Buying Collegiate Funding Services Inc. will complete an initiative meant to put JPMorgan Chase & Co.'s student lending operations under more direct control.
Under the deal announced Thursday, the New York company is to pay $663 million in cash, or $20 per share, for the Fredericksburg, Va., student loan outsourcer. Collegiate will be combined with JPMorgan Chase's education finance unit.
J. Barry Morrow, the president and chief executive of Collegiate Funding Services, will become the president of the new combined Chase Education Finance, which will be headquartered in Fredericksburg.
Before JPMorgan Chase bought Bank One in July 2004, both used SLM Corp., better known as Sallie Mae, to process federally insured student loans and some private loans. In addition, both companies had a partnership with Sallie Mae for the sale of loans originated under their banks' names.
Soon after the merger, JPMorgan Chase cancelled the Sallie-Bank One partnership. In March of this year it canceled the other one.
Student lending was a business in which JPMorgan Chase "wanted to control our destiny, make an investment," said Brad L. Conner, an executive vice president in its retail financial service and the president of its home equity and education lending operations. "We wanted to really view it as a growth engine," he said.
"We weren't going to be in a position to do that when the business was in essence run by Sallie Mae using our brands."
Dropping Sallie Mae did leave gaps in JPMorgan Chase's student lending operation though, Mr. Conner said. It lacked infrastructure to service government-sponsored loans and had had too little reach in the direct-to-consumer sector, he said.
The deal announced Thursday will advance the company in both areas, Mr. Conner said. Collegiate Funding can service federally insured and direct-to-consumer loans as well as add to JPMorgan Chase's direct-to-consumer portfolio, he said.
Last year Chase Education Finance originated $7.9 billion of student loans. Collegiate Funding originated $4.4 billion of loans, private and federally insured, and serviced $12.1 billion of loans as of the end of the third quarter.
JPMorgan Chase expects the acquisition, which is to close next quarter, to help it pick up share in what it sees as a growth area in consumer lending.
"We think the opportunity in education finance is huge," said Mr. Conner. "It's a growing business segment. The cost of education is going up, and we think it's a great growth engine for Chase. We want to be the premier player in education lending, and we didn't have all the pieces of the puzzle."
What the deal might mean for another JPMorgan Chase relationship in the student lending business was a subject of debate Thursday on Wall Street.
The company has a contract, recently extended through 2010, with First Marblehead Corp. of Boston to process direct-to-consumer loans.
The purchase of Collegiate Funding, which also has a contract with First Marblehead, "could have long-term implications for First Marblehead," wrote Matt Snowling, an analyst at Friedman, Billings, Ramsey & Co. Inc., in a note published Thursday. "The deal provides critical insight into Chase's long-term plans to bring loan servicing and origination in-house."
Under the extended contract, JPMorgan Chase has the right to purchase another student lender that has a relationship with First Marblehead, Mr. Snowling wrote. "Termination" of Collegiate Funding Service's agreement with First Marblehead can occur without penalty if a three-month written notice is supplied, he wrote.
"As First Marblehead's largest client, at approximately 36% of loan volumes, we believe this acquisition presents serious risks to the long-term relationship between First Marblehead and its largest client," he wrote.
JPMorgan Chase says that is not the case.
"We continue to believe that they [First Marblehead] are an important partner," Mr. Conner said. Yet "going forward we would want to operate in only one way with First Marblehead," he said.
"Today both businesses [Collegiate and JPMorgan Chase] originate direct-to-consumer loans that were sold to First Marblehead. We would look to consolidate that."
First Marblehead has had other problems this year. In September, Daniel M. Meyers resigned as its chairman and chief executive after the board learned he had given gifts to a former employee at Bank of America Corp. B of A severed its deal with First Marblehead after the disclosure but returned after negotiations.
Thomas K. Brown, the founder and chairman of Second Curve Capital LLC, wrote in a note published Thursday that the deal is a "material positive" for First Marblehead. "If Chase's plan had been to drop First Marblehead and go with Collegiate Funding Services - as some investors seem to think - Chase wouldn't have renewed that contract," wrote Mr. Brown, whose firm owns holds 6.63% of First Marblehead shares. First Marblehead's stock closed down 14%.
