of the merger shall be the officers of the surviving corporation until such time as their successors are appointed. Currently, our executive officers do not have employment agreements and we are unaware of any change in their benefits that will occur after the effective time of the merger. See “The Merger — Interests of Certain Persons in the Merger”.

 

Opinions of Financial Advisors (Page [  ])

 

In connection with the merger, the transaction committee’s financial advisors, UBS Securities LLC, which we refer to as UBS, and Greenhill & Co., LLC, which we refer to as Greenhill, each separately delivered to the transaction committee and the board of directors a written opinion, each dated April 15, 2007, as to the fairness, from a financial point of view and as of the date of such opinion, of the merger consideration to be received by the holders of the Company’s common stock (other than, in the case of UBS’ opinion, Parent, holders of beneficial interests in Parent and their respective affiliates to the extent they are holders of the Company’s common stock and, in the case of Greenhill’s opinion, affiliates of or holders of beneficial interests in Parent or Merger Sub to the extent they are holders of the Company’s common stock). The full text of the written opinions of UBS and Greenhill are attached to this proxy statement as Annex B and Annex C, respectively. Holders of the Company’s common stock are encouraged to read these opinions carefully in their entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review undertaken. UBS’ and Greenhill’s opinions were provided to the transaction committee and board of directors and were directed only to fairness of the merger consideration from a financial point of view, do not address any other aspect of the merger or any related transaction and do not constitute a recommendation to any stockholder as to how to vote or act with respect to the merger or any matters relating to the merger.

 

Under the terms of UBS’ engagement, the Company has agreed to pay UBS for its financial advisory services in connection with the merger an aggregate fee estimated to be approximately $50.6 million, of which $10 million (representing approximately 20% of UBS’ aggregate fee) has been paid and approximately $40.6 million (representing approximately 80% of UBS’ aggregate fee) is contingent upon completion of the merger. Under the terms of Greenhill’s engagement, the Company has agreed to pay Greenhill $4 million upon delivery of its opinion, all of which has been paid.

Financing (Page [  ])

 

Parent and Merger Sub estimate that the total amount of funds necessary to complete the merger and related transactions will be approximately $25.3 billion, which will be funded by new credit facilities, private offerings of debt securities and equity financing provided by the Investor Group. Funding of the equity and debt financing is subject to the satisfaction of the conditions set forth in the commitment letters under which such financing will be provided. See “The Merger — Financing of the Merger” beginning on page [  ]. The following arrangements are in place for the financing of the merger, including the payment of the aggregate merger consideration and the payment of related transaction costs, charges, fees and expenses:

 

Equity Financing.  Parent has received equity commitment letters from each Investor, pursuant to which, and subject to the conditions contained therein, the Investors have agreed severally to make or secure aggregate capital contributions of up to approximately $8.8 billion to Parent.

 

Debt Financing.  Parent has received a debt commitment letter from Bank of America and JPMorgan Chase, which we refer to collectively as the Lender Parties, and certain of their respective affiliates to provide Parent (i) up to $12.5 billion under a senior secured term loan facility and (ii) to the extent Parent does not issue up to $4.0 billion in aggregate principal amount of senior second lien secured notes in a Rule 144A offering or other private placement, $4.0 billion under a senior second lien secured bridge facility.

 

Other Financings.  On April 30, 2007, the Lender Parties and certain affiliates thereof entered into Participation Purchase and Security Agreements with subsidiaries of the Company pursuant to which such Lender Parties and their affiliates agreed to purchase participation interests in eligible FFELP and private credit loans up to an aggregate amount of $30.0 billion. These arrangements will be available until the earliest to occur of (i) February 15, 2008, (ii) the closing date of the merger and (iii) ninety days after termination of the merger agreement (or fifteen days after the date of termination of the merger agreement in connection with a “superior proposal”, as defined in the merger agreement).

 

In addition, the Lender Parties have agreed to provide upon closing, subject to the conditions set forth in the debt commitment letter, (i) three-year asset-backed commercial paper conduit facilities (with 364-day committed liquidity support facilities) of not more than $28.0 billion in the aggregate, for securitization of FFELP and private credit loans of the surviving corporation and its subsidiaries, (ii) forward flow purchase facilities regarding the purchase and sale of certain FFELP and private credit student loans for an aggregate purchase price of up to $180.0 billion over five years following the Closing Date and (iii) a loan purchase facility regarding the purchase and sale of eligible unencumbered assets for an aggregate purchase price of up to $20.0 billion over the 364 days following the Closing Date.

 

Antitrust and Other Regulatory Approvals (Page [  ])

 

We have agreed to use our reasonable best efforts to obtain all regulatory approvals required to complete the transactions contemplated by the merger agreement. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act, and the rules promulgated thereunder by the Federal Trade Commission, which we refer to as the FTC, the merger may not be completed until notification and report forms have been filed with the FTC and the Antitrust Division of the Department of Justice, which we refer to as the DOJ, and applicable waiting periods have expired or been terminated. The Company and Parent filed notification and report forms under the HSR Act with the FTC and the Antitrust Division of the DOJ on May 18, 2007, and termination of the applicable waiting period was granted on June 18, 2007. Parent filed for approval from the Federal Deposit Insurance Corporation on June 1, 2007, and the parties have filed for other approvals from federal, state and foreign regulatory authorities.

 

Material U.S. Federal Income Tax Consequences (Page [  ])

 

The exchange of shares of the Company’s common stock for cash pursuant to the merger agreement generally will be a taxable transaction to U.S. Holders for U.S. federal income tax purposes. U.S. Holders who exchange their shares of the Company’s common stock in the merger will generally recognize capital gain or loss in an amount equal to the difference, if any, between the cash received in the merger and their adjusted

tax basis in their shares of the Company’s common stock. You should consult your own tax advisor for a complete analysis of the effect of the merger for federal, state, local and foreign tax purposes.

 

Conditions to the Merger (Page [  ])

 

Conditions to Each Party’s Obligations.  Each party’s obligation to complete the merger is subject to the satisfaction or waiver of the following conditions:

 

 

Conditions to Parent’s and Merger Sub’s Obligations.  The obligation of Parent and Merger Sub to complete the merger is subject to the satisfaction or waiver of the following additional conditions:

 

 

Conditions to the Company’s Obligations.  Our obligation to complete the merger is subject to the satisfaction or waiver of the following further conditions:

 

 

To the extent legally permitted, either party may waive compliance with conditions to the closing of the merger. Our board of directors intends to re-solicit stockholder approval if either party waives material conditions to the closing of the merger and such changes in the terms of the merger render the disclosure that the Company previously provided to stockholders materially misleading.

 

Restrictions on Solicitations of Other Offers (Page [  ])

 

Commencing on the date of the merger agreement, we have agreed not to:

 

 

 

Notwithstanding these restrictions, at any time prior to the approval of the merger agreement by our stockholders, we are permitted to engage in discussions or negotiations with, or provide information with respect to the Company to, any third party to the extent that:

 

 

In addition, we may terminate the merger agreement and enter into a definitive agreement with respect to a superior proposal if we receive a bona fide written acquisition proposal that our board of directors (acting through the transaction committee if such committee still exists) concludes in good faith, after consultation with its independent financial advisor and outside counsel, constitutes a superior proposal, after giving effect to any adjustments to the terms of the merger agreement offered by Parent, and determines in good faith, after consultation with outside counsel, that the failure to take such action would be inconsistent with its fiduciary duties under applicable law. The Company is not entitled to enter into any agreement with respect to a superior proposal unless the merger agreement has been or is concurrently terminated in accordance with its terms and in certain circumstances the Company has concurrently paid to Parent the $900 million termination fee as described in further detail in “The Merger Agreement — Termination Fees” beginning on page [  ].

 

Termination of the Merger Agreement (Page [  ])

 

The merger agreement may be terminated at any time prior to the completion of the merger, whether before or after stockholder approval has been obtained:

 

 

 

 

 

 

 

Termination Fees (Page [  ])

 

The merger agreement provides that the Company will be required to pay Parent a termination fee equal to $900 million upon termination of the merger agreement in the following circumstances:

 

 

The Company will also be required to pay Parent a fee equal to $900 million in the following circumstances:

 

 

The merger agreement provides that Parent will be required to pay the Company a termination fee equal to $900 million upon termination of the merger agreement in the following circumstances:

 

 

Limitation on Liability (Page [  ])

 

The Company’s sole and exclusive remedy with respect to any breach of the merger agreement will be the termination of the merger agreement in accordance with its terms and payment by Parent to the Company of the $900 million termination fee, if applicable.

 

Specific Performance (Page [  ])

 

The Company is not entitled to seek an injunction or injunctions to prevent breaches of the merger agreement by Parent or Merger Sub or any remedy to enforce specifically the terms and provisions of the merger agreement.

 

Parent and Merger Sub are entitled to seek an injunction or injunctions to prevent breaches of the merger agreement by the Company or to enforce specifically the performance of the terms and provisions of the merger agreement by the Company in any federal court located in the State of Delaware or any Delaware state court, in addition to any other remedy to which they are entitled at law or in equity.

 

Limited Guarantees (Page [  ])

 

In connection with the merger agreement, each of the Investors entered into a limited guarantee with the Company under which, among other things, each of the Investors is guaranteeing payment of the termination

fee payable by Parent, if applicable, and Parent’s obligation for breach of the merger agreement, if applicable, up to a maximum amount equal to each Investor’s respective pro rata share of $900 million. The limited guarantee is the Company’s sole recourse against each Investor as a guarantor.

 

Appraisal Rights (Page [  ])

 

Under Delaware law, holders of the Company’s common stock who do not vote in favor of approving and adopting the merger agreement will have the right to seek appraisal of the fair value of their shares of the Company’s common stock as determined by the Delaware Court of Chancery if the merger is completed, but only if they comply with all requirements of Delaware law, which are summarized in this proxy statement. This appraisal amount could be more than, the same as or less than the merger consideration. Any holder of the Company’s common stock intending to exercise such holder’s appraisal rights, among other things, must submit a written demand for an appraisal to us prior to the vote on the approval and adoption of the merger agreement and must not vote or otherwise submit a proxy in favor of approval and adoption of the merger agreement. Your failure to follow exactly the procedures specified under Delaware law will result in the loss of your appraisal rights.

 

Market Price of Common Stock (Page [  ])

 

The closing sale price of the Company’s common stock on the New York Stock Exchange, which we refer to as the NYSE, on April 12, 2007, the last trading day prior to press reports of rumors regarding a potential acquisition of the Company, was $40.75. The $60.00 per share to be paid for each share of the Company’s common stock in the merger represents a premium of approximately 47.24% to the closing price on April 12, 2007 and a premium of approximately 44.17% to the average closing share price during the thirty trading days ended April 12, 2007.

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a stockholder. Please refer to the “Summary” and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement, which you should read carefully. See “Where You Can Find More Information” beginning on page [  ].

 

 

 

 

 

 

 

This proxy statement, and the documents to which we refer you in this proxy statement, include forward-looking statements based on estimates and assumptions. There are forward-looking statements throughout this proxy statement, including, without limitation, under the headings “Summary,” “Questions and Answers about the Special Meeting and the Merger,” “The Merger,” “The Merger — Regulatory Approvals,” and in statements containing words such as “believes,” “estimates,” “anticipates,” “continues,” “contemplates,” “expects,” “may,” “will,” “could,” “should” or “would” or other similar words or phrases. These statements, which are based on information currently available to us, are not guarantees of future performance and may involve risks and uncertainties that could cause our actual growth, results of operations, performance and business prospects, and opportunities to materially differ from those expressed in, or implied by, these statements. These forward-looking statements speak only as of the date on which the statements were made and we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement included in this proxy statement or elsewhere. In addition to other factors and matters contained or incorporated in this document, these statements are subject to risks, uncertainties, and other factors, including, among others:

 

 

and other risks detailed in our current filings with the SEC, including our most recent filings on Forms 10-Q and 10-K. See “Where You Can Find More Information” beginning on page [  ]. Many of the factors that will determine our future results are beyond our ability to control or predict. In light of the significant uncertainties inherent in the forward-looking statements contained herein, readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. We cannot guarantee any future results, levels of activity, performance or achievements. The statements made in this proxy statement represent our views as of the date of this proxy statement, and it should not be assumed that the statements made herein remain accurate as of any future date. Moreover, we assume no obligation to update forward-looking statements or update the reasons that actual results could differ materially from those anticipated in forward-looking statements, except as required by law.

 

SLM Corporation

 

12061 Bluemont Way

Reston, Virginia 20190

(703) 810-3000

 

The Company is the nation’s leading provider of saving-and paying-for-college programs. The Company originates education loans and serves nearly 10 million student and parent customers. The Company and its subsidiaries offer debt management services as well as business and technical products to a range of business clients, including higher education institutions, student loan guarantors and state and federal agencies.

 

For more information about the Company, please visit our website at www.salliemae.com. Our website address is provided as an inactive textual reference only. The information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference. See also “Where You Can Find More Information” beginning on page [  ]. The Company’s common stock is publicly traded on the NYSE under the symbol “SLM”.

 

Parent

 

Mustang Holding Company Inc.

c/o J.C. Flowers & Co. LLC

717 Fifth Avenue, 26th Floor

New York, New York 10022

(212) 404-6800

 

Parent is a newly formed Delaware corporation. Parent was formed solely for the purpose of acquiring the Company and has not engaged in any business except activities incidental to its formation and in connection with the transactions contemplated by the merger agreement. Following completion of the merger, Parent will be owned 50.2% by investment vehicles affiliated with J.C. Flowers and 24.9% by each of JPMorgan Chase and Bank of America.

 

At the effective time of the merger, Parent will be owned by the Investor Group. The Investors have the right to include additional investors in Parent and as a result, the Investors may ultimately include additional equity participants.

 

Merger Sub

 

Mustang Merger Sub, Inc.

c/o J.C. Flowers & Co. LLC

717 Fifth Avenue, 26th Floor

New York, New York 10022

(212) 404-6800

 

Merger Sub is a newly formed Delaware corporation and a wholly owned subsidiary of Parent that was formed solely for the purpose of completing the merger. Merger Sub has not engaged in any business except activities incidental to its formation and in connection with the transactions contemplated by the merger agreement. Upon the completion of the proposed merger, Merger Sub will cease to exist and the Company will continue as the surviving corporation.

 

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by our board of directors for use at the special meeting to be held on [          ], 2007 at [          ] local time, at [          ], or at any postponement or adjournment thereof. The purpose of the special meeting is for our stockholders to consider and vote upon approval and adoption of the merger agreement (and to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies). Our stockholders must approve and adopt the merger agreement in order for the merger to occur. If the stockholders fail to approve and adopt the merger agreement, the merger will not occur. A copy of the merger agreement is attached to this proxy statement as Annex A. This proxy statement and the enclosed form of proxy are first being mailed to our stockholders on [          ], 2007.

 

We have fixed the close of business on [          ], 2007 as the record date for the special meeting, and only holders of record of the Company’s common stock on the record date are entitled to vote at the special meeting. On the record date, there were [          ] shares of the Company’s common stock outstanding and entitled to vote. Each share of the Company’s common stock entitles its holder to one vote on all matters properly coming before the special meeting.

 

A majority of the total voting power of the Company’s common stock issued, outstanding and entitled to vote at the special meeting constitutes a quorum for the purpose of considering the proposals. Shares of the Company’s common stock represented at the special meeting but not voted, including shares of the Company’s common stock for which proxies have been received but for which stockholders have abstained, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies.

 

Approval and adoption of the merger agreement requires the affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of the Company’s common stock. For the proposal to approve and adopt the merger agreement, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions will not be counted as votes cast or shares voting on the proposal to approve and adopt the merger agreement, but will count for the purpose of determining whether a quorum is present. If you abstain, it will have the same effect as a vote “AGAINST” the approval and adoption of the merger agreement.

 

Under the rules of the NYSE, brokers who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are precluded from exercising their voting discretion with respect to approving non-routine matters such as the approval and adoption of the merger agreement and, as a result, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote those shares, referred to generally as “broker non-votes.” These “broker non-votes” will be counted for purposes of determining a quorum, but will have the same effect as a vote “AGAINST” the approval and adoption of the merger agreement.

 

As of [          ], the record date, the directors and executive officers of the Company held and are entitled to vote, in the aggregate, [          ] shares of the Company’s common stock, representing less than [     ]% of the Company’s common stock outstanding. The directors and executive officers have informed the Company that they currently intend to vote all of their shares of the Company’s common stock “FOR” the approval and adoption of the merger agreement.

 

If you submit a proxy by telephone or the Internet or by returning a signed proxy card by mail, your shares will be voted at the special meeting as you indicate on your proxy card or by such other method. If you sign your proxy card without indicating your vote, your shares will be voted “FOR” the approval and adoption of the merger agreement and “FOR” the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies, and in accordance with the recommendations of our board of directors on any other matters properly brought before the special meeting for a vote.

 

If your shares of the Company’s common stock are held in street name, you will receive instructions from your broker, bank or other nominee that you must follow in order to have your shares voted. If you do not instruct your broker to vote your shares, it has the same effect as a vote “AGAINST” approval and adoption of the merger agreement.

 

Proxies received at any time before the special meeting, and not revoked or superseded before being voted, will be voted at the special meeting. You have the right to change or revoke your proxy at any time before the vote taken at the special meeting:

 

 

Please do not send in your stock certificates with your proxy card. When the merger is completed, a separate letter of transmittal will be mailed to you that will enable you to receive the merger consideration in exchange for your stock certificates.

 

Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies. Any adjournment may be made without notice (if the adjournment is not for more than thirty days or if after the adjournment no new record date is fixed), other than by an announcement made at the special meeting of the time, date and place of the adjourned meeting. Whether or not a quorum exists, holders of a majority of the combined voting power of the Company’s common stock represented in person or by proxy at the special meeting and entitled to vote thereat may adjourn the special meeting. Any signed proxies received by the Company which do not include voting instructions regarding an adjournment of the special meeting will be voted “FOR” an adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow the Company’s stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed.

 

Stockholders are entitled to statutory appraisal rights under Delaware law in connection with the merger. This means that you are entitled to have the value of your shares determined by the Delaware Court of Chancery and to receive payment based on that valuation. The ultimate amount you receive as a dissenting stockholder in an appraisal proceeding may be more than, the same as or less than the amount you would have received under the merger agreement.

 

To exercise your appraisal rights, you must submit a written demand for appraisal to the Company before the vote is taken on the merger agreement and you must not vote in favor of the approval and adoption of the

merger agreement. Your failure to follow exactly the procedures specified under Delaware law will result in the loss of your appraisal rights. See “Dissenters’ Rights of Appraisal” beginning on page [  ] and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex D.

 

This proxy solicitation is being made and paid for by the Company on behalf of its board of directors. In addition, we have retained MacKenzie Partners to assist in the solicitation. We will pay MacKenzie Partners approximately $20,000 plus reasonable out-of-pocket expenses for their assistance. Our directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. We will also request brokers and other fiduciaries to forward proxy solicitation material to the beneficial owners of shares of the Company’s common stock that the brokers and fiduciaries hold of record. Upon request, we will reimburse them for their reasonable out-of-pocket expenses. In addition, we will indemnify MacKenzie Partners against any losses arising out of that firm’s proxy soliciting services on our behalf.

 

If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call MacKenzie Partners at 800-323-2885.

 

The opinions referenced in this proxy statement will be made available for inspection and copying at the principal executive offices of the Company during its regular business hours by any interested holder of the Company’s common stock.

 

The Company’s board of directors, acting upon the unanimous recommendation of the transaction committee, has approved the merger agreement and the transactions contemplated thereby. The Company’s board of directors has determined that the merger agreement and the transactions contemplated thereby are advisable and in the best interests of the Company and its stockholders and recommends that the Company’s stockholders vote “FOR” the proposal to approve and adopt the merger agreement. See “The Merger — Reasons for the Merger; Recommendation of the Transaction Committee and Our Board of Directors” on page [  ] for a more detailed discussion of the recommendation of the Company’s board of directors.

 

The following discussion contains material information pertaining to the merger. This discussion of the merger is qualified in its entirety by reference to the merger agreement, which is annexed to this proxy statement. You should read the entire merger agreement carefully as it is the legal document that governs the merger.

 

To enhance stockholder value, the Company’s board of directors has periodically discussed and reviewed the Company’s business, strategic direction, performance and prospects in the context of developments in the industry and in the markets in which the Company operates. The Company’s board of directors has also regularly discussed with senior management various potential strategic alternatives.

 

In the fall of 2005, representatives of the Company had various exploratory discussions with representatives of several private equity firms, including representatives of a private equity firm that we refer to below as the Other Bidder, concerning a potential acquisition of the Company. The discussions were terminated in December 2005 due in substantial part to the uncertainty of the parties involved as to the feasibility of a leveraged buyout of the Company, including in particular concerns relating to whether the Company would be able to maintain its investment grade debt ratings in connection with any such transaction.

 

In October 2006, Mr. Albert L. Lord, the Chairman of the board of directors of the Company, had a discussion with Mr. Spencer Fleischer of Friedman Fleischer & Lowe, a San Francisco-based private equity firm regarding the private equity industry and inquired about the parties who might have an interest in pursuing a possible transaction with the Company. Mr. Lord made the inquiry based on Mr. Lord’s personal knowledge of Mr. Fleischer as part of Mr. Lord’s overall efforts to assess strategic options for the Company. In November 2006, Mr. Fleischer introduced Mr. Lord to representatives of J.C. Flowers to discuss the possibility of an acquisition of the Company.

 

Although the circumstances remained that had made a leveraged buyout of the Company difficult in the fall of 2005, Mr. Lord engaged in a discussion with J.C. Flowers because of the reputation of that firm, and Mr. J. Christopher Flowers in particular, as being experienced in and capable of completing complex transactions in the financial services industry and having in depth knowledge of the financial services industry. After the initial discussion with Mr. Flowers, Mr. Lord held intermittent discussions with Mr. Flowers regarding the possibility of an acquisition of the Company by an investor group led by J.C. Flowers. Thereafter, senior management of the Company met other representatives of J.C. Flowers to discuss the possibility of a transaction and review the Company’s business.

 

On January 25, 2007, at a regularly scheduled meeting of the board of directors of the Company, the board of directors discussed strategic alternatives of the Company and asked management to review strategic options for the Company and report back to the board of directors at its next regularly scheduled meeting. As a result of such request, the Company requested that Sandler O’Neill & Partners, L.P., which we refer to as Sandler O’Neill, review strategic alternatives for the Company and prepare a report on strategic alternatives for the next regularly scheduled meeting of the board of directors, to be held in March 2007.

 

On February 7, 2007, after Mr. Flowers indicated to Mr. Lord that he believed that a transaction between the Company and a group of investors to be led by J.C. Flowers might be feasible, the board of directors convened a meeting to review the preliminary discussions that had taken place with J.C. Flowers. After discussion, the board of directors approved the formation of a transaction committee comprised of independent directors Ann Torre Bates, Ronald F. Hunt, Albert L. Lord and Wolfgang Schoellkopf to evaluate and review strategic opportunities for the Company.

 

On several occasions in February, senior management of the Company had meetings with representatives of J.C. Flowers, JPMorgan Chase and Bank of America to discuss the Company’s business including the Company’s business outlook, the legislative and regulatory environment for the student loan industry, and the feasability of financing a leveraged buyout. J.C. Flowers requested the participation of JPMorgan Chase and Bank of America because, among other reasons, they are both prominent financial institutions familiar with

the lending and capital markets businesses, including the distribution of assets such as student loans, into the capital markets and because their possible participation might facilitate a transaction.

 

On February 12, 2007, the transaction committee held a telephonic meeting to consider the retention of independent legal counsel and financial advisors.

 

After the February 12 meeting, Messrs. Lord and Schoellkopf, on behalf of the transaction committee, held meetings with several law firms and investment banks. On February 16, 2007, at a telephonic meeting of the transaction committee, Messrs. Lord and Schoellkopf informed other members of the transaction committee that they had interviewed possible legal advisors and, after discussion, the transaction committee determined to engage Davis Polk & Wardwell, which we refer to as Davis Polk, as its legal advisor. Representatives of Davis Polk were then invited to join the meeting and reviewed with the transaction committee its fiduciary duties in connection with its consideration of a possible transaction. On March 2, 2007, Messrs. Lord and Schoellkopf informed other members of the transaction committee that they had interviewed possible financial advisors, including UBS and Greenhill, and, subsequently, the transaction committee determined to retain UBS as financial advisor to the transaction committee, subject to negotiation and execution of an approved engagement letter.

 

Also on March 2, 2007, the transaction committee determined that it would be beneficial to meet with representatives of J.C. Flowers to learn more about their assessment of the Company and their perspectives on the possibility of a transaction.

 

On March 8, 2007, the transaction committee and its financial and legal advisors met with representatives of J.C. Flowers and Bank of America. A representative of Bank of America indicated that it was expecting to be a member of the Investor Group. The transaction committee was further advised that JPMorgan Chase was also expected to join the Investor Group. After the meeting, the transaction committee and representatives of UBS and Davis Polk met to discuss next steps and to review other potential third parties that might be interested in exploring a potential transaction with the Company. Members of the transaction committee were committed to creating a strong competitive process; however, the committee recognized that it was also important to preserve the confidentiality of any process in view of the potential for material disruption to the Company (including the potential for damage to its investment grade rating) that might result from a premature public disclosure, which necessarily meant limiting the number of bidders involved. Concern was also expressed that given the size and public prominence of the Company and the special characteristics of a leveraged buyout involving the Company, particularly the Company’s continuous need for significant amounts of capital to fund its ongoing operations, a premature public disclosure could negatively impact the Company’s credit ratings or the Company’s access to capital markets and result in an unsatisfactory offer or the Company not being acquired at all. In light of the presence in the Investor Group of two major financial institutions and a private equity fund with a high level of acknowledged experience in financial institutions transactions, as well as the discussions with several private equity firms in the fall of 2005 regarding a potential transaction which indicated that a transaction involving a leveraged buyout of the Company would be difficult, the transaction committee determined to limit the number of parties to be approached. After review of a number of potential parties, the transaction committee instructed UBS to approach a leading private equity firm which we refer to as the Other Bidder. The transaction committee instructed UBS to contact the Other Bidder because of the prior interest the Other Bidder had shown in an acquisition of the Company, the reputation of the Other Bidder as a leading private equity firm capable of completing large, complex leveraged buyout transactions and the favorable impression that the Other Bidder’s approach to analyzing the Company’s business and structuring a potential transaction in connection with the discussions in the fall of 2005 regarding a potential transaction had left on the members of the transaction committee. No other parties were contacted as a result of the transaction committee weighing the risks of premature disclosure as described above compared to the transaction committee’s assessment of the likelihood of significant interest from other parties.

 

On March 9, 2007, the transaction committee held a telephonic meeting at which representatives of UBS discussed the response of the Other Bidder to inquiries from UBS about a possible transaction. UBS informed the transaction committee that the Other Bidder had indicated that it was prepared to commence due diligence of the Company immediately and was interested in pursuing a possible transaction.

 

On March 11, 2007, Messrs. Lord and Schoellkopf and representatives of UBS met with representatives of the Other Bidder regarding a potential transaction.

 

On March 14, 2007, the transaction committee held a meeting at which Messrs. Lord and Schoellkopf updated the transaction committee and representatives of UBS and Davis Polk on their meeting with representatives of the Other Bidder on March 11, 2007. Messrs. Lord and Schoellkopf reported that the Other Bidder was determined to pursue a potential transaction and that they thought it appropriate that the Other Bidder be invited to submit an indication of interest.

 

Later on March 14, 2007, the board of directors met for its regularly scheduled meeting. Among other activities, it received a report from Sandler O’Neill regarding the strategic alternatives for the Company and a report from the transaction committee and its financial and legal advisors regarding the process being undertaken by the transaction committee. The report by Sandler O’Neill was consistent with the board of directors’ and the transaction committee’s view that a possible transaction was worth pursuing.

 

On March 21, 2007, the transaction committee held a telephonic meeting at which representatives of UBS updated the transaction committee on developments with the Investor Group and the Other Bidder. The transaction committee discussed next steps for the transaction and instructed UBS to inform the Investor Group and the Other Bidder that they should submit their initial indications of interest on March 26, 2007.

 

On March 22, 2007, in accordance with the transaction committee’s instructions, UBS sent bid process letters to J.C. Flowers and the Other Bidder. The letters specified March 26, 2007 as the submission deadline for an offer to acquire 100% of the Company’s common stock and requested that each prospective bidder submit, among other things, a proposed price indication and a detailed description of the structure and funding sources for its proposal, with particular emphasis on whether debt ratings of the Company after the transaction was consummated would constitute a condition to such a proposal.

 

During March and April, the Company, with the assistance of Sandler O’Neill and UBS, assembled non-public information (including certain non-public financial information regarding the Company’s financial condition and results of operations, as well as the Company’s budgets, plans and forecasts for future periods) in response to requests from J.C. Flowers and the Other Bidder and their respective equity and debt financing sources and made this information available to the representatives of J.C. Flowers and the Other Bidder and their respective equity and debt financing sources through an on-line data room. During this period, management of the Company held several meetings with representatives of J.C. Flowers and the Other Bidder and their respective equity and debt financing sources (which included Bank of America and JPMorgan Chase for J.C. Flowers and a number of prominent financial institutions for the Other Bidder) to discuss the Company’s business, operations, plans, budgets and forecasts, and to answer questions raised by them and their respective advisors regarding these matters. The transaction committee instructed management to refrain from engaging in discussions with either bidder regarding their personal roles or involvement in a potential transaction until such time as an agreement was reached by the transaction committee with a bidder on the price and principal terms of a transaction.

 

On March 26, 2007, the transaction committee held a meeting. At the meeting, representatives of UBS updated the transaction committee on the indicative proposal letter submitted by the Other Bidder earlier in the day. The Other Bidder proposed to acquire 100% of the Company’s common stock for between $56.00 and $57.50 per share in cash. The proposal was not contingent on obtaining financing or the Company maintaining an investment grade credit rating. Representatives of UBS informed the transaction committee that the Investor Group had indicated to UBS that the Investor Group would not submit an indicative proposal on March 26, 2007 as requested by the transaction committee and instead requested exclusivity as a condition to proceeding with the transaction. UBS also reported that the Investor Group had emphasized the importance of the Company retaining an investment grade credit rating after the transaction and indicated that its members would be unlikely to proceed without an investment grade credit rating for the Company after the transaction. The transaction committee rejected the request for exclusivity and was thereafter advised by representatives of the Investor Group that they would submit a bid on March 28, 2007. After further discussions, the transaction committee decided, based upon the receipt of a proposal from the Other Bidder and the communication from the Investor Group, that the Company was well positioned to receive bids from two credible potential

acquirors and that the benefits of bringing another potential acquiror into the process were outweighed by the negative impact such an action might have on the Company and on the possibility of a successful conclusion of the current process. The transaction committee therefore instructed Davis Polk to distribute a draft merger agreement to the Other Bidder and instructed UBS not to contact other potential bidders at that time. Also on March 26, 2007, UBS reviewed with the transaction committee the current market environment, the Company’s strategic position and the alternatives of the Company pursuing a possible transaction and not pursuing a possible transaction.

 

On March 29, 2007, the Investor Group submitted an indicative proposal letter, and the transaction committee held a telephonic meeting at which representatives of UBS updated the transaction committee on this indicative proposal letter. The Investor Group proposed to acquire 100% of the Company’s common stock for $58.25 per share in cash. The proposal was not contingent on obtaining financing or the Company maintaining an investment grade credit rating. The transaction committee discussed the proposal and instructed UBS to inform the Other Bidder and the Investor Group that final bids, including definitive merger agreements and financing commitments, should be submitted by April 11, 2007. The transaction committee also authorized the distribution of the draft merger agreement to the Investor Group.

 

On March 30, 2007, the board of directors held a telephonic meeting at which representatives of UBS and Davis Polk updated the board of directors on the status of negotiations with the Investor Group and the Other Bidder.

 

During the week of April 2, the Company, with the assistance of UBS and Sandler O’Neill, conducted separate due diligence sessions with the Investor Group and the Other Bidder and their respective advisors.

 

On April 4, 2007, the transaction committee held a telephonic meeting at which representatives of Davis Polk updated the transaction committee on the material issues raised by the revised draft of the merger agreement received from the Other Bidder. Representatives of UBS then updated the transaction committee on the progress of due diligence being conducted by the Investor Group and the Other Bidder. The transaction committee also discussed the desirability of engaging Greenhill as an additional financial advisor to the transaction committee. The transaction committee approved the engagement of Greenhill as an additional financial advisor to the transaction committee with a view that Greenhill would be requested solely to issue an opinion with respect to the proposed transaction and would be paid a fixed fee regardless of the conclusions reached in such opinion.

 

Later that same day, the transaction committee received a revised draft of the merger agreement from the Investor Group.

 

On April 6, 2007, the transaction committee held a telephonic meeting at which Mr. Thomas J. Fitzpatrick, the then Vice Chairman and Chief Executive Officer of the Company, and Mr. C.E. Andrews, the then Executive Vice President and Chief Financial Officer of the Company, provided an update on the due diligence conducted by the Other Bidder and the Investor Group. The transaction committee also discussed with Messrs. Fitzpatrick and Andrews the funding and liquidity needs of the Company between the signing of a merger agreement and closing. After Messrs. Fitzpatrick and Andrews left the meeting, representatives of Davis Polk reviewed with the members of the transaction committee principal issues raised by the revised drafts of the merger agreement received from the Investor Group and the Other Bidder, including the closing conditions and the allocation of various risks to the closing of the transaction.

 

Later that same day, representatives of Davis Polk had separate discussions with each of Wachtell, Lipton, Rosen & Katz, legal counsel for the Investor Group, and the outside legal counsel for the Other Bidder, regarding the significant issues raised by the draft merger agreements submitted by each of the bidders. Each of the bidders was instructed to submit a revised draft of the merger agreement with its definitive bids on April 11, 2007.

 

On April 11, 2007, the Investor Group submitted a definitive bid to acquire 100% of the Company’s common stock for $58.25 per share in cash. The proposal was accompanied by a markup of the draft merger agreement, debt commitment letters from JPMorgan Chase and Bank of America, the form of equity commitment letter and the form of limited guarantee from each of the equity sponsors of the Investor Group

(J.C. Flowers, JPMorgan Chase and Bank of America) under which the equity sponsors would, on a several basis, guarantee the payment of the termination fee payable in certain circumstances by Parent and Merger Sub under the merger agreement.

 

On April 12, 2007, the Other Bidder submitted a definitive bid to acquire 100% of the Company’s common stock for $58.00 per share in cash. The proposal was accompanied by a markup of the draft merger agreement, debt commitment letters from major lending institutions, the form of equity commitment letter and the form of limited guarantee to be submitted by the Other Bidder and its equity co-investor under which the equity sponsors would guarantee the payment of the termination fee payable under the merger agreement in certain circumstances.

 

Later in the day, the transaction committee held a telephonic meeting at which UBS updated the transaction committee on negotiations with both bidders and informed the transaction committee that the Other Bidder had requested more time to complete its due diligence. The transaction committee discussed the timing and other implications of the Other Bidder’s request and instructed UBS to inform the Other Bidder to move forward as quickly as possible. Representatives of Davis Polk and the transaction committee discussed the material issues raised by each draft of the merger agreement submitted by each of the bidders. It was noted that both bidders had made significant progress in accommodating the requests of the transaction committee communicated to them.

 

On the evening of April 12, 2007, the transaction committee was advised that reporters had approached the Company seeking comments for news articles to the effect that discussions regarding a possible sale of the Company were ongoing. Such news articles were subsequently published.

 

On April 13, 2007, a telephonic meeting of the board of directors was held at which board members were updated on the status of negotiations with each bidder and on the recent news articles. Immediately following the board meeting, the transaction committee conducted a telephonic meeting and discussed the implications that the news articles might have on the process and the status of negotiations with each bidder.

 

Later that day, Davis Polk engaged in negotiations with representatives of both bidders regarding the remaining issues in the draft merger agreements, including in particular the definition of “Material Adverse Effect,” and the treatment of possible antitrust risks of the bid by the Investor Group. In accordance with the transaction committee’s instructions, UBS requested the bidders to submit their “best and final” offer on the afternoon of Saturday, April 14, 2007.

 

On the morning of April 14, 2007, the transaction committee held a telephonic meeting at which representatives of UBS updated the transaction committee on the status of the process with both bidders and representatives of Davis Polk reported on the contractual allocations of risks related to the closing being discussed with the bidders. Later that day, the transaction committee held a meeting at the offices of Davis Polk at which UBS reported to the committee that the Other Bidder had submitted an offer to purchase 100% of the Company’s common stock for $58.50 per share in cash but had indicated that further due diligence was still required before the Other Bidder would be in a position to enter into a definitive agreement. The Other Bidder had indicated that it was unwilling to give the transaction committee a clear indication of the time it would need to complete its due diligence but indicated it would be at least a few days. UBS also informed the transaction committee that the Investor Group submitted a bid to purchase 100% of the Company’s common stock for $59.00 per share in cash and that the Investor Group indicated that its due diligence was completed and it was prepared to proceed to negotiate final documents immediately. UBS further reported that the Investor Group indicated a willingness to increase its bid to $60.00 per share in cash if the transaction committee would grant exclusivity and recommend the Investor Group’s proposal to the board of directors. After deliberation, in light of the higher price offered by the Investor Group and the fact that the Other Bidder asked for more time to complete its due diligence, the transaction committee instructed UBS to inform the Investor Group that the transaction committee was prepared to move forward to negotiate a definitive agreement with the Investor Group so long as the Investor Group was prepared to complete the definitive documentation and announce the transaction before the markets opened on Monday, April 16, if certain changes to the proposal were made by the Investor Group, including increasing the purchase price to

$60.00 per share and the resolution of all remaining contractual issues in the merger agreement on satisfactory terms.

 

Thereafter, the parties and their respective advisors worked to finalize the definitive merger agreement, financing agreements and ancillary documents.

 

On April 15, 2007, the transaction committee held a meeting at the offices of Davis Polk. Davis Polk updated the transaction committee on the outstanding issues in the merger agreement and reviewed the fiduciary duties of directors under Delaware law. UBS and Greenhill reviewed their joint financial analysis of the merger consideration with the transaction committee and each separately delivered an oral opinion, which opinion was confirmed by delivery of a written opinion dated April 15, 2007, to the transaction committee and the board of directors, to the effect that, as of that date and based on and subject to certain assumptions, matters considered and limitations described in such opinion, the merger consideration to be received by the holders of the Company’s common stock (other than, in the case of UBS’ opinion, Parent, holders of beneficial interests in Parent and their respective affiliates to the extent they are holders of the Company’s common stock and, in the case of Greenhill’s opinion, affiliates of or holders of beneficial interests in Parent or Merger Sub to the extent they are holders of the Company’s common stock) pursuant to the merger agreement was fair, from a financial point of view, to such holders of the Company’s common stock.

 

After considering the terms of the proposed merger agreement with the Investor Group and other related transaction documents and the other factors set forth in “Reasons for the Merger, Recommendation of the Transaction Committee and Our Board of Directors — Transaction Committee”, the transaction committee unanimously resolved that the proposed merger with the Investor Group was advisable and in the best interest of the Company and its stockholders, that it was advisable and in the best interest of the Company and its stockholders to enter into the merger agreement with the Investor Group and the transactions contemplated thereby and recommended that the board of directors approve and declare advisable such transactions and agreements and recommend approval and adoption by the Company’s stockholders of such merger agreement.

 

Later in the day, the board of directors met at the offices of Davis Polk. Davis Polk reviewed with the board of directors the fiduciary duties of directors under Delaware law. Mr. Lord updated the board of directors on the offers submitted by both the Investor Group and the Other Bidder on the previous day and reported that the transaction committee had unanimously determined that the proposed merger agreement with the Investor Group was advisable and in the best interest of the Company and its stockholders and recommended that the board of directors approve and declare advisable the merger agreement and the transactions contemplated thereby and recommend approval and adoption by the Company’s stockholders of such merger agreement. UBS and Greenhill reviewed with the board of directors their joint financial analysis of the merger consideration which previously had been reviewed with the transaction committee and each separately confirmed for the board of directors its opinion regarding the fairness, from a financial point of view, of the merger consideration rendered earlier in the day to the transaction committee. After considering the proposed terms of the merger agreement with the Investor Group, the other related transaction documents and the other factors set forth in “Reasons for the Merger, Recommendation of the Transaction Committee and Our Board of Directors — Our Board of Directors”, the board of directors, by unanimous vote of the directors present, approved and declared advisable and in the best interests of the Company and its stockholders the merger agreement with the Investor Group and the transactions contemplated thereby, and recommended that the stockholders of the Company vote for the approval and adoption of the merger agreement.

 

On April 15, 2007, the Company, Parent and Merger Sub executed the merger agreement and ancillary agreements and the transaction was announced prior to the opening of the NYSE on April 16, 2007.

 

Transaction Committee

 

The transaction committee, consisting solely of independent directors, and acting with the advice and assistance of the Company’s independent legal and financial advisors, evaluated and negotiated the merger proposal, including the terms and conditions of the merger agreement, with Parent and Merger Sub and the

Investor Group. The transaction committee unanimously determined that the merger is advisable and that it is in the best interests of the Company and its stockholders for the Company to enter into the merger agreement, and unanimously recommended that the board of directors (i) authorize and approve entry by the Company into the merger agreement and the completion of the transactions contained therein and (ii) recommend that the stockholders of the Company approve and adopt merger agreement.

 

In the course of reaching its determination, the transaction committee considered the following factors and potential benefits of the merger, each of which the members of the transaction committee believed supported its decision:

 

 

 

 

 

 

 

 

 

The transaction committee also considered a variety of risks and other potentially negative factors concerning the merger agreement and the merger, including the following:

 

 

The foregoing discussion summarizes the material factors considered by the transaction committee in its consideration of the merger. After considering these factors, the transaction committee concluded that the positive factors relating to the merger agreement and the merger outweighed the potential negative factors. In view of the wide variety of factors considered by the transaction committee, and the complexity of these matters, the transaction committee did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual members of the transaction committee may have assigned different weights to various factors. The transaction committee unanimously approved, and recommended that the board of directors approve, the merger agreement and the merger based upon the totality of the information presented to and considered by it.

 

Our Board of Directors

 

Our board of directors, acting upon the unanimous recommendation of the transaction committee and by a unanimous vote of the members of the board of directors present at the meeting described above on April 15, 2007 (i) determined that the merger agreement and the merger are fair to and in the best interests of the Company and its stockholders and declared the merger to be advisable, (ii) approved the execution, delivery and performance of the merger agreement and the completion of the transactions contemplated thereby, including the merger, and (iii) resolved to recommend that the stockholders approve and adopt the merger agreement and directed that such matter be submitted to the stockholders for their approval.

 

In reaching these determinations, our board of directors considered (i) a variety of business, financial and market factors including the various recent legislative and regulatory proposals made by the current administration and members of Congress regarding changes to the economic and regulatory aspects of the student loan industry, the recent price of the Company’s common stock and the Company’s future prospects, (ii) the joint financial presentation of UBS and Greenhill, including the separate opinions of UBS and Greenhill, each dated April 15, 2007, to the Company’s transaction committee and board of directors as to the fairness, from a financial point of view and as of the date of the opinions, of the merger consideration to be received by the holders of the Company’s common stock (other than, in the case of UBS’ opinion, Parent, holders of beneficial interests in Parent and their respective affiliates to the extent they are holders of the Company’s common stock and, in the case of Greenhill’s opinion, affiliates of or holders of beneficial interests in Parent or Merger Sub to the extent they are holders of the Company’s common stock), as more fully described under the caption “The Merger — Opinion of Financial Advisors”, (iii) each of the factors considered by the transaction committee, including the positive factors and potential benefits of the merger and the risks and other potentially negative factors concerning the merger, as described above, (iv) the unanimous recommendation of the transaction committee and (v) the fact that the merger consideration and the other terms of the merger agreement resulted from negotiations between the transaction committee and the Investor Group, and the board of director’s belief that $60.00 per share in cash for each share of the Company’s common stock represented the highest per share consideration that could be obtained.

 

The foregoing discussion summarizes the material factors considered by the board of directors in its consideration of the merger. In view of the wide variety of factors considered by the board of directors, and the complexity of these matters, the board of directors did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual members of the board of directors may have assigned different weights to various factors. The board of directors approved, and recommends that stockholders approve and adopt, the merger agreement and the merger based upon the totality of the information presented to and considered by it.

 

Our board of directors recommends that you vote “FOR” the approval and adoption of the merger agreement and “FOR” the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Opinions of UBS and Greenhill

 

On April 15, 2007, at meetings of the Company’s transaction committee and board of directors held to evaluate the proposed merger, UBS and Greenhill each separately delivered to the Company’s transaction committee and board of directors an oral opinion, which opinion was confirmed by delivery of a written opinion dated April 15, 2007, to the effect that, as of that date and based on and subject to various assumptions, matters considered and limitations described in such opinion, the merger consideration to be received by holders of the Company’s common stock (other than, in the case of UBS’ opinion, Parent, holders of beneficial interests in Parent and their respective affiliates to the extent they are holders of the Company’s common stock and, in the case of Greenhill’s opinion, affiliates of or holders of beneficial interests in Parent or Merger Sub to the extent they are holders of the Company’s common stock) was fair, from a financial point of view, to such holders.

 

UBS’ and Greenhill’s opinions, the full texts of which described the assumptions made, procedures followed, matters considered and limitations on the review undertaken by UBS and Greenhill, are attached as Annex B and Annex C, respectively, and are incorporated into this proxy statement by reference. UBS’ and Greenhill’s opinions were directed only to the fairness of the merger consideration from a financial point of view and do not address any other aspect of the merger or any related transaction. The opinions do not address the relative merits of the merger or any related transaction as compared to other business strategies or transactions that might be available to the Company or the Company’s underlying business decision to effect the merger or any matters relating to the merger. The opinions do not constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to the merger or any related transaction. Holders of the Company’s common stock are encouraged to read the opinions carefully in their entirety. Although subsequent developments may affect their opinions, UBS and Greenhill do not have any obligation to update, revise or reaffirm their opinions. The summaries of UBS’ and Greenhill’s opinions described below are qualified in their entirety by reference to the full texts of their respective opinions.

 

Opinion of UBS Securities LLC

 

In arriving at its opinion, UBS, among other things:

 

 

In connection with its review, with the consent of the Company’s board of directors and the transaction committee, UBS did not assume any responsibility for independent verification of any of the information provided to or reviewed by UBS for the purpose of its opinion and, with the consent of the Company’s board of directors and the transaction committee, UBS relied on that information being complete and accurate in all material respects. In addition, with the consent of the Company’s board of directors and the transaction committee, UBS did not make any independent evaluation or appraisal of any of the assets or liabilities, contingent or otherwise, of the Company, and was not furnished with any evaluation or appraisal. With respect to the financial forecasts and estimates prepared by the Company’s management referred to above, UBS assumed, at the direction of the Company’s board of directors and the transaction committee, that they were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the Company’s management as to the Company’s future performance. UBS is not an expert in the evaluation of loan portfolios or allowances for losses with respect to loan portfolios, was not requested to, and did not, conduct a review of individual credit files, and was advised and therefore assumed that such allowances for the Company were in the aggregate appropriate to cover such losses. UBS’ opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information available to UBS as of, the date of its opinion. At the direction of the Company’s board of directors and the transaction committee,

UBS contacted another potential buyer group (the Other Bidder) to solicit an indication of interest in a possible transaction with the Company and held discussions with such group prior to the date of UBS’ opinion.

 

At the direction of the Company’s board of directors and the transaction committee, UBS was not asked to, and it did not, offer any opinion as to the terms, other than the merger consideration to the extent expressly specified in UBS’ opinion, of the merger agreement or any related documents or the form of the merger or any related transaction. In rendering its opinion, UBS assumed, with the consent of the Company’s board of directors and the transaction committee, that (i) the final executed form of the merger agreement would not differ in any material respect from the draft that UBS reviewed, (ii) the Company and Parent would comply with all material terms of the merger agreement, and (iii) the merger would be completed in accordance with the terms of the merger agreement without adverse waiver or amendment of any material term or condition of the merger agreement. UBS also assumed that all governmental, regulatory or other consents and approvals necessary for the completion of the merger would be obtained without any material adverse effect on the Company or the merger. Except as described above, the Company imposed no other instructions or limitations on UBS with respect to the investigations made or the procedures followed by UBS in rendering its opinion.

 

Under the terms of UBS’ engagement, the Company has agreed to pay UBS for its financial advisory services in connection with the merger an aggregate fee estimated to be approximately $50.6 million, of which an aggregate of $10 million (representing approximately 20% of UBS’ aggregate fee) has been paid in connection with the execution of UBS’ engagement and delivery of UBS’ opinion and approximately $40.6 million (representing approximately 80% of UBS’ aggregate fee) is contingent upon completion of the merger. In addition, the Company has agreed to reimburse UBS for its reasonable expenses, including reasonable fees, disbursements and other charges of counsel, and to indemnify UBS and related parties against liabilities, including liabilities under federal securities laws, relating to, or arising out of, its engagement. In the past, UBS has provided services unrelated to the proposed merger to the Company and to certain affiliates of JPMorgan Chase and Bank of America, each of which will be an investor in Parent, for which UBS received compensation. In addition, an affiliate of UBS currently is a participant under existing credit facilities of the Company and JPMorgan Chase, for which such affiliate has received and expects to receive fees and interest payments. In the ordinary course of business, UBS, its successors and affiliates may hold or trade, for their own accounts and the accounts of their customers, securities of the Company and certain affiliates of the Investor Group and, accordingly, may at any time hold a long or short position in such securities.

 

The Company and its transaction committee selected UBS as financial advisor in connection with the merger because UBS is an internationally recognized investment banking firm with substantial experience in similar transactions and is familiar with the Company and its business. UBS is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities and private placements.

 

Opinion of Greenhill & Co., LLC

 

For purposes of its opinion, Greenhill, among other things,

 

 

 

Greenhill assumed and relied upon, without independent verification, the accuracy and completeness of the information publicly available, supplied or otherwise made available to it by representatives and management of the Company for purposes of its opinion and further relied upon the assurances of the representatives and management of the Company that they are not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the Company’s financial forecasts and other financial and operating data concerning the Company that were supplied or otherwise made available to Greenhill and that the Company directed Greenhill to use for purposes of its analyses, Greenhill assumed such forecasts and data were reasonably prepared on a basis reflecting the best currently available estimates and good faith judgments of the management of the Company as to those matters. Greenhill expressed no opinion with respect to such forecasts and data or the assumptions upon which they were based. In arriving at its opinion, Greenhill did not undertake an independent valuation or appraisal of the assets or liabilities of the Company, nor were any such appraisals provided to it. In addition, Greenhill assumed that the merger would be completed in accordance with the terms set forth in the final, executed merger agreement, which Greenhill assumed would be identical in all material respects to the draft dated April 15, 2007 (the latest draft it reviewed), and without any waiver or modification of any material terms or conditions set forth in the merger agreement. Greenhill further assumed that all governmental and third party consents, approvals and agreements necessary for the completion of the merger will be obtained without any adverse effect on the Company or the merger. Greenhill’s opinion was necessarily based upon financial, economic, market and other conditions as in effect on, and the information made available to Greenhill as of, the date of its opinion.

 

Greenhill was not requested to and did not provide advice concerning the structure, the specific amount of consideration, or any other aspect of the sale of the Company. Greenhill was not requested to, and did not, assist the Company’s transaction committee or board of directors in its evaluation of alternatives for, or participate in any process undertaken on behalf of the Company, including the solicitation of expressions of interest from, or preliminary discussions with, third parties regarding the potential acquisition of the Company or in the negotiations of the terms of the acquisition, nor was Greenhill requested to, and it did not, provide any advice or services in connection with the merger other than the delivery of its opinion. Greenhill expressed no opinion as to whether any alternative transaction might produce consideration for the Company in an amount in excess of the amount contemplated by the merger. Except as described above, the Company imposed no other instructions or limitations on Greenhill with respect to the investigations made or the procedures followed by Greenhill in rendering its opinion.

 

Under the terms of Greenhill’s engagement, the Company has agreed to pay Greenhill $4 million upon delivery of its opinion, all of which has been paid. In addition, the Company has agreed to reimburse Greenhill for its reasonable out-of-pocket expenses, including reasonable fees and expenses of counsel, and to indemnify Greenhill and related parties against liabilities relating to or arising out of its engagement.

 

The Company’s transaction committee selected Greenhill as its financial advisor to render its opinion because Greenhill is an internationally recognized investment banking firm that provides financial advice on significant mergers, acquisitions, restructurings and similar corporate finance transactions, and it believed that Greenhill’s experience qualified it to render its opinion.

 

Summary of Joint Financial Presentation

 

In connection with rendering their respective opinions to the Company’s board of directors and the transaction committee, UBS and Greenhill jointly performed a variety of financial and comparative analyses, each of which is a standard valuation methodology, which are summarized below. The following summary is not a complete description of all analyses performed and factors considered by UBS or Greenhill in connection with their respective opinions. The preparation of a financial opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis or summary description. With respect to the selected companies analysis and the selected transactions analysis summarized below, no company or transaction used as a comparison was either identical or directly comparable to the Company or the merger. These analyses necessarily involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading or acquisition values of the companies concerned.

 

UBS and Greenhill believe that the analyses and the summary below must be considered as a whole and that selecting portions of the analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying UBS’ and Greenhill’s analyses and their respective opinions. Neither UBS nor Greenhill drew, in isolation, conclusions from or with regard to any one factor or method of analysis for purposes of its opinion, but rather each of UBS and Greenhill arrived at its ultimate opinion based on the results of all analyses undertaken and assessed as a whole.

 

The estimates of the future performance of the Company provided by the Company’s management in or underlying UBS’ and Greenhill’s analyses are not necessarily indicative of future results or values, which may be significantly more or less favorable than those estimates. In performing their analyses, UBS and Greenhill considered industry performance, general business and economic conditions and other matters, many of which were beyond the control of the Company. Estimates of the financial value of companies do not necessarily purport to be appraisals or reflect the prices at which companies actually may be sold.

 

The merger consideration was determined through negotiation between the Company and the Investor Group and the decision to enter into the merger was solely that of the Company’s board of directors. UBS’ and Greenhill’s opinions and financial analyses were only one of many factors considered by the Company’s board of directors and the transaction committee in their evaluation of the merger and should not be viewed as determinative of the views of the Company’s board of directors, the transaction committee or management with respect to the merger or the merger consideration.

 

The following is a brief summary of the material financial analyses reflected in UBS’ and Greenhill’s joint financial presentation and reviewed with the Company’s board of directors and the transaction committee in connection with UBS’ and Greenhill’s respective opinions relating to the proposed merger. The financial analyses summarized below include information presented in tabular format. In order to fully understand UBS’ and Greenhill’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of UBS’ and Greenhill’s financial analyses.

 

Selected Companies Analysis

 

UBS and Greenhill performed a selected companies analysis of the Company, an analysis which is based on the then current market values and trading multiples of other publicly traded companies believed to be generally relevant, in order to derive trading multiples for these companies which then could be compared with corresponding multiples implied for the Company based both on the trading price of the Company’s common stock and the merger consideration.

 

In this analysis, UBS and Greenhill reviewed, to the extent publicly available, selected financial and stock market data of the following 11 publicly traded companies, consisting of three student lending companies, five banks and three finance companies. These selected companies were believed to be generally relevant because,

among other things, either they are companies involved in student lending as their business or they are other large market capitalization companies for which consumer financial services represent all or a portion of their overall business.

 

 

UBS and Greenhill reviewed, among other things, closing stock prices on April 13, 2007 as a multiple of calendar years 2007 and 2008 estimated earnings per share, commonly referred to as EPS, and as multiples of book value per share and tangible book value per share as of December 31, 2006. EPS, book value per share and tangible book value per share are financial measures commonly considered in the valuation of companies in the financial services industry. UBS and Greenhill then compared these multiples derived from the selected companies with corresponding multiples implied for the Company based both on the closing price of the Company’s common stock on April 12, 2007 (which was the last trading day prior to published rumors of a potential sale of the Company) and on the merger consideration. Financial data of the selected companies were based on median EPS estimates as compiled by Institutional Brokers’ Estimate System, public filings and other publicly available information. Financial data of the Company were based on internal estimates of the Company’s management, public filings and other publicly available information. This analysis indicated the following implied high, median and low multiples for the selected companies, as compared to corresponding multiples implied for the Company based on the closing price of the Company’s common stock on April 12, 2007 and on the merger consideration:

 

 

Discounted Cash Flow Analysis

 

UBS and Greenhill performed a discounted cash flow analysis of the Company, an analysis which is based on the projected future cash flows of the Company, discounted to present value, distributable to stockholders, in order to derive an implied equity value range per share for the Company which then could be compared with the merger consideration. Using financial forecasts and estimates prepared by the Company’s management referred to above for calendar years 2007 through 2012, UBS and Greenhill calculated a range of implied present values as of April 13, 2007 of the excess equity that the Company could generate from April 13, 2007 through December 31, 2011 using discount rates ranging from 11.0% to 13.0%. UBS and Greenhill also calculated a range of implied terminal values for the Company as of December 31, 2011 by applying a range of forward price to earnings terminal value multiples of 10.0x to 14.0x to the Company’s calendar year 2012 estimated net income, net income is a financial measure commonly used to estimate terminal values for companies in the financial services industry. The implied terminal values were then discounted to present value as of April 13, 2007 using discount rates ranging from 11.0% to 13.0%. This analysis resulted in a range of implied present values of approximately $39 to $58 per share of the Company’s common stock, as compared to the merger consideration of $60 per share.

 

Selected Transactions Analysis

 

UBS and Greenhill performed a selected transactions analysis of the Company, an analysis which is based on the transaction values and transaction value multiples of merger and acquisition transactions believed to be generally relevant, in order to derive transaction value multiples for these transactions which then could be compared with corresponding multiples implied for the Company based on the merger consideration.

 

In this analysis, UBS and Greenhill reviewed transaction value multiples in the following eight transactions announced since January 1, 2000 involving companies in the financial services industry with transaction values in excess of $10 billion:

 

 

UBS and Greenhill reviewed the transaction value in each selected transaction as a multiple of the relevant target company’s next twelve months estimated net income and as multiples of the relevant target company’s book value and tangible book value as of the most recent completed accounting period prior to public announcement of the relevant transaction. Net income, book value and tangible book value are financial measures commonly considered in the valuation of the target company in merger and acquisition transactions in the financial services industry. UBS and Greenhill then compared these multiples derived from the selected transactions with corresponding multiples implied for the Company based on the merger consideration. Multiples for the selected transactions were based on publicly available information at the time of announcement of the relevant transaction. Financial data for the Company were based on internal estimates of the Company’s management, public filings and other publicly available information. This analysis indicated the following implied high, median and low multiples for the selected transactions, as compared to corresponding multiples implied for the Company based on the merger consideration:

 

 

The Company provided UBS and Greenhill the estimates set forth in the table below regarding the Company’s net income for the purposes of the financial analyses performed by UBS and Greenhill in connection with their respective opinions:

 

Core Earnings Available to Common Stockholders

 

The Company does not as a matter of course make public projections as to future performance or earnings beyond the current fiscal year and is particularly cautious of making projections for extended earnings periods due to the variability of the underlying assumptions and estimates. This financial data was prepared for internal budgeting and other purposes, and was not prepared with a view toward public disclosure or with a view toward complying with the published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information or GAAP. The financial forecasts are not facts and should not be relied upon as being necessarily indicative of actual future results, and readers of this proxy statement are cautioned not to place undue reliance on the financial forecasts. As explained in the Company’s Annual Report on Form 10-K, in addition to the financial information that the Company prepares in accordance with generally accepted accounting principles, which we refer to as GAAP, management evaluates the Company’s performance on financial information that is prepared on a basis that differs from GAAP. We refer to this financial information as “Core Earnings”. Management utilizes Core Earnings, in part, because the volatility of financial results calculated under GAAP measures make it difficult to make meaningful period-to-period comparisons of key operational and performance indicators. Volatility in GAAP net income cannot be projected and is not reflected in the financial projections listed above. These estimates are “forward-looking statements” and actual results may differ materially from them; see “Cautionary Statement Concerning Forward-Looking Information” on page [  ].

 

Neither the Company’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the financial forecasts, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the financial forecasts.

 

Upon completion of the merger, Parent will cause an aggregate of approximately $25.3 billion to be paid to holders of the Company’s common stock, options, restricted stock units, deferred stock units, restricted stock and other equity, assuming that no Company stockholder validly exercises and perfects its appraisal rights. Parent and Merger Sub have obtained equity and debt financing commitments described below and are obligated to use their reasonable best efforts to obtain the debt financing in connection with the transactions contemplated by the merger agreement.

 

Equity Financing

 

The Investors have collectively agreed to cause up to approximately $8.8 billion of cash to be contributed to Parent, which will constitute the equity portion of the merger financing. Subject to certain conditions, each of the Investors may assign a portion of its equity commitment obligation; provided that it remains obligated to perform to the extent not performed by such assignee. The approximate commitment of each Investor pursuant to the equity commitment letters is as follows (in billions):

 

 

Each of the equity commitments is generally subject to the satisfaction or waiver of all of the conditions to Parent’s and Merger Sub’s obligation to effect the closing of the merger under the merger agreement in accordance with its terms. Each of the equity commitment letters will terminate upon termination of the merger agreement.

 

Debt Financing

 

Parent has received a debt commitment letter, dated April 15, 2007, from the Lender Parties and certain of their affiliates pursuant to which the Lender Parties have agreed to provide, subject to the conditions set forth therein, up to $12.5 billion under a senior secured term loan facility and, to the extent Parent does not issue $4.0 billion in aggregate principal amount of senior second lien secured notes in a Rule 144A or other private placement to be launched prior to closing, up to $4.0 billion under a senior second lien secured bridge

facility for the purpose of financing the merger and paying fees and expenses incurred in connection with the merger. The debt commitment letters expire on February 15, 2008.

 

Conditions Precedent to the Debt Commitments

 

The availability of the senior secured term loan facility and the senior second lien secured bridge facility is subject to customary closing conditions, including:

 

 

Senior Secured Term Loan Facility

 

Under the senior secured term loan facility, Parent may borrow up to $12.5 billion in order to finance the merger and payment of related fees and expenses. Borrowings under the senior secured term loan facility will mature on the seventh anniversary of the closing of the merger.

 

The obligations under the senior secured term loan facility will be guaranteed by the surviving corporation and, subject to certain exceptions, its existing and subsequently organized and acquired wholly-owned domestic subsidiaries, and will be secured by, subject to customary exceptions, perfected first-priority liens on substantially all of the present and future assets and stock of Parent, the surviving corporation and the other guarantors.

 

The debt commitment letters provide that the definitive documentation for the senior secured term loan facility will include representations, covenants and events of default usual and customary for facilities of this type.

 

Banc of America Securities LLC and J.P. Morgan Securities Inc. have been appointed to act as co-lead arrangers and joint bookrunners for the senior secured term loan facility.

 

Senior Second Lien Secured Bridge Facility

 

As part of the debt financing transactions, Parent is expected to issue $4.0 billion of senior second lien secured notes in a Rule 144A private placement or other private offering. The obligations under the senior second lien secured notes will be guaranteed by the guarantors under the senior secured term loan facility and secured by perfected second-priority liens on collateral under the senior secured term loan facility. Parent is expected to offer the notes to “qualified institutional buyers” pursuant to Rule 144A under the Securities Act and to other purchasers pursuant to other applicable exemptions under the Securities Act.

 

To the extent the offering of notes by Parent is not completed on or prior to the closing of the merger, Parent may borrow up to $4.0 billion in loans under a senior second lien secured bridge facility in order to finance the merger and payment of related fees and expenses. Borrowings under the senior secured second lien bridge facility will mature on the eighth anniversary of the closing of the merger. If such borrowings are not paid in full on or before the first anniversary of the closing of the merger, lenders under the senior second lien secured bridge facility will have the option to exchange their bridge loans for senior second lien secured notes on customary terms.

 

The obligations under the senior second lien secured bridge facility will be guaranteed by the surviving corporation and each other guarantor of the senior secured term loan facility and secured by perfected second priority liens on the collateral securing the senior secured term loan facility. The lien priority and related creditors’ rights with respect to the senior secured term loan facility and the senior second lien secured bridge facility will be set forth in a customary intercreditor agreement.

 

The senior second lien secured bridge loan facility will contain representations, covenants and events of default customary for a financing of this type.

 

Banc of America Securities LLC and J.P. Morgan Securities Inc. have been appointed to act as co-lead arrangers and joint bookrunners for the senior second lien secured bridge facility.

 

The definitive documentation for the senior secured term loan facility and the senior secured lien secured bridge facility has not been finalized and, accordingly, the actual terms may differ from those described in this proxy statement.

 

Interim Facility

 

On April 30, 2007, the Lender Parties and certain affiliates thereof entered into Participation Purchase and Security Agreements with subsidiaries of the Company pursuant to which such Lender Parties and their affiliates have agreed to purchase participation interests in eligible FFELP and private credit loans up to an aggregate amount of $30.0 billion. These arrangements will be available until the earliest to occur of (i) February 15, 2008, (ii) the closing date of the merger and (iii) the ninety days after termination of the merger agreement (or fifteen days after the date of termination of the merger agreement in connection with a “superior proposal” as defined in the merger agreement).

 

Permanent Facilities

 

As part of the debt commitment letter, the Lender Parties have agreed to provide upon closing, subject to the conditions set forth in the debt commitment letter, (i) three-year asset-backed commercial paper conduit facilities (with 364-day committed liquidity support facilities) of not more than $28.0 billion in the aggregate, for securitization of FFELP and private credit loans of the surviving corporation and its subsidiaries, (ii) forward flow purchase facilities regarding the purchase and sale of certain FFELP and private credit student loans for an aggregate purchase price of up to $180.0 billion over the five-year period following the Closing Date and (iii) a loan purchase facility regarding the purchase and sale of eligible unencumbered assets for an aggregate purchase price of up to $20.0 billion over the 364 days following the Closing Date. The surviving corporation and its subsidiaries will retain no residual interest in the student loans sold under the forward flow purchase facilities, but will retain their rights to the related student loan servicing fees.

 

The definitive documentation for the permanent facilities described above has not been finalized and, accordingly, the actual terms of such facilities may differ from those described in this proxy statement.

 

Except as described in the section entitled Conditions Precedent to the Debt Commitments, it is anticipated that the surviving corporation’s existing unsecured debt will remain outstanding and that such outstanding debt will not be equally and ratably secured with the senior secured term loan facility or the senior second lien secured notes or the senior second lien secured bridge facility obtained in connection with the merger.

 

In connection with the merger agreement, each of the Investors entered into a limited guarantee with the Company pursuant to which, among other things, each Investor is providing the Company a guarantee of payment of the termination fee payable by Parent, if any, and Parent’s obligation for breach of the merger agreement with respect to the payment obligations of Parent, if any, up to a maximum amount equal to its pro rata share of the $900 million termination fee. Each guarantee will remain in full force and effect until the earlier of (i) the effective time of the merger, (ii) the termination of the merger agreement in accordance with its terms by mutual consent of the parties or under circumstances in which Parent and Merger Sub would not be obligated to make payments to the Company and (iii) one hundred eighty days after the termination of the merger agreement; provided that the limited guarantee will not terminate as to any claim for which notice has been given to the respective guarantor prior to such termination until final resolution of such claim. The limited guarantee is the Company’s sole recourse against each Investor.

 

In connection with the merger agreement, Parent and Merger Sub have agreed that if the merger agreement is terminated, Parent and Merger Sub will release any person (other than Bank of America Corporation and its affiliates, JPMorgan Chase & Co. and its affiliates and J.C. Flowers II L.P. (an affiliate of J.C. Flowers) and its affiliates and any investors in such L.P. or any such affiliates to the extent of pre-existing limitations not specifically relating to the merger agreement) from any agreements or arrangements pursuant to which any such person has agreed to provide financing, whether pursuant to the commitment letters or otherwise, for the merger or which may reasonably be expected to limit, restrict, restrain or otherwise impair in any manner, directly or indirectly, the ability of any potential debt or equity financing source to provide financing or other assistance to any person, including the Company or any of our subsidiaries. Parent and Merger Sub have also agreed that if the merger agreement is terminated, Parent and Merger Sub will release any member of the Company’s management from any agreements or arrangements which may reasonably be expected to limit, restrict, restrain or otherwise impair in any manner, directly or indirectly, the ability of such person to participate in an alternative transaction.

 

In considering the recommendation of the board of directors with respect to the merger agreement, holders of shares of the Company’s common stock should be aware that the Company’s directors and executive officers have interests in the merger that may be different from, or in addition to, those of the Company’s stockholders generally. These interests may create actual or potential conflicts of interest. The board of directors was aware of these actual or potential conflicts of interest and considered them, among other matters, in reaching its decision to approve the merger agreement and to recommend that the Company’s stockholders vote in favor of approving and adopting the merger agreement.

 

In accordance with the terms of the merger agreement, the officers of the Company at the effective time of the merger shall be the officers of the surviving corporation until such time as their successors are appointed. Currently, our executive officers do not have employment agreements with the Company and we are unaware of any change in their benefits that will occur after the effective time of the merger.

 

At the effective time of the merger, the directors of Merger Sub will become the directors of the surviving corporation and none of the current directors of the Company will be directors of the surviving corporation.

 

Stock Options and Restricted and Performance Stock Awards

 

The merger agreement provides for the conversion of equity interests in the Company’s common stock into cash consideration, without interest, at the effective time of the merger as follows:

 

 

 

As required by applicable law, cash payments will be reduced by any required federal, state, local and foreign withholding taxes.

 

The table below sets forth, as of June 15, 2007, for each of the Company’s directors and executive officers:

 

 

All dollar amounts are gross amounts and do not reflect deductions for income taxes and other withholding. In each case with respect to options, the payment is calculated by multiplying the number of shares subject to each option by the amount, if any, by which $60.00 exceeds the exercise price of the option.

 

 

 

The table below sets forth additional information about options held by each of the Company’s directors and executive officers. The table sets forth the grant date, the status of each option as vested or unvested, and the exercise price of each option.