Sovereign Deposes Its Sovereign

While the markets reacted favorably to last Wednesday's news that longtime Sovereign (NYSE: SOV) CEO Jay Sidhu was resigning rather than face an ouster by the company's board of directors, the $11 billion bank resorted to a bit of subterfuge to complete the detail and mask the details.

It seems that every executive who is forced out of a company by unpleasant business is said to be leaving for "personal reasons," "to spend more time with family," "for health reasons," or similar explanations. Sidhu and Sovereign chose the "health reasons" excuse, though just two days later, the bank admitted in an SEC filing filed after the market's close that "(t)he resignation and retirement came in the face of a threatened termination." I mean, why bother with the ruse to begin with?

Yet it's going to be costly for the bank to get rid of its ruler. That same filing shows Sidhu will walk away with some $44 million in princely pay and benefits, since the separation was determined to be "without cause." Thus he'll receive $10.5 million as part of his employment agreement; $22.4 million from his retirement plans; $9 million in accelerated equity awards; a one-time $1 million bonus for resigning; and a continuation of his life, disability, and medical insurance for five years.

Interestingly, the bank -- which was going to terminate Sidhu anyway -- is also going to pay him $40,000 a month for three years for "consulting services," and director's fees until the end of the year. That's a cool $1.4 million handout for something the board will undoubtedly not take him up on. He also keeps the nearly 3 million shares of stock he owns, worth about $70 million, along with an additional $6 million worth owned through family members and retirement accounts. Yet the deposed monarch did give up 26,686 shares of restricted stock worth about $650,000. Somehow I think he'll manage to scrape by.

By all accounts, Jay Sidhu ruled as any emperor would: with impunity and disregard for the lowly shareholder. Despite having grown Sovereign from a small savings-and-loan to the third-largest thrift, with 800 branches in the Northeast, his rule became more dictatorial as it continued. Shareholders had wanted the company to buy back its shares, not do more acquisitions. Instead, Sidhu completed a deal with Spain's Banco Santander Central Hispano, giving it a 25% ownership position in Sovereign, and used the proceeds to buy a New York-based community bank. He structured the deals so that they did not require shareholder approval, which upset large stakeholders like Relational Investors, a San Diego-based asset management firm which has been agitating for change for awhile because of lackluster stock performance, and Franklin Mutual Advisors, a division of Franklin Resources (NYSE: BEN).

To complete the Santander deal, Sidhu had to use some ruses of his own. He sold to Santander a combination of new shares and treasury shares (stock already bought back by the company). Since the NYSE doesn't count treasury shares, the deal didn't violate the exchange's rule requiring shareholder approval of transactions resulting in the issuance of more than 20% of outstanding shares.

Does the overthrow heighten the chances of Sovereign being taken over? Could be. Rumors immediately surfaced that Santander would move to acquire the remaining 75% of the shares it doesn't own. As part of the deal, the Spanish bank can move to acquire Sovereign at $40 a stub after two years, but nothing would prohibit it from moving sooner. Santander quashed such rumors the other day, but perhaps someone else -- maybe Wachovia (NYSE: WB), with a large presence already in the Northeast -- would find Sovereign to be a complement to its branches.

The king is dead. Long live the king!

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• Rumblings in Sovereign's Kingdom

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.