Can This Thrift's Rifts Be Mended?Joseph Weber
The showdown came at a board meeting on Nov. 23, 1993. Tired of a deadlocked board that had stymied his plans to sell Sovereign Bancorp Inc., Frederick J. Jaindl, the thrift's chairman and biggest shareholder, summoned directors to a surprise session. His grandfatherly demeanor gone, he whipped out resolutions to add a tie-breaking ninth director and hire an investment banker to arrange a deal. When the motions stalled, Jaindl stunned his colleagues by ruling that a "no" vote cast by his chief opponent on the merger issue, CEO Jay S. Sidhu, 43, was somehow invalid because he was an employee.
Sovereign's lawyers later nullified Jaindl's action. But nearly a year and a half later, Jaindl's failed coup still haunts the $6.8 billion thrift, based in Wyomissing, Pa. The thrift--at Sidhu's urging--later filed suit against Jaindl, 67, and two supporters on the board, alleging that they were in a "scheme" to sell the bank without full board consent. Jaindl countersued, alleging that Sidhu and his allies at Sovereign had "sabotaged" efforts to study a sale. They later dropped the suits as part of a cease-fire agreement, but Jaindl suddenly resigned on Apr. 24. In a letter to the board, he cited an "ineradicable sense of mistrust and hostility" at Sovereign.
Sovereign's saga crystallizes the contentious issues springing up as the banking industry shrinks. Bank managers' desire for independence is colliding with shareholders' quest for returns, especially at banks and thrifts like Sovereign--midsize institutions too small to survive and too big to be overlooked. In February, shareholders, including investor Michael Price, forced management at Michigan National Corp., with $10 billion in assets, to agree to sell the bank. In April, managers at Compass Bancshares in Birmingham, Ala., with $9 billion in assets, fended off a dissident shareholder's proxy fight to force a merger.
In Sovereign's case, Jaindl claims that Sidhu is afraid of losing his job, one that provided the CEO with $1.8 million in total compensation last year. That's more than CEOs earned at CoreStates Financial, First Fidelity Bancorporation, or PNC Bank--outfits said to be interested in Sovereign. Sidhu points out that his package includes $1.2 million in stock options that align his interests with those of stockholders. Sovereign's second-biggest stockholder, with a 2.9% stake, the CEO blames Jaindl's desire for a quick return for the turmoil. With 6.4% of Sovereign's shares, Jaindl's holdings are valued at $34 million. Sidhu insists he's not against a merger. He adds, however, that "as long as you can increase your earnings faster than those of a potential acquirer, then you can deliver a better value to shareholders."
HOT TICKET. Sovereign's fate may soon be decided. The cease-fire agreement, which also put off any sale discussion, expires on July 18. After peaking at over 11 a couple of years ago at the height of takeover speculation, Sovereign shares are down to about 91/2. But many analysts believe the savings bank is high on the shopping list of potential suitors. Sovereign is the biggest thrift in Pennsylvania, with 120 offices in lucrative Pennsylvania, New Jersey, and Delaware markets. "The race isn't over," vows Jaindl.
By most accounts, Sovereign has thrived under Sidhu's leadership. Born in New Delhi, Sidhu attended Wilkes University in Wilkes-Barre, Pa., where he got an MBA. He later worked for a couple of small banks, including Horizon Bancorp, now part of Chemical Bank. When he took over at Sovereign in 1989, he built the business by acquiring small banks. Last year, the bank's earnings climbed 30%, to $46.4 million.
Sidhu often sought Jaindl's advice. A rough-hewn turkey grower who lost his right hand in a farming accident years ago, Jaindl raises 1 million birds a year. He's also known as a shrewd real estate speculator who sells or develops chunks of his 11,000 Pennsylvania acres. And his list of powerful friends is long, including Pennsylvania Governor Tom Ridge and Maryland chicken mogul Frank Perdue.
Jaindl decided in early 1993 that the time to sell Sovereign was drawing near. Consolidation was rife. Banks such as PNC, CoreStates, and First Fidelity were hunting for game. Moreover, thanks to Sidhu's success, Sovereign's stock had soared from 11/2 at the end of 1990 to 63/8 at yearend 1992. That meant the value of Jaindl's investment had quadrupled, to $20.3 million--not including the premium his shares would likely fetch in a merger.
On June 1, 1993, Jaindl sent a memo to all directors, urging a sale. But Sidhu objected, saying shareholders would get a bigger reward if Sovereign survived and continued to expand. With Sidhu and Jaindl at loggerheads, each began lobbying directors for support. But the board split 4-4, and Jaindl was powerless to force a deal. Other big shareholders seemed divided on the issue and avoided the battle.
NO QUITTER. As the debate dragged on, Sovereign received a number of feelers. In October, 1993, First Fidelity sent a letter to Jaindl and the board, suggesting talks about a possible deal. And Jaindl claims that CoreStates suggested an offer in January, 1994, of about $19 a share, $7 more than Sovereign's stock price. Neither CoreStates nor Fidelity--now being acquired by First Union Corp. in Charlotte, N.C.--will comment. Sidhu confirms there were inquiries but insists he never received a firm offer.
After the failure of Jaindl's late-November push to add a ninth board member, warfare erupted at Sovereign. Sovereign filed suit in federal court in Philadelphia on Dec. 20, 1993, against the chairman and two board allies. In early January, 1994, Jaindl counterattacked, suing Sidhu and his allies. On Jan. 18, the parties agreed to avoid a court fight and dropped their suits. Sovereign picked up all legal bills, which wound up at more than $1 million. The two sides also agreed to add an independent ninth director--who later supported Sidhu--and suspended sale talks for at least 18 months.
In the meantime, Sidhu has pursued his strategy of acquiring other banks, with the support of the entire board, including Jaindl. In 1994, Sovereign snapped up three thrifts. Sidhu added three more institutions in 1995. But the recent acquisitions doubled the amount of goodwill Sovereign is carrying on its books, to $129 million, by Mar. 31 of this year. That, in turn, lowered Sovereign's capital. The ratio of tangible equity to assets fell from 3.75% at the end of 1994 to 2.74% by Mar. 31. Sovereign sold $100 million worth of convertible preferred stock in May to shore up its capital base. "There's never been a capital problem," says Sidhu, who plans more acquisitions.
By spring of this year, Jaindl had had enough. He resigned just four days after being reelected at the annual meeting. Jaindl says he was frustrated, claiming Sidhu wasn't disclosing proposals he may have been receiving from other banks. "Jay would keep all these things to himself," says Jaindl. Sidhu insists he never kept anything from the board.
Few directors expect Jaindl to sit idly by after the standstill agreement expires in July. He may not be able to get the kind of lucrative deal available in 1993. Suitors are more frugal these days. But Jaindl isn't a quitter. Sidhu may have triumphed in the first battle. The war at Sovereign rages on.
SOVEREIGN'S BOARDROOM SAGA
The sale issue lingers, but the bloom is off: Some say prices for savings banks peaked in '93
JUNE, 1993 In the midst of bank consolidation, Chairman Frederick Jaindl tells CEO Jay Sidhu he wants the company sold in six months. Sidhu argues for independence, and the eight-member board splits down the middle.
OCTOBER, 1993 First Fidelity sends a letter to Jaindl and board suggesting a potential purchase. The inquiry is not pursued, Jaindl says. Sidhu says he never received a firm offer.
NOVEMBER, 1993 Jaindl calls a meeting to add a tie-breaking ninth director and to hire an investment banker. Board splits 4-4. Jaindl invalidates Sidhu's vote, a move later disallowed by company lawyers.
DEC. 20, 1993 Jaindl and others are sued by Sovereign, which accuses them of seeking to force a sale of the bank. Jaindl files a counterclaim, charging that Sidhu didn't consider all options available to Sovereign.
JAN. 18, 1994 The two sides settle suits, agreeing to stop hostilities and halt any talk of merger for 18 months. As part of the terms, a ninth director is added, and the bank pays more than $1 million in legal costs for both parties.
APR. 24, 1995 Jaindl quits, citing an "ineradicable sense of mistrust and hostility" in his letter to board. He also expresses concern about Sovereign's weaker capital base after recent acquisitions.
JULY 18, 1995 Memo of understanding freezing hostilities is due to expire, freeing Jaindl to press for a sale or other changes at the bank.