Sallie Mae development sparks call spread widening on other deals, debate on M&A action

By Ronda Fears

Memphis, July 11 - Signs that the $25 billion private equity buyout of SLM Corp., the student loan company commonly known as Sallie Mae, is in jeopardy sparked a scare for other deals and advanced a debate about the fate of the seemingly non-stoppable merger and acquisition deal train.

Many who were involved in SLM were caught off-guard by the news, however, amid widespread media reports that the M&A deal train is showing no signs of slowing down.

"This clearly was not anticipated. It's causing other spreads to widen," said a sellside trader. "These situations tend to have a ripple effect and spreads on some deals widen a little."

First Data Corp., Alltel Corp. and Tribune Co. were all lower on the Sallie Mae development.

Traders have been talking about the pain of short positions for months, although the market has continued to rage ahead except for a few isolated pull backs. Three or four years ago, hedge funds were betting that the depressed volatility index would have to tick higher, but it remains in the upper teens. Thus, some have said in recent discussions that perhaps there is just a New World Order developing and there will not be a collapse in M&A activity.

"Relax," said a buyside analyst at a high-profile special situations shop, who asked not to be quoted by name. "Let the lemmings run around for a few days. This is all nonevent stuff. But, the lemmings will run until they go off a cliff."

Not all buysiders are so glib, however.

With the high-yield market beginning to balk at LBO financing deals in recent weeks, some see the Sallie Mae news portending that the deal train might be slowing down or even headed for a crash that will halt everything.

Another portfolio manager at a mid-sized shop is bracing for the end, although he admits that he has no specific time frame for the M&A mania to hit the wall. And with the subprime crisis in full view, as well as rising energy prices and other economic pressures, he reckons the catalyst will be something no one sees coming.

"It's coming - whether it's a week, a month, I don't know - but the end is coming," he told Prospect News on Wednesday. "Whenever someone says there's a new dynamic we are at the top of the market. That's when you head for the hills. The length of cycles change, but to say that business is no longer cyclical is a dream."

His level of anxiety about the situation at this juncture is couched in terms of concern about so many adjustable-rate mortgages having to be reset - estimated by mortgage experts to amount to $1.5 trillion by the end of 2007 - and rising gasoline prices. To insulate against what he considers inevitable, he is turning away from growth and momentum stocks to value stocks and keeping a short position.

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