Sallie Mae and its dissident shareholders fought to a draw Thursday, agreeing to mediation after neither side's plan for the student loan concern prevailed.
The parties announced the mediation effort after Sallie Mae's privatization plan failed to garner enough votes at the second meeting of the company's shareholders in a week.
"We will develop revisions to our plan that will address shareholder concerns and enable them to make privatization a reality," Sallie Mae president Lawrence A. Hough said.
A 1996 law requires the government to liquidate the $40 billion-asset, government-sponsored enterprise by 2013 unless half the shareholders approve a privatization plan by March 1998.
A preliminary tally Thursday awarded 21.2 million shares for Sallie Mae's privatization plan and an equal number against. "It is a dead heat," said Peter Harkins, who administered the election. To win, Sallie Mae needed at least 26.4 million votes, or half of the outstanding shares.
Sallie Mae chairman William Arcenaux adjourned the meeting until June 5 to give holders of the remaining 10 million shares an opportunity to vote.
Last Friday, the dissident shareholders, known as the Committee to Restore Value, held a special shareholder meeting on its plan to privatize Sallie Mae. That plan, which envisions Sallie Mae becoming a direct lender, received 23 million votes, more than three million shy of a majority. The committee voted to keep its polls open until May 29 to collect more votes.
The mediator has been selected, but was not identified Thursday. He will try to broker a compromise, but has no power to force either side to accept a deal.
In an effort to reach a compromise, the dissident group late Thursday proposed two new rounds of shareholder voting. Investors would first decide whether Sallie Mae should privatize. They then would vote on who should serve on company's board. Mr. Hough said management would consider the plan. "We are pleased a dialogue has begun," he said.
Who sits on Sallie Mae's board will determine whether the company starts making student loans-the primary issue dividing management and the dissidents.
Mr. Hough said originating loans would alienate the banking industry, which contracts with Sallie Mae to securitize and service student loans. "It is an extraordinary risky undertaking," he said. "It destroys the core of our relationships with lenders."
Becoming an originator, he said, would require Sallie Mae to invest millions of dollars in marketing to make students aware of the company's services. Also, it would take Sallie Mae years to become a major player because students do not normally switch lenders after they start school. The dissidents "don't have a sense for the market that we do," Mr. Hough said. "Our sense is from being out there."
Albert L. Lord, a Sallie Mae director who leads the opposition, said Thursday that the company already is an originator because students send loan applications directly to it. The only difference is that banks currently provide the capital in exchange for a cut of the profit.
"It is our job to acquire assets," Mr. Lord said. "We don't see any reason to cut off any way to get assets. If the banks are upset, so be it."
Any compromise must move the company into the origination business and give shareholders the right to elect each member of the new board, Mr. Lord said. "Whatever we work out will reflect what the shareholders want," he said.
Smith Barney analyst Thomas O'Donnell predicted after the meeting that Sallie Mae will become an originator, regardless of which side wins. "The economics of the marketplace dictate it," he said. "They are going to have to do it. It is inevitable."
The industry has long opposed Sallie Mae's entry into the loan origination business, arguing that the company would stifle competition.
"We are disappointed there wasn't a definitive win for management," said John E. Dean, special counsel to the Consumer Bankers Association. "That would have been the best thing for the industry."
Bankers said they are watching the Sallie Mae in-fighting closely.
"We are all very, very interested in the outcome of the current situation," said Jon A. Veenis, president of Norwest Student Loan Center. "Sallie Mae is a dominant player in the business. To the extent its business plan may change has a potential impact on other participants, such as banks."
Sallie Mae and its dissident shareholders also are fighting over the composition of the board of directors. Sallie Mae has proposed replacing eight directors who support the dissidents while the Committee to Restore Value has proposed removing six directors who support management.
Mr. Lord said he has rejected two compromise offers by Sallie Mae, including one that would give his group four of the 16 board seats.
Most of Sallie Mae's stock is held by institutional investors. FMR Corp., Chancellor Capital, and Capital Group Cos., together control nearly 30% of the outstanding shares. Neither Sallie Mae nor the dissidents revealed how individual investors voted.