The Bees In Sallie Mae's Bonnet

The Student Loan Marketing Assn.'s 1994 annual report opens with a simple but unwittingly prescient phrase: "Times change, and we change with them." The quotation refers to the Washington (D.C.) company's efforts to adapt to a Clinton Administration program for direct government loans to students--a frontal attack on the core business of the congressionally created but shareholder-owned company known as Sallie Mae. Recently, though, the report's language has taken on new meaning: Dissident shareholders are calling for a major overhaul of the two-decades-old company.

On Apr. 10, four investors, including two former Sallie Mae executives, announced they would run for seats on the company's 21-member board. And on Apr. 25, the dissidents, led by former Sallie Mae Chief Operating Officer Albert L. Lord, said they may add four more names to their slate before the annual meeting this month, a sign that they believe they have substantial investor support. They have good reason: Sallie's stock price has plummeted from $74.50 in 1993 to $39.75, while profits slumped 6% last year, to $403 million. "Times have changed, and this company hasn't changed at all," rails one major institutional investor, mocking Sallie's claim. "There is incredible investor dissatisfaction."

That's a big change from Sallie's salad days. The company's mission is to provide liquidity to the student-loan market by buying loans from banks that make them. Sallie and its shareholders profited handsomely in the 1980s and early 1990s, in part because an implicit government guarantee enables the company to borrow at very low rates. But the company's profitability--and hefty salaries for executives--eventually made it a target in Washington.

In 1993, the Clintonites pushed through Congress the direct lending plan, figuring it would be simpler for students and cheaper for taxpayers. Direct government student lending is expected to rise to 40% of the market in the 1995-96 academic year from a mere 5% in the current year. The Administration also has slapped onerous new fees on Sallie, hurting its margins further.

Lord thinks the company needs a major strategic shift to regain its footing. In some ways, he's a surprising insurgent. He and Sallie Mae CEO Lawrence A. Hough were friends as they worked their way up the ranks. They live two miles apart, and their families have spent Christmas Eves together.

"POTENTIAL RETRIBUTION." Lord left the company in January, 1994, though, in part because of differences with Hough. That split reflects the issues Lord is now raising. He is calling for Sallie to sell some of the student loans on its books. "We should have been securitizing loans two years ago," he declares. He also would shrink the company's $13 billion investment portfolio and consider spinning off its loan-servicing operation. He thinks Sallie could then use the proceeds to buy back even more shares than the company now plans, boosting the stock price. Sanford C. Bernstein & Co. analyst Jonathan Gray says such moves make sense. "All of these ideas should be looked at," he says.

Hough says he is looking for longer-term solutions. He sees Sallie's real salvation in removing all ties to the government. He figures that as an independent entity, the company could aggressively pursue new business. And he warns that federal policymakers, who would need to approve full privatization, could view a spinoff of the servicing operation as an attempt to circumvent their authority. "The reality is, it invites potential retribution," he says.

Even so, Hough is showing a new feistiness. On Apr. 14, Sallie sued the Education Dept., arguing that a fee imposed in 1993 is illegal because it doesn't apply to other holders of student loans.

Some of the dissidents are encouraged by Sallie's newfound chutzpah. But they don't think it's enough. The race is on to prove who is best suited to change Sallie's direction. Already, the stock has risen 10% since the board slate was announced. Regardless of which side emerges victorious, Sallie Mae investors may be the real winners.

Shaking Up Sallie Mae

Dissident shareholders' ideas for restructuring

SLIM DOWN the company's $54 billion balance sheet, partly by dumping low-yielding investments

SPIN OFF the healthy loan-servicing operation

BUY BACK more stock than the 3-5 million shares already planned

CUT OUT some operating expenses, including fees to lobbyists and consultants

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