Thursday, October 12, 2006

Sovereign Bancorp CEO Doesn’t Deliver the Goods (but Walks Away with Them)

Last evening, financial services company Sovereign Bancorp Inc (SOV-$24.31) said that longtime President and Chief Executive Officer Jay Sidhu resigned (and retired) over “family and health-related issues.”

And Jesus said " shall know the truth, and the truth shall make you free." [John 8:32]

The truth is that family played no role with Sidhu’s decision. The Board and major shareholders pressured Sidhu to resign amid concerns over the Company’s deteriorating fundamentals, coupled with the fact that Sidhu had failed to follow through on prior promises to boost the valuation of the banking company. According to a California Public Employees’ Retirement System PX14A6G filing with the SEC (on September 8, 2006), Sovereign’s three-year stock performance had under-performed both the S&P 500 and S&P 500 Bank Index by more than 20 percent.

Nevertheless, the Board and the Company thanked “Jay for his outstanding service to Sovereign over a long and distinguished career.”

In a research note filed Wednesday morning, Richard Weiss of Janney Montgomery Scott upped his rating to a “buy,” citing the resignation of Sidhu as a positive for shareholders, “as it greatly increased the probability of a sale to another institution and lowered the odds of Sovereign acquiring yet another company."

Paul A Samuelson, a Nobel laureate in Economics (1970), said: “Wall Street indices (have) predicted nine out of the last five recessions!” Ask two equity analysts for their thinking on a stock and you’ll get three opinions—buy, sell, and hold.

Alternatively, Salvatore DiMartino, a banking analyst at Bear Stearns & Co: Company, thought it “unlikely that (Sovereign) would be sold in the near term given weakening fundamentals, increased competition from larger banks, and the lack of buyers. Maintaining peer performance" [which means if banking valuations increase, up goes the stock price of Sovereign—and if the valuations of bank stocks decline, so, too, will the price of Sovereign’s Common Stock].

Citigroup cut Sovereign to "sell" from "hold," and lowered its price target by a dollar to $23. The brokerage in a research note said it lowered its rating because “Sovereign shares are overvalued in the absence of a takeover.”

Amidst all this dubiety, the only certainty is Mr. Sidhu's severance package, which entitles him to benefits of approximately $13 million (which excludes an additional $37.4 million in exercisable stock options).

“Markets can remain irrational longer than you can remain solvent."John Maynard Keynes

Editor David J Phillips does not own any of the stocks mentioned in this article. You can see his portfolio holdings in the sidebar. The 10Q Detective has a full disclosure policy.

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