With its $25 billion buyout in legal limbo, Sallie Mae has been contacted by other investors potentially interested in acquiring the student lender, whose business has been hurt by the uncertainty.Sallie Mae, formally known as SLM Corp., on Thursday said it swung to a third-quarter loss of $344 million. It blamed the weaker-than-expected results in part on the effect of a new law that reduces by $20 billion federal subsidies to student lenders and soured its buyout bidders on the transaction, now being battled in court. "We've got to sort out this merger mess. It's gone on too long," Chairman Albert Lord said in a conference call. "It ties our hands on day-to-day activities." Until the dispute is resolved, he said, Sallie Mae cannot negotiate with other potential buyers, pursue its own potential acquisitions or buy back shares.



The terms of the company's buyout agreement with an investor group led by private-equity firm J.C. Flowers & Co. prohibit such activities.

Nevertheless, as the dispute with the investor group plays out, Lord said Sallie Mae has received expressions of interest from other possible buyers.

"We get calls," Lord said. "I'm actually not allowed to talk about them."

Steven Davidoff, a professor at Wayne State Law School in Detroit, said in a written comment that the earnings news could be "a driver for the Flowers group to use SLM's deteriorated position to renegotiate a price."

On Monday, Sallie Mae sued the investor group, which also includes Bank of America Corp. and JPMorgan Chase & Co., for attempting to back out of a $60-a-share cash offer for the company. The investors say student-loan legislation recently signed into law by President Bush, and weaker economic conditions, have made the price agreed upon in April unacceptable. A reduced cash offer of $50 a share expired Tuesday.

Lord had some harsh words for the investor group and in particular for J. Christopher Flowers, who runs the private equity firm bearing his name.

The two banks "remain the logical owners for the company, but they're not the only possible owners," Lord said. "So if Chris's deal doesn't go, so be it. We'll start over."

Stephanie Cutter, a spokeswoman for the Flowers firm, declined to comment.

Sallie Mae's quarterly loss, equivalent to 85 cents a share, compared with profit of $263 million, or 60 cents a share, in the third quarter of 2006.

The company said its income was reduced during the July-September period by $28 million as a result of the cut in subsidies under the new student-loan law and by $18 million for expenses related to the merger agreement with the Flowers-led investor group.

By taking a one-time charge to account for the legislation's financial impact, Sallie Mae could bolster its legal argument — that the new student-lending law does not represent a significant long-term detriment to its business, as J.C. Flowers and its partners contend.

In fact, Sallie Mae CEO C.E. Andrews argued that Sallie Mae stands to benefit from the legislation over time, because smaller competitors will be weeded out by the tougher market environment.

The Reston, Va.-based company reported "core earnings" of $259 million, or 59 cents a share in the July-September period, compared with $321 million, or 73 cents a share. Core earnings exclude treatment for student loans bundled together as securities and derivatives, the complex financial instruments used as a hedge against interest-rate swings.

Analysts surveyed by Thomson Financial anticipated quarterly core earnings of 74 cents per share.

In its suit filed Monday in Delaware Chancery Court, Sallie Mae is seeking to force the investors to honor the original $25 billion deal or pay a $900 million breakup fee.

Judges traditionally have been skeptical of buyers' efforts to walk away from acquisitions by arguing that economic or regulatory conditions have changed so greatly that the deals should be scrapped, legal experts say. Some Wall Street analysts view Sallie Mae's suit as a high-stakes tactic to force a resolution of the deal.

The student-loan provider said core net interest income was $664.3 million, up from $601.4 million a year ago. Net interest income is the difference between how much it costs a bank to borrow money and the amount it receives from lending money.

Shares of Sallie Mae gained 13 cents, or 0.3 percent, to close at $48.76.

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On the Net:

SLM Corp.: http://www.salliemae.com