Edited by Douglas Harbrecht

THE TUG-0F-WAR OVER SALLIE MAE

For most of its 25-year history, the Student Loan Marketing Assn., which buys student loans from banks to hold in its own portfolio, operated largely in obscurity. But just as the $48 billion lending giant prepares to surrender its government charter and become wholly private, the company better known as Sallie Mae finds itself in the midst of a highly public proxy battle.

On one side, a band of Sallie Mae alumni, led by former Chief Operating Officer Albert L. Lord, is attempting to seize control of the company and put it on a far more aggressive growth path. On the other is the current management, led by Chief Executive Lawrence A. Hough, which favors staying the current course.

Whatever the outcome of the shareholder vote, slated for July 31, the company will be under new leadership: In June, as Hough sought votes for his slate of directors, he promised that if his side won, he would step down and help recruit a successor with more private-sector experience than either he or Lord possess. The decision, which he says was "poll tested" with key shareholders, was designed to guarantee support for a slate of directors who will ensure that the company follows Hough's strategy. But it was also a tacit acknowledgement that Hough had become a liability among large shareholders who blame him for the stock's poor performance for much of the '90s, though lately it has surged back to a record 145.

Hough upped the ante even more on July 21 when he announced that the company had coaxed legendary Vanguard Group fund manager John B. Neff out of retirement to join its proposed board. And in recent weeks, Hough has hinted to Wall Street that a further management shakeup might follow as well.

But Hough's salvo may have backfired -- leaving some large investors convinced that his departure only exacerbates what they perceive as a management vacuum at Sallie Mae. As a result, many Wall Street observers believe that Hough's resignation may have helped shift momentum toward Lord's dissidents in recent weeks -- who now appear on the brink of pulling off a surprising upset. "It looks to me like management is going to fall short," says David Drake, research director for Institutional Shareholder Services Inc., which advises fund managers on proxy issues.

On July 24, ISS delivered what may be the fatal blow to Hough's effort when it issued a report to its many institutional clients recommending they vote for the dissident slate -- a surprising turnabout from an earlier report backing management. Sallie Mae officials were stunned by the reversal, calling the ISS decision "unenlightened." Despite the blow, they maintain that they'll prevail. "There's a sense here this is still winnable, although it's gotten a lot harder," says one insider.

Lord's insurgents, though outspent by Sallie Mae's management, have the backing of many of the company's largest shareholders including Chancellor Capital, Capital Research & Management, Boston Partners, and the majority of Fidelity Management's various portfolio managers holding Sallie stock -- a group that controls a combined 39% of all shares. With that support, Lord's group shocked Wall Street at a special June meeting by winning support from the owners of 22 million shares -- roughly the same number garnered by management. With neither side able to muster a majority of the 53 million outstanding shares, the rivals agreed to settle the dispute at the July meeting, where the victor only needs a majority of the shares actually voted.

Whatever the outcome, Sallie Mae will come out of the proxy battle a different company. And that may be why investors are pushing stock higher already.

By Dean Foust in Washington