Has Sam Heyman Lost $1 Billion on Sallie Mae?

Sam Heyman is a hedge fund manager, corporate raider, and merger arbitrageur. He came massively unstuck in Australia in May, when his merger-arb tactics relating to the acquisition Qantas by Airline Partners Australia were described as "an elaborate and cunning plan straight out of Blackadder" in the Australian. But that might not have been his worst decision of 2007.

Take a look at Sallie Mae's Q3 conference call, from October, when Al Lord was still chairman and not CEO. The call came after Sallie Mae had agreed to be bought by Chris Flowers for $60 per share, and the two sides were fighting it out over whether the merger had to go ahead. On the call, Lord explains that most of Sallie Mae's long-term shareholders had sold after the merger was announced, and that his new shareholders were mainly merger arbs:

The stock returned to $58 in June on the announcement that we are going to do a $60 deal. Most of my long-term shareholders sold stock during the run-up period. They were very well-rewarded. I know our board feels personally very good about the returns that we were able to generate for that set of shareholders over 10 years.
It is now October 2007. We only have a few long-term holders left but today we have a very large gathering of our new shareholders and our fiduciary responsibility now runs to you.

A bit later on, one participant in the call introduces himself, and urges Lord to hold out for $60 per share:

Mr. Lord, members of the Sallie Mae board, I am hear on behalf of the Heyman Companies, holders of the Sallie Mae shares and derivative contracts, representing more than 30 million shares, constituting more than 7% of the company's outstanding equity...
to engage in discussions with Flowers with respect to his recent, clearly inadequate offer, valued by most market observers at little more than $51 per share, would be tantamount to negotiating with ourselves.

At the time of the call, Sallie Mae's stock had fallen back from that $58 high to just under $50 per share; it's probably safe to assume that Heyman built up his stake in the mid-$50s somewhere, paying something in the region of $1.6 billion for it. He clearly had no interest in selling at $51, which would probably have resulted in a loss for him.

Today, 30 million shares of Sallie Mae are worth about $550 million, which means that if Heyman held onto his stake, he's sitting on a billion-dollar loss. And one reader, who wishes not to be identified, tells me that Heyman has indeed held onto most if not all of his shares over that time.

Heyman would not be the only hedge fund manager to lose money on the Sallie Mae merger play, of course. Michael Price owned 315,000 shares at the end of September and told Bloomberg on December 13 that he had been buying even more in the previous couple of days. And in general I think it's fair to assume that a huge proportion of the Sallie Mae losses in recent months have been borne by merger arbs.

I suppose that's just as well: merger arbs and their hedge-fund-investor clients can presumably afford to lose more money than most other people. But it'll be interesting to see how the big event-driven hedge funds turn out to have performed over the past few months.

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