The First Marblehead Corporation

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The First Marblehead Corporation

COMPANY FOUNDED: 1991

INITIAL PUBLIC OFFERING: 2003

RESIGNATION OF MEYERS: 2006

COMPANY FOUNDED: 1991

While First Marblehead was cofounded in 1991 by Daniel Maxwell Meyers and Stephen E. Anbinder, credit for the idea goes to Meyers. He grew up in Marblehead, Massachusetts, where he developed a profound respect for the value of education. His father, Newton Meyers, earned a degree from Brown University at the age of 18, the result of high test scores and a Navy program that was implemented during World War II. After completing his military service, the elder Meyers used the GI Bill to finance a degree from Harvard Business School. He was so enamored with education that on vacations the Meyers family often visited college campuses. When Newton Meyers died, Daniel’s mother pursued her own college education, this despite being the daughter of first-generation Russian immigrants who were opposed to higher education for women. Nevertheless, she graduated from Salem State College in 1952 and then supported her four children, all of whom became college graduates.

Daniel Meyers received a degree in economics from Brandeis University in 1984. He then went to work on Wall Street, starting out in the mail room at E.F. Hutton, where one of the firm’s traders took him under his wing and taught Meyers the basics of arbitrage and derivatives. Meyers proved to be a quick learner and a talented trader, who moved on to work at Prudential Bache Securities, L.F. Rothschild Unterberg Towbin, and Commodities Corporation. Later in the 1980s he became involved in asset-backed securities. This experience led him to wonder if there was a way to provide private college loans at reasonable interest rates through the securities market.

To flesh out the idea, Meyers took on a partner, a fellow trader named Stephen E. Anbinder, about 20 years his senior. A Harvard Business School graduate, Anbinder had spent a decade heading the fixed income capital markets group at Dillon Read & Company, a securities brokerage firm. In 1990 Meyers and Anbinder conferred with economist David Breneman, a Harvard professor who was an expert on the economics of higher education. “When Dan described his vision to me, I realized that this was a serious and valuable idea,” Breneman told UVA TopNews Daily. “What impressed me most was his drive to help young people enter and complete college.”

With Breneman serving on the company’s advisory board and providing access to key people, Meyers and Anbinder launched First Marblehead in 1991 as a limited partnership. In August 1994 it was incorporated in Delaware. For the first ten years the company served individual colleges, raising money on Wall Street to provide a supplemental pool of loan money. The company reached a major turning point in June 2001 when it forged a strategic alliance with The Education Resources Institute (TERI), a Boston-based nonprofit company founded in 1985 to provide education financing and information services. At the cost of $9.2 million First Marblehead acquired TERI’s loan processing operations, forming the basis of a new subsidiary, First Marblehead Education Resources, which retained about 160 TERI employees. As part of the alliance, the unit continued to provide the loan origination and processing services related to TERI Education Loans as part of a master servicing agreement. More importantly, First Marblehead possessed the capabilities to service other lenders, in particular banks.

With the TERI assets in hand, First Marblehead was able to accelerate its growth. After posting revenues of $6.7 million and net income of $2 million in fiscal 2001, the company saw revenues soar to more than $41.3 million in 2002, yielding earnings of more than $12.2 million. Processing fees for TERI alone accounted for $14.2 million, structural advisory fees all but tripled to $14.8 million, while residuals increased from $1.1 million to $11.8 million. The company’s administrative and other fees also increased by about a third to $475,000. The sharp growth continued in 2003, when processing fees from TERI increased to $20.6 million, administrative and other fees enjoyed threefold growth to $1.4 million, as did residuals to $30 million, and structural advisory fees improved to $39.3 million. Total revenues for the year reached $91.4 million and net income was an impressive $31.5 million.

INITIAL PUBLIC OFFERING: 2003

A few months after the close of fiscal 2003, First Marblehead went public. With Goldman Sachs & Co., J.P. Morgan Securities Inc., and Bear, Stearns & Co. Inc. serving as managing underwriters, the initial public offering of stock was conducted on October 31, 2003, and netted approximately $115.1 million for the company. A follow-on public offering of shares held by stockholders was conducted eight months later, but none of these proceeds went to the company.

COMPANY PERSPECTIVES

First Marblehead is an industry leader in providing services for private, non-governmental, education lending in the United States.

First Marblehead continued to enjoy rapid growth in fiscal 2004, as it helped lend $1.8 billion to 200,000 students. As a result, its balance sheet showed sizable increases in all areas, especially structural advisory fees, which grew from $39.3 million to $98.2 million. All told, first Marblehead more than doubled total revenues to $199.3 million while posting net income of $75.3 million. Important factors in the company’s strong performance were an increase in the number of people entering the traditional college age group, and rising tuition costs that far outpaced the amount of public loan funds that were available, forcing people to turn to private funding sources. First Marblehead was well positioned to take advantage of this situation because it was one of the few companies that could offer a full range of outsourcing services to lenders for private student loans. There was some concern among investors, however, that a large bank might grow interested in offering the same profitable services. First Marblehead hoped that banks remained more interested in focusing on the extremely lucrative federally guaranteed loan business and in converting those college-age borrowers into long-term customers. Moreover, the cost and bother of duplicating First Marblehead’s operation would, it was hoped, serve as a deterrent to those considering entering the field.

Investors took notice of First Marblehead’s stellar performance, bidding up the price of its stock, which in a matter of six months doubled its initial $16 price. The company continued to ride high in 2005. It found a new partner in FindTuition.com, part of CareerBuilder Inc., which offered financial aid research information to three million students. The web site began to market loans of a First Marblehead partner, Charter One Bank, and First Marblehead provided back-office support. For fiscal 2005 revenues increased to $418 million and net income approached an impressive $160 million. The company’s stock price also topped $73 during the year.

RESIGNATION OF MEYERS: 2006

Fiscal 2006 proved troublesome, however. A major client, CFSI, announced that it planned to take in-house the services it had outsourced to First Marblehead. There was also concern that student-loan giant SLM Corp., “Sallie Mae,” was going to encroach on the company’s business. Then, in September 2006, Meyers abruptly resigned when it became known that he had exchanged gifts worth $32,000 with an employee of an important client. Although Meyers maintained that the gifts were purchased with his own money, the board concluded that his conduct had violated the firm’s ethics policy. Soon the Wall Street Journal reported that Meyers had exchanged gifts, which included an expensive watch, with Kathy Cannon, a senior executive in Bank of America Corp.’s student-lending division, First Marblehead’s second largest client.

Selected to replace Meyers was First Marblehead’s president and chief operating officer, Jack L. Kopnisky, who had only recently joined the company. However, the loss of its longtime CEO was a major blow to the company. “Meyers was the heart and soul of this company,” industry analyst Matt Snowling told the Boston Herald. “He was the one, out there for years knocking on doors at schools and banks, building the business … he’s well-known in the educational community.” By early October 2005, the price of First Marblehead shares slipped to $21. The price rebounded only to take another fall a month later when Bank of America announced it would not renew its contract with First Marblehead under the current terms. The two sides finally came to an accommodation a few months later, news that helped to buoy the price of First Marblehead stock. The situation improved even further when GE Consumer Finance decided to use the company to help it market a full suite of private student loans services under the GE Money banner, including financing programs for K–12 and continuing education programs in addition to undergraduate and graduate school.

Despite the turbulence, First Marblehead again produced strong results when 2006 came to a close. Revenues increased to $563.6 million and net income continued to climb to nearly $236 million. Shortly after the year ended, First Marblehead announced that it was seeking regulatory approval to acquire the $40 million asset, one branch Union Federal Savings Bank of North Providence, Rhode Island, which provided deposit and loan services to retail customers in the state. The deal was completed in November 2006. First Marblehead indicated that it planned to have Union Federal fund loans originated under its Astrive brand, but it was uncertain what further purpose there might be in owning a bank. Union Federal might simply serve as nothing more than a research-and-development lab, but, according to American Banker, it held “the potential to build a portfolio of loans; to fund loans for new partners not able to do so themselves; or to provide such partners with lines of credit to make their own loans.” While the move offered long-range flexibility, it also created short-term risk, as some of First Marblehead’s clients might chaff at the possibility of the firm offering direct competition.

KEY DATES

1991:: Company is formed as a limited partnership.
1994:: Company incorporates in Delaware.
2001:: Loan processing services of The Education Resources Institute are acquired.
2003:: Company goes public.
2005:: Cofounder Daniel Meyers resigns.

While First Marblehead was busy acquiring a bank, it also took steps to diversify its client base in fiscal 2007. It expanded its relationship with the College Board, and also signed deals with KeyCorp, Ensure Bank, Monster.com, E-Loan, and ConnectEdu, a web site for high school students. Through the first six months of fiscal 2007, First Marblehead turned in outstanding results, recording an increase in revenues from $268.4 million to $500.7 million over the comparable period in fiscal 2006, while net income grew from $105.9 million to $222.2 million. Nevertheless, investors who had renewed their faith in the company after Meyers’ departure became faint of heart again, as First Marblehead shares lost a fifth of their value in the early weeks of calendar 2007. “The most obvious worry,” according to the Wall Street Journal, was “new federal legislation that could boost government’s student-loan program and take business away from the private-loan sector that First Marblehead services.” There was also concern that the loans First Marblehead arranged were being paid off faster than expected, a situation that would ultimately hurt earnings. Kopnisky suggested, however, that investors were behaving “very myopically,” and overreacting to short-term events. Because the private-loan market was continuing to grow at a fast clip, he said he did not foresee a drop in overall demand for private loans or the services First Marblehead had to offer.

Ed Dinger

PRINCIPAL SUBSIDIARIES

First Marblehead Data Services, Inc.; First Marblehead Education Resources, Inc.; TERI Marketing Services, Inc.; First Marblehead Securities Corporation; GATE Holdings, Inc.