SLM Corp. (NYSE: SLM), a manager of $160 billion in education loans that serves nearly 10 million student and parent customers, is recently trading down $2.04 to $20.83. SLM announced today that it has entered into a series of transactions with its equity forward contract counterparties at Citibank (NYSE: C). SLM call option volume of 39,244 contracts compares to put volume of 16,830 contracts. SLM January option implied volatility of 110 is above its 26-week average of 43 according to Track Data, suggesting larger price movements.

Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

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• According to sources and reported by the FT's dealReporter, despite ongoing litigation, a consortium led by JC Flowers remains interested in taking SLM Corporation (NYSE: SLM).

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• The Economic Times reported that three bidders for Ford Motor Company's (NYSE: F) Jaguar and Land Rover units, Tata Motors, M&M and One Equity, submitted their final "competitive" bids Wednesday. The bids are rumored to be in the range of $1.5B-$2B, but may undergo revisions at some point.

Sallie Mae (NYSE: SLM) is sick of having sand kicked in its face by its potential buyer, JC Flowers, and Flowers' banks.The private equity firm that agreed to pay $25 billion for the student loan company has come back with a lower price, claiming that Sallie Mae's financial future has gotten much worse. Now, Sallie Mae is suing to get its break-up fee of $900 million

According to Reuters, "The suit seeks a declaration that Sallie Mae may terminate the merger agreement and collect the damages, that the buyer group has repudiated the merger agreement, and that no material adverse effect has occurred." SLM is arguing that there has been no meaningful change in its business since Flowers made its offer. The buyout firm and its banks make the case that legislation slashing subsidies to student lenders and a serious credit squeeze have cut Sallie Mae's value. Flower's banks are JP Morgan (NYSE: JPM) and Bank of America (NYSE: BAC).

The move by SLM may usher in a new wave of litigation as private equity buyers walk away from buyouts that they no longer think make financial sense. If Sallie Mae can win in court and collect its $900 million, a number of legal actions could follow brought by public companies that watched buyouts fall apart.

While it may seem odd, it is possible that the legal system will slow buyouts as much as the current credit crunch.

Douglas A. McIntyre is a partner at 24/7 Wall St.

The gunfight at the OK Corral. Private equity firm JC Flowers tried to back out of its deal to buy student loan company Sallie Mae (NYSE: SLM). Then the firm came back with an offer $10 below the original $60 a shared price.

The whole matter put the Sallie Mae board in a bind. Take a lower price. Or take nothing and watch the shares fall. The stock trades just above $49 now.

But SLM got a big vote of support in its efforts to push Flowers to honor the original deal. Three of its big institutional shareholders said that the private equity firm has to do the right thing and write the $60-a-share check. The firms include Barrow, Hanley Mewhinney & Strauss, New York hedge fund QVT Financial and Capital Guardian Trust Company. "We strongly support your decision to hold firm to your contract and a $60-per-share sale price and hope you will continue to reject any overtures to renegotiate the contract price or the structure of the consideration," QVT Managing Director Nick Brumm said in a letter obtained by The New York Post.

Now, it would appear that Flowers is on the hot seat. These large investors are saying that it is liable for the $25 billion deal. No one should be surprised if they decide to take the buy-out operation to court.

With $25 billion on the table, the action has turned very unfriendly.

Douglas A. McIntyre is a partner at 24/7 Wall St.

First Data, the first of the large PE deals seeking financing following the meltdown of the credit markets, placed $9.4 billion in loans yesterday. Supposedly, the amount of debt sold was nearly double the $5 billion banks targeted.

Also, Oaktree Capital Management, BlackRock and Eaton Vance are forming funds to buy up some of this debt. The 400 bps banks have had to add on to yields are beginning to pique investor's interest.

What should also begin to be seen is that the amount of debt that needs to be placed should start coming down. News reports cite as much as $330 to $370 billion in loans need to be placed. However, this number seemed to grow as the credit-market meltdown fears hit the markets. Prior to the panic hitting a crescendo, $200 billion in leveraged loans and some $75 to $100 billion of high yield bonds were the target that needed to be sold.

However, take away First Data and TXU Corporation (NYSE: TXU), the two large deals being financed, and add to that Harman International Industries Incorporated (NYSE: HAR) and Sallie Mae that look like they might not get financed, and this number drops rather quickly. Plus add all the smaller deals that are not household names that will not get done and next thing you know this problem is being resolved.

Once again, free markets are correcting the problem that they created.

Since the dog days of August, a chill has spread through the hallowed halls of private equity. $350 billion worth of leveraged buyout loans are sitting on the books of banks, looking for a home with investors. While one deal that was on the rocks, First Data's acquisition by KKR, managed to close, there are others, like J.C. Flowers' proposed $60 a share takeover of SLM Corp. (NYSE: SLM) which have fallen through.

As more and more deals go the way of Sallie Mae, you'll be hearing a lot more of the expression Material Adverse Change (MAC). MAC is a standard contract clause in a merger agreement which gives the acquirer the right to back out of a deal if there is a material adverse change -- an unexpected and permanent impairment in the value of the company. If an acquirer can successfully "call a MAC," it can get out of a deal without paying the breakup fee.

In the case of the SLM deal, J.C. Flowers announced it was backing out due to legislation signed by the president which makes the student lending business less attractive by cutting subsidies to student-loan providers, thus reducing Sallie Mae's profit prospects. In the case of KKR and The Goldman Sachs Group's (NYSE: GS) effort to welch on its proposed deal to acquire Harman International (NYSE: HAR), the MAC is an earnings report that came in lower than expected -- 93 cents instead of $1.22.

There have been rumors and press reports for a couple of weeks that the J.C. Flowers deal to buy student loan company Sallie Mae (NYSE: SLM) might fall apart. Finding debt to close the purchase of the company was getting tough.

Yesterday, the rumors became news. Flowers backed out of its commitment. The Wall Street Journal writes that, "Mr. Flowers informed a group of UBS bankers that he wasn't prepared to pay the $60-a-share price he had agreed to in April." UBS is Sallie Mae's banker.

Flowers may simply be fishing for a price lower than his first offer. With its stock price at risk, the SLM board might be tempted to take a reduced price.

The buyout firm is arguing that legislation which could hurt the student loan market amounts to a "material adverse effect" to the deal, and that this gives Flowers the legal right to walk away.

The SLM board does not have any good choices. It could sue Flowers to complete the deal, and it probably should. But, as the legal fight drags on shares in the student loan company are likely to fall. That leaves the board between Scylla and Charybdis.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Despite a 50 basis point drop in the price of money, the Bernanke bailout is not helping the LBO market much. The New York Times [registration required] reports that a $25 billion deal to take student loan bundler Sallie Mae parent SLM Corp. (NYSE: SLM) private is on the skids.

Meanwhile, Bloomberg News reports that the negative side effects of lower interest rates is helping weaken the dollar. This morning it hit a record low of $1.40 relative to the euro. This may actually be good news for companies that derive a significant portion of their revenues from overseas -- particularly in Europe. But as someone who is thinking about taking a trip to Europe next year, I am concerned about how outrageous the prices there will seem to me.

J.C. Flowers, the firm spearheading the SLM buyout, may be willing to walk away from the deal and pay the $900 million breakup fee. Sallie Mae stock now trades 17% below its 52-week high of $58, probably because the market anticipates the deal will either fall apart or be concluded at a much lower price.

MAJOR PAPERS:

• The SEC is said to be preparing civil charges against past and present employees at a number of brokerage firms, including Morgan Stanley (NYSE: MS), regarding abusive stock lending, reported the Wall Street Journal (subscription required).
• Ron Gettelfinger, the UAW president, has put aside talks with General Motors Corporation (NYSE: GM) about a trust fund to oversee retiree health care, to instead focus on a new four-year contract that doesn't include the fund, according to the Wall Street Journal.
• The Financial Times (subscription required)) reported that Absolute Capital Management froze withdrawals from eight of its hedge funds yesterday, after it discovered up to $530M of previously undisclosed investments in illiquid shares of tiny U.S. companies.
• The Financial Times reported that British bank HSBC Holdings (NYSE: HBC) has rejected activist investor Eric Knight's demands for large-scale changes in the bank's corporate governance.

OTHER PAPERS:

• The consortium that had agreed to buy Sallie Mae (NYSE: SLM) for $25B is going to reopen negotiations and try to obtain a lower price, reported the New York Times, citing sources.

Private equity interests were all set to buy Sallie Mae (NYSE: SLM). Now, in light of tight credit for buying big companies, the investors want a better price. It may be that Wall St. saw it coming. After the stock hit a 52-week high of $58, "shares of SLM closed yesterday at $48.55, because investors expect a price cut," according to The New York Times.

The private equity firms involved, J. C. Flowers & Company and Friedman Fleischer & Lowe, are going to try to go back to the company to reset a the purchase price. It is not clear how much of a haircut they want the Sallie Mae shareholder to take. The total value, based on the current offer is $25 billion. The New York Times also reports that there is a $900 million break-up fee due to the company if the buyers walk.

The news is further evidence that private equity buy-outs of large public companies are dead, at least for the time being. The banks and institutional investors which provide the debt for these deals do not want to take on any more risk for leveraged financings that could collapse if a company misses its numbers.

The news will be especially hard on anyone who owns a share or two of the student loan company. When the deal was first announced in April, Sallie Mae shares moved from $41 to $56 in a matter of days. When credit markets got choppy in July, those shares began to fall.

Now, they may go even lower.

Douglas A. McIntyre is a partner at 247wallst.com.

With concerns that the Sallie Mae (NYSE: SLM) transaction may not close hitting the headlines as Congress returns to session ahead of next year's presidential election, could an opportunistic candidate turn national sentiment against a small, yet powerful, private equity group?

Sallie Mae was incarnated to provide low-cost loans to U.S. students so they could afford a college education, mostly targeting those groups who could least afford it. While this mandate has lost its focus as Sallie Mae loans are no longer cheap, it does leave the opportunity for a smart politician to seize the moment: Why should the profits of government-backed debt for students go to JC Flowers, so they make billions in profits?

The same could be said about the recently completed buyout of HCA, the large hospital chain. While it is a Class A operation, it generates a substantial portion of its revenue from Medicare and Medicaid. Once again, why should the U.S. taxpayer, who finances both Medicare and Medicaid, be paying money to HCA so they can pay down the $30-plus billion in debt so a few shareholders can walk away with billions?

It is interesting how one deal, Sallie Mae, could potentially raise so many red flags. As with most market excesses, one deal always become the poster-child deal symbolizing an era's end. Look for it to be Sallie Mae this time around. HD Supply renegotiating the terms for its deal could prove to be pure chump change.

The shareholders of student-loan provider SLM Corporation (NYSE: SLM), better known as Sallie Mae, have agreed to a $25.3B buyout by a group led by J.C. Flowers & Co. -- but that does not mean the deal is done. Now the buyer must decide if it still wants Sallie Mae, and if so, are they are still willing to pay a price that is now 28% higher than SLM's closing price yesterday.

But there's some uncertainty about Sallie Mae's business model due to the government's possibly cutting subsidies more than SLM had anticipated. That would negatively affect the company's profit and possibly cause the buyers to withdraw or seek to renegotiate terms. This has not gone unnoticed by SLM shareholders. "Sallie Mae seems to be trying to move it to fruition before the legislation goes through," says Richard Hofmann, an analyst with CreditSights.

SLM Corp. said it doesn't expect the proposed legislation to kill the transaction, but a spokesman for the buyers said that there was a "possibility that the conditions to closing may not be met." Whether the buyers are truly skeptical of the transaction closing, or are using this as leverage for a better price, is unclear.

Says Hofmann: "Our question has been whether Flowers wants to abandon the deal, or do they want better terms? To say they really think it is a bad deal and want to walk away is far-fetched."

Another possibility is that the buyers, who include Flowers, JPMorgan Chase & Co. (NYSE: JPM) and Bank of America Corp. (NYSE: BAC), have reconsidered this large a purchase in light of the current market conditions. If so, they won't be alone.

Citigroup Inc. (NYSE: C) opened at $51.55. So far today the stock has hit a low of $51.50 and a high of $52.09. As of 10:35, C is trading at $52.00, up $0.59 (1.1%).

After hitting a one year high of $57.00 in December, the stock has dropped to support levels in the upper $40s before charging back, but the stock has dropped again over the last six weeks. Competitor SLM Corp (NYSE: SLM) is driving financial stocks up in the wake of some strong gains after a Thomas Weisel analyst stated that yesterday's sell-off should be viewed as a buying opportunity for SLM shares. C and most other financial sector stocks are rising behind SLM. Technical indicators for C are bearish and steady, while S&P gives the stock a very positive 5 STARS (out of 5) strong buy rating.

For a bullish hedged play on this stock, I would consider an August bull-put credit spread below the $47.50 range. A bull-put credit spread is an options position that combines the purchase and sale of call options to hedge risk and leverage returns. For this particular trade, we will make an 8.7% return in less than 2 months as long as C is above $47.50 at August expiration. C would have to fall by more than 13.4% before we would start to lose money.

C hasn't been below $47.50 since last July and has shown support around $51.50 recently. This trade could be risky if the company's earnings (due out July 20) disappoint, but even if that happens, it looks like this position could be protected the strong support the stock found between $48 and $50.

Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls a position in SLM. He does control a long hedged position in C.

In the $25 billion buyout of SLM Corp (NYSE: SLM), also known as Sallie Mae, the buyers -- J.C. Flowers, Friedman Fleischer & Lowe, Bank of America (NYSE: BAC) and JP Morgan Chase & Co. (NYSE: JPM) – used the legal services of Wachtell Lipton Rosen & Katz as well as Sullivan & Cromwell LLP.

Well, it looks like it was money well spent. According to a report in The Wall Street Journal, it looks like the SLM deal may come undone because of proposed legislation in Congress that would curtail the school loan industry. The private equity firms believe it would be a violation of the merger agreement. However, SLM disagrees. So, this could lead to even more legal fees and litigation.

SLM's stock is down about 8.65% to $52.80. The current buyout offer is $60 per share.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

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• The Wall Street Journal (subscription required) reported that the UAW and representatives of Kirk Kerkorian, which made a $4.5B proposal for DaimlerChrysler AGs (NYSE: DCX) Chrysler unit, met to discuss the potential of an employee stock ownership plan and other alternatives to a takeover of the struggling automaker.
• A $25B deal to take SLM Corporation (NYSE: SLM), known as Sallie Mae, private will most likely remain under the scrutiny of a federal regulator, reported the Wall Street Journal.

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• Digitimes.com reported that Koninklijke Philips Electronics (NYSE: PHG) has decided to withdraw from the Taiwan handset market.