612 Part IV • The Information Management System
had a $50 billion portfolio of student loans and was the
largest funding source and servicer for student loans in
the United States. The company’s primary role was to
purchase student loans from banks and other lenders,
creating a secondary market and freeing up funds for the
institutions to lend out money to other borrowers.
Albert L. Lord, Sallie Mae’s CEO, had been a major
catalyst in transforming the company from a GSE to a pub-
licly held business. In the early 1990s he helped streamline
the company’s operations, but then left the company in 1993
when the board opposed his plans for restructuring the com-
pany. Two years later, he led a dissident slate of eight direc-
tors that was elected to the 21-member board and was able
successfully to launch a plan to reposition the company
from a buyer of loans to a competitive lender to students.^4
As CEO since 1997, Lord began phasing out the
company’s government-sponsored status, despite some
internal opposition.^5 Lord also switched its marketing
focus to get closer to the customer. Rather than working
solely with banks and financial institutions, the company
began marketing to students through the schools. At the
time of the merger announcement in June 2000, Sallie Mae
was a $14 billion public firm.
USA Group was originally founded in 1960 as USA
Funds, a not-for-profit company based in the Indianapolis,
Indiana, area. At the time of the merger, USA Group had a
$16 billion portfolio of student loans, was the largest
guarantor of student loans in the United States, and had
been aggressively growing its fee-based businesses of loan
origination and default collection. In 1999, the company
had an excess of $150 million in revenues over expenses,
and employed 3,000 people, across 20 states, the District
of Columbia, and Canada.
Laying the Groundwork for the Merger
As Sallie Mae entered the new millennium, its executive
team was concerned that the company could not maintain
its double-digit growth in 2004 and beyond if it did not
expand its servicing role. At the same time, USA Group’s
executive team was seeking a buyer to gain access to the
capital it needed to take advantage of market opportunities
to grow the company’s private loans and for-profit collec-
tions businesses. USA Group became an acquisition target
for Sallie Mae for three primary reasons:
1.Its complementary student loan services would
result in Sallie Mae having a role in the entire lifecycle of the student loan, from origination to default
collection.
2.Economies of scale from combining operations
would allow Sallie Mae to continue being profitable
in the face of narrowing margins.
3.Sallie Mae leaders could leverage the information
technology and marketing prowess of USA Group to
grow revenues.Prior to nailing down the final offer, Sallie Mae sent
a team of four IT leaders to Indianapolis in May 2000 to
conduct due diligence for the merger. The goals of the visit
were to validate the information about the company that
had been received and to report back to the CEO about any
previously unforeseen issues that could materially impact
the purchase offer.My colleagues and I were pretty impressed with
what USA Group was doing from a technical stand-
point. Their approach was thoughtful, strategic, and
focused. We were impressed with their ability to
make progress on strategic activities... and they
had executed very effectively.... They were a good
step ahead of us in the rollout and deployment of
automated call-center technologies as well as tools
to manage their hardware and software assets. We
had languished behind and couldn’t get focused on
newer technologies. I believe this was due in part to
a period of several changes in IT management in the
previous years, making it difficult to focus on long-
term projects. In contrast, the USA Group manage-
ment team was very stable and had worked together
for a long time.
—Cindy Gunn, Vice President of Computer
Operations for Sallie MaeThe New Merged Company
USA Group was acquired by Sallie Mae for $770 million
on July 31, 2000. The new Sallie Mae became a single
source of service for customers—from the point of loan
application to successful repayment (see Exhibit 1).
The immediate financial goals for the merger were to
reduce headcount by 1,700 (25 percent) and to reduce
costs by 40 percent. Due to significant redundancies across
the two companies, nine customer service centers would
be reduced to six, and four data centers would be consoli-
dated into one. In addition to successfully achieving
its cost reduction goals for the merger, the combined com-
pany sought to attain double-digit growth in its business as
a result of the merger.(^4) Investor’s Business Daily(Los Angeles, CA), July 11, 2001,
“Sallie Mae’s Albert Lord: Hard Work Helped Him Repair Lender.”
(^5) The privatization process is scheduled to be completed in 2006.