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The State Joins Foes of a Controversial Bank Deal

Investment chief Orin Kramer weighs in against a three-way Sovereign transactionTrenton-The furor over Sovereign Bancorp’s plan to sell a $2.4 billion chunk of its stock to Spain’s largest bank and use the proceeds to acquire a bank in Brooklyn, New York, keeps growing hotter. Those weighing in against the deal include Orin S. Kramer, the chairman of the New Jersey Investment Council, who blasted the proposal two weeks ago in a letter to the New York Stock Exchange.

Kramer added his voice to opponents of the deal that include Sovereign’s two largest stockholders, Relational Investors of San Diego and Short Hills-based Franklin Mutual Advisors, which own 7.3% and 4.8% of the company, respectively. He joined them in asking the Big Board to block Sovereign’s plan to sell a 19.8% stake in itself to Santander Central Hispano and then pay $3.6 billion for Independence Community Bank of Brooklyn.

The proposed Santander investment would be a hair short of the 20% stake that requires a shareholder vote under New York Stock Exchange regulations. Opponents of the transaction say the deal should at least be put to a shareholder vote.

Jumping into the fray last week was the Council of Institutional Investors (CII), a New York City-based association of more than 130 public, corporate and union pension funds with more than $3 trillion in investments. CII wrote to the New York Stock Exchange charging that the terms of the Santander deal represented an attempt to evade Big Board regulations governing shareholder approval.

Philadelphia-based Sovereign has 121 New Jersey branches and a workforce of more than 1,100 employees in the state. The Independence deal would fill a gap in Sovereign’s network of branches, which extends from Massachusetts to Maryland. Independence has 120 branches in the New York metropolitan area, including 51 in New Jersey.

Under terms of the proposed deal, Santander could buy an additional 5.1% of Sovereign stock immediately after the 19.8% transaction, and acquire the rest of the company over five years. During that time, Santander would have the right of first and last approval. Santander could also block any attempt to fire Sovereign CEO Jay Sidhu.

Kramer wrote on behalf of the state’s $67.5 billion pension fund, which holds Sovereign shares: “[We] view the uniquely byzantine Sovereign-Santander-Independence transaction as a parody of NYSE rules and regulations.” In an interview with NJBIZ he contended that under Sidhu, “the company’s shares have historically traded at a discount to its peer companies. Management at Sovereign is known for actions that dilute shareholder value.”

Sovereign spokesperson Ed Shultz says the Santander and Independence deals meet all applicable laws and regulatory requirements. In a statement last week, Santander chairman Emilio Botin declared that “for any institution…the entry of Santander is positive for all shareholders….”

“I’m not certain I see what all the fuss is about,” says Jordan Kimmel, a Randolph-based portfolio manager who works with Tocqueville Asset Man- agement and the Magnet Investment Group. “Sovereign is trading near its five-year high of $25. The transactions that Sovereign proposes appear to be within legal boundaries.” Kimmel says Sovereign ranks in the middle of 18 banking institutions in terms of operating margins, sales and growth.

The Santander-Sovereign-Independence deal was first announced October 24, less than a week after Relational Investors filed a plan with the Securities & Exchange Commission to nominate two of its principals to the Sovereign board of directors. Relational attacked the three-way Sovereign deal the day it was made public, claiming that Sovereign was offering too much for Independence. Relational called the proposed Santander acquisition an effort to dilute the voting power of Sovereign shareholders and thus thwart Relational’s bid for board seats.

Briance Mascarenhas, a management professor at the Rutgers-Camden School of Business, sees the proposed Sovereign moves in the context of industry-wide banking consolidation. “For a long time, restrictive laws in the United States kept banks here from expanding beyond their state borders,” Mascarenhas says. “Over time, many Asian and European banks grew to be far larger, especially in the commercial and trade-financing segments. As the laws here were relaxed, domestic banks started to grow through consolidations, which also offer greater operating efficiencies through shared platforms and systems. You’ll probably see more consolidations as banks in the U.S. continue to make up lost ground.”

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