Boardroom Survivor
Behind Sovereign's Growth:
A Chief Who Plays Hardball
Tough Tactics to Take On
Bank's Largest Shareholder
Staff Reporters of THE WALL STREET JOURNAL
November 25, 2005; Page A1
For 16 years as Sovereign Bancorp's chief executive, Jay S. Sidhu has used savvy deal-making and boardroom hardball to transform a troubled Pennsylvania savings and loan into a major regional bank with branches from New Hampshire to Maryland.
He engineered 27 acquisitions that helped Sovereign's stock outpace most of its competitors' over the past decade. And Mr. Sidhu, an émigré from India who began as an outsider in Pennsylvania's insular banking world, has become a national force in community banking by repeatedly triumphing over rebellious directors and shareholders.
Now, the 54-year-old banker has prevailed in the first round of the biggest fight of his career.
![[Sidhu]](http://online.wsj.com/public/resources/images/HC-GG987_Sidhu_Jay11242005221610.gif)
The bank's largest shareholder, San Diego-based money manager Relational Investors LLC, launched a proxy fight in October seeking shareholder support to win two board seats. It said it acted after concluding Mr. Sidhu wouldn't address complaints that the stock had underperformed recently. Days later, Mr. Sidhu unveiled his biggest deal yet: Sovereign announced it would buy Independence Community Bank Corp. of Brooklyn, N.Y., for $3.6 billion, and would finance the purchase by selling 19.8% of itself for $2.4 billion to Spain's top bank, Banco Santander Central Hispano SA.
The deals were structured in ways that diluted the voting power of Relational and other existing investors, that made it difficult to fire Mr. Sidhu and that appeared to make it unnecessary for Sovereign to seek shareholder approval. That sparked a broader revolt. Backed by other big shareholders and corporate-governance watchdogs, Relational petitioned the New York Stock Exchange to force a vote on the sale to Santander, which likely would have sunk both deals.
On Tuesday, the NYSE agreed the sale could proceed without a vote. But the exchange forced the two banks to alter terms of the deals, removing job-protection provisions for Mr. Sidhu. He remains vulnerable in the proxy fight by Relational, which also may appeal the NYSE's decision to the Securities and Exchange Commission. And investors were unhappy: Sovereign's stock price dropped 2.2% to $22.17 on the Big Board on Wednesday. (See related article1.)
As with Mr. Sidhu's past shareholder scuffles, this one is rooted partly in his management style. Big shareholders, including Relational and Franklin Mutual Advisers LLC, describe him as autocratic. People familiar with the board say Mr. Sidhu has excluded directors from important deal deliberations or waits until the last minute to brief them. Some investors say his public statements about acquisition plans are misleading. Today, Mr. Sidhu has a board of supportive directors who have scant banking experience, are compensated unusually well and, in some cases, enjoy access to Sovereign loans and business opportunities.
• NYSE Won't Require Vote on Sovereign Deal3
11/23/05
A Sovereign spokesman said in a statement, "The board is continuously apprised of all major acquisition developments in a very timely and prudent manner." In an interview earlier this month, Mr. Sidhu described the pending deals as a "very good deal for shareholders" that would secure Sovereign's long-term future in a competitive banking market. He denied structuring them to avoid a shareholder vote or to thwart Relational and defended Sovereign's board as independent. After that interview, Mr. Sidhu declined to comment further.
The son of an Indian army colonel, Mr. Sidhu was raised in New Delhi in a middle-class family. He arrived in Pennsylvania's Pocono mountains in the 1970s with a scholarship to attend what is now called Wilkes University. Mr. Sidhu worked at several banks including one based in New Jersey. He said he decided to leave that bank in 1979 after being told that his Indian accent would deter his career, he told the Reading Eagle newspaper last year. He returned to India for an arranged marriage, and today has two children.
Associates say Mr. Sidhu sometimes becomes agitated by opposing viewpoints. "He will make statements that I believe he sometimes later regrets," says stock analyst James Ackor of RBC Capital Markets, who follows Sovereign and occasionally golfs with Mr. Sidhu. "He is passionate about building a best-in-class company [but] gets overly excited and fired up when challenges come from shareholders."
His career took a crucial turn when Independence Bancorp in Perkasie, Pa., hired him, and he became a protégé of its president, Paul Wieand. Mr. Sidhu followed Mr. Wieand to a savings and loan, Penn Savings Bank near Reading, that later became Sovereign.
At the time, the entire savings-and-loan industry -- Penn Savings included -- was in crisis over bad commercial real-estate loans and interest-rate risks. The banking industry, meanwhile, was going through major changes. Regulators and lawmakers began allowing mergers that crossed state borders and encouraging competition from financial firms outside the banking industry. A wave of consolidation ensued, leading to the rise of huge national banks. Small banks had two options: buy or be bought.
After becoming chief executive in 1989, Mr. Sidhu in the 1990s went on a deal-making tear, acquiring thrifts, banks and branches at a rate of at least one a year, and sometimes up to four. "He was at his best making a deal," says former Sovereign director Samuel Willard Jr.
In 1993, he had his first shareholder clash. Pennsylvania landowner and turkey farmer Frederick Jaindl, whose birds are regularly served at White House Thanksgiving dinners, controlled about 20% of Sovereign's stock and for years had been calling for the bank's sale. Half of Sovereign's directors backed Mr. Jaindl, then chairman; the others supported Mr. Sidhu, who opposed a sale.
The two sides traded lawsuits, then dropped them. By late 1995, Mr. Jaindl and several allies had left the board. At the time, the view of Mr. Jaindl, now deceased, was, "The hell with it. I've had enough," according to Mr. Willard. "Jay was strong enough to emerge as the whole show," Mr. Willard says.
Investors Fret
In 1999, Mr. Sidhu agreed to pay $1.4 billion for nearly 300 branches that were divested after the merger of Fleet Financial Group Inc. and BankBoston Corp. Though controversial, the deal didn't require shareholder approval because it involved branches, not a whole company. Sovereign's stock plummeted as investors fretted over the resulting heavy debt and Sovereign's reduced capital levels.
That prompted another showdown, this time with Mr. Sidhu's old mentor, Mr. Wieand, who had joined the board of Sovereign's banking unit in 1996. "The bank board seemed to me to be excluded from critical dialogue regarding the Fleet Bank Boston acquisition," Mr. Wieand wrote fellow directors in January 2001.
Rhoda Oberholtzer, who left the board later in 2001, says directors were free to dissent and ask tough questions. In the end, the board supported Mr. Sidhu, and Mr. Wieand quit soon thereafter. A Sovereign spokesman declined to comment on any internal board matters.
In April 2002, when Sovereign's chairman retired, Mr. Sidhu assumed the role. That ascension reduced the number of directors to six, significantly fewer than many of Sovereign's regional peers.
Today, Sovereign is ranked among the nation's 25 largest banks by market value. With headquarters in Philadelphia and its main bank offices in the Reading suburb of Wyomissing, Sovereign has $63 billion in assets and 731 offices. Between October 1995 and October 2005, the return on its stock, including dividends, was 257%, compared with 225% for the Standard & Poor's bank index during that period.
Relational says Sovereign's board lacks outside directors who might be inclined to challenge Mr. Sidhu. Aside from Mr. Sidhu on the parent company board, only Andrew Hove Jr., a former Federal Deposit Insurance Corp. acting chairman, has any experience working at a bank.
Sovereign directors used to receive as much as $313,127 each a year, including bonuses tied to management's board-approved bonuses, Relational estimates. That's about $100,000 more than what directors at Citigroup Inc., the world's largest bank, receive. Following pressure from Relational, Sovereign in August lowered directors' pay to between $142,000 and $182,000. While that's more than directors at similar banks get, Sovereign justifies the pay by noting that its directors meet 14 times a year, five more times than its peer average.
Directors' Independence
Sovereign has had business dealings with and made increasing loans to its directors in recent years. Loans and credit lines to Sovereign directors and executives have risen to $94.1 million this year, from $4.7 million six years ago, records show.
Governance experts say such financial dealings can compromise directors' independence. Sovereign responded in an SEC filing on Monday that the loans and business dealings were minimal. Like other banks, the filing said, Sovereign "encourages its nonmanagement directors to maintain their personal and commercial banking business with [Sovereign] rather than with a competitor."
"We have no loans to any directors at favorable terms, no loans that are not compliant with federal regulations," Mr. Sidhu said earlier this month, adding the bank's directors adhere to the "highest possible ethical standards."
The bank pays a company owned by lead director Daniel K. Rothermel, a Reading lawyer, for lawn care at its properties. The Monday filing said payments to Mr. Rothermel's firm since 2002 are expected to total $17,400 by year's end. "We spend more on lunches and dinner," said Mr. Sidhu. Mr. Rothermel didn't return calls.
Sovereign rents office space from a real-estate firm owned by director Cameron C. Troilo Sr., the compensation committee's chairman. In the Monday filing, the bank said payments to the company are expected to total $487,454 this year. Sovereign added that the Troilo leases all have been at market rates. Mr. Troilo didn't return calls.
In late 1999, the bank loaned $3.5 million to Mr. Troilo so he could buy a Lawrenceville, N.J., bank building from Sovereign for $2.8 million, upgrade it, and lease some of it back to the bank. To help secure the loan, Mr. Troilo used another Sovereign-mortgaged property, in Pennsylvania, that he also rented to the bank. Sovereign rejected a competing investor group's offer of just over $3 million. The Monday filing said Mr. Troilo's bid was better because it included "no financing, inspection or due diligence" conditions.
Relational, which currently owns 7.4% of Sovereign, specializes in buying big stakes in underperforming companies and advocating for change. Headed by Ralph Whitworth, a protégé of corporate raider Boone Pickens, it began buying Sovereign shares in 2002.
Since then, Mr. Sidhu's comments about Sovereign's acquisition intentions have irked Mr. Whitworth and other investors. At a March 2003 conference, for example, Mr. Sidhu said: "You should not expect us to do any material acquisitions." People who thought otherwise, he added, were "totally misinformed." About three months later, Sovereign agreed to pay $400 million for First Essex Bancorp of Andover, Mass. In the fall of 2003, he again told investors not to expect any material acquisitions. In January 2004, the bank agreed to pay $1.1 billion for Seacoast Financial Services Corp. of New Bedford, Mass.
Sovereign "has routinely gone out and said one thing and done another," said Robert H. Hughes, a bank analyst at Keefe, Bruyette & Woods, echoing comments by other analysts. The company says Mr. Sidhu's pronouncements were accurate because the acquisitions weren't material.
By the fall of 2004, Sovereign's shares were still trading at a discount to the bank's peers, Mr. Whitworth says. In October of that year, Mr. Whitworth told Mr. Sidhu the board was conflicted and lax and demanded a board seat for himself, Mr. Whitworth recalls. Mr. Sidhu declined. This spring, Sovereign named a new director, Marian Heard, a former United Way executive. Mr. Whitworth wasn't mollified.
He met with the directors in May. He recalls noting that Ms. Heard was being paid less than other directors. "You all have the same duties," he says he told them. "So why is it that you pay yourselves $300,000 a year and you pay Ms. Heard $65,000?" He says Ms. Heard seemed surprised to hear that. Sovereign since has equalized directors' pay. Ms. Heard didn't return calls.
Relational announced its intention to seek two Sovereign board seats and formally launched its proxy fight on Oct. 20. On Oct. 24, Mr. Sidhu unveiled the Independence and Santander deals. He indicated to investors that he had been talking to Independence's CEO since the summer. Some investors, including Relational and Franklin Mutual, an adviser to funds that own nearly 5% of the stock, were surprised and angry. Weeks earlier, Mr. Sidhu had suggested no big deals were in the works. Sovereign says Mr. Sidhu's discussions over the summer with Independence's CEO were mainly social, but included talk of potential acquisitions "sometime in the future."
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com4, Jesse Eisinger at jesse.eisinger@wsj.com5 and Clint Riley at clint.riley@wsj.com6
1 comment:
Why has Sidhu moved heaven and earth to deprive the stocholders of their voting rights.
Each move he makes seems to make one more suspicious.
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