Sallie Mae 2009 Annual Report Download - page 169

6. Goodwill and Acquired Intangible Assets (Continued)
income approach is a better measure of the value of its reporting units in the current environment. During the
latter half of 2008 and during 2009, the Company experienced a trend of lower and very volatile market
capitalization. During 2009, the Company’s stock price fluctuated significantly from a low of $3.19 in March
2009 subsequent to the Administration’s 2010 budget proposal which would eliminate the FFELP and require
all federally funded students loans to be originated through the DSLP, to a high of $12.00 in December 2009.
At September 30 and December 31, 2009, the Company’s stock price was $8.72 and $11.27, respectively.
Based on these share prices as of September 30 and December 31, alone, the market capitalization of the
Company was greater than the carrying value of the reporting units. The Company believes the share price has
been significantly reduced due to the continued downturn in the credit and economic environment as well as
uncertainties surrounding the ongoing legislative process. Management believes these economic factors should
not have a long-term impact. In addition, the Company will review and revise, potentially significantly, its
business model based on the final form of legislation upon completion of the legislative process.
The following table illustrates the book basis of equity for each reporting unit and the estimated fair
value determined in conjunction with Step 1 impairment testing as of September 30, 2009.
Book Basis
of Equity
Fair Value
of Equity $ Difference % Difference
(Dollars in millions)
Lending .............................. $1,474 $3,270 $1,796 122%
APG ................................ 1,390 1,690 300 22
Guarantor Servicing ..................... 142 221 79 56
Upromise ............................. 297 430 133 45
The estimated fair value of the Company resulting from its step 1 impairment test was 41 percent higher
than its market capitalization. The Company views this as a reasonable “control premium.” As discussed
above, the Company’s stock price was at $12.00 per share during December 2009, which by itself results in a
market capitalization that is greater than the carrying value of the reporting units which results in no
impairment. Management reviewed and approved the valuation prepared by the appraisal firm for each
reporting unit, including the valuation methods employed and the key assumptions used, such as the discount
rates, growth rates and control premiums, as applicable, for each reporting unit. Management also performed
stress tests of key assumptions using a range of discount rates and growth rates, as applicable. Based on the
valuations performed in conjunction with Step 1 impairment testing and these stress tests, there was no
indicated impairment for any reporting units at September 30, 2009.
Management acknowledges that the economic slowdown could adversely affect the operating results of
the Company’s reporting units. In addition, the decrease in the market price of the Company’s common stock
resulting from the market turbulence and uncertainty surrounding the ongoing legislative process has reduced
its total market capitalization. Both of these factors adversely affect the fair value of the Company’s reporting
units. If the forecasted performance of the Company’s reporting units is not achieved, or if the Company’s
stock price remains at a depressed level or declines further resulting in continued deterioration in the
Company’s total market capitalization, and depending on the final form of legislation, if any, the fair value of
one or more of the reporting units could be significantly reduced, and the Company may be required to record
a charge, which could be material, for an impairment of goodwill. Management believes that the turbulence in
the stock market and uncertainties surrounding the legislative process has resulted in a market price for the
Company’s common stock that is not indicative of the true value of the Company’s reporting units.
In addition, if SAFRA or the Community Proposal are passed, certain revenue streams in the Lending
and APG reporting units and the entire revenue stream of the Guarantor Servicing reporting unit will wind
F-42
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)