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Big noise from Wyomissing

Jay Sidhu has taken Sovereign Bancorp from a small-town Pennsylvania thrift to America's 18th-biggest bank in 15 years by doing 30 takeovers -- and counting. Is he a financial genius or a deal junkie?

Jay Sidhu is triumphant. The chairman and CEO of Sovereign Bancorp jabs his index finger at a chart that shows the bank's share price rising 3.6 percent in a single recent month, when most of its rivals' declined.

"This is the real news!" exclaims Sidhu, sitting in his ground-floor Philadelphia office. "Investors have been saying, 'Let's wait and see what happens to the market, what happens to our capital levels, what happens with higher interest rates.' Well, now they see. All those issues are behind us."

Nothing gets the voluble Sidhu going more than Sovereign's chronically undervalued -- in his estimation -- share price. Last October, during his third-quarter earnings conference call, he lectured analysts for ten minutes on why the bank deserved a higher price-earnings multiple.

That same day Sidhu put out an argumentative press release calling the share price "totally unwarranted": Sovereign had hit all its promised targets, increasing net income and earnings per share by 10 percent annually for five straight years, and it projected 15 percent EPS growth for 2005, so no way did it deserve a forward P/E ratio of less than 13, the rough average of its regional bank peers. Sovereign's forward P/E is about 11.

Sidhu is a frustrated -- and frustrating -- man. The 53-year-old Indian émigré believes, not without reason, that he has achieved remarkable success over the past 15 years, transforming a tiny, ailing eastern-Pennsylvania savings bank with $400 million in assets into the nation's 18th-largest banking company, with $59 billion in assets and 665 branches. Most of that growth came through acquisitions that have given Sovereign an enviable franchise in the mid-Atlantic and New England states.

Recent numbers suggest that the bank's rapid ascent is continuing. Total deposits jumped 19 percent last year, loans 40 percent. Sidhu contends that he is outperforming and outcompeting some of the biggest banks in the country; he wants Sovereign to be regarded as a world-class institution alongside Citigroup and J.P. Morgan Chase & Co. He laments the fact that analysts and investors just aren't grasping the magnitude of his accomplishment and rewarding Sovereign with a higher stock price.

"We have a franchise that is highly successful, a business model and a style and track record that merit a higher P/E," Sidhu tells Institutional Investor.

The CEO, who frequently gesticulates and occasionally shouts, would seem to have a point. Sovereign reported a 28 percent increase in operating earnings in 2004, to $617 million. (They rose a further 8 percent per share year-on-year in 2005's first quarter, just under the consensus forecast.) Yet the stock slumped 5 percent in 2004, to $22.55, compared with a 7.5 percent gain for the Keefe, Bruyette & Woods bank index.

So what's the problem? Well, it turns out that investors have a number of issues with Sidhu. To hear many tell it, the Sovereign CEO has terminal transaction addiction: He simply can't stop himself from buying banks.

"People on the Street don't have confidence that Jay is not going to go out and do another dilutive deal," says Collyn Gilbert, a Boca Raton, Florida­based analyst with brokerage firm Ryan Beck & Co. "They're saying he's a deal junkie -- that he's going to continue to make acquisitions."

Sidhu hasn't helped matters by insisting that he's kicked the habit and then promptly going out and scoring another bank. At a May 2003 investor conference sponsored by KBW, the Sovereign CEO vowed not to engage in any further "material acquisitions," saying, "Those of you who keep thinking we might do that, you are totally misinformed." Little more than a month later, Sovereign announced the $400 million cash and stock purchase of $1.8 billion-in-assets First Essex Bancorp, based in Andover, Massachusetts. And in November 2003, Sidhu again told investors -- this time at a Sandler O'Neill & Partners meeting -- not to expect "material acquisitions." Two months later he agreed to pay $1.1 billion in stock for Seacoast Financial Services Corp., a New Bedford, Massachusetts, bank with $5.4 billion in assets. Then in March 2004 he arranged to pay $1 billion for $5.3 billion-in-assets Waypoint Financial Corp., in Harrisburg, Pennsylvania.

Ryan Beck's Gilbert says she knows of institutional investors who are intrigued by Sovereign, "but they're saying, 'We know we can buy it a lot cheaper after Jay does his next deal.'" Ralph Whitworth, a founder and principal of San Diego­based Relational Investors, which owns 8.9 million, or 2.6 percent, of Sovereign's shares, shakes his head. "There's a sense that we can't trust these [Sovereign] people," he says.

In between deals Sidhu has sought to pull the disparate parts of Sovereign into a cohesive bank. The institution grades itself on what Sidhu describes as "four critical success factors": asset quality, interest rate risk, efficiency and service quality. Executives are expected to achieve goals in five key operational areas: sales, revenues and expenses, margins, customer service and business unit performance. Managers also must live up to certain leadership expectations, which include aligning employees with goals and showing what Sidhu calls a "passion for continuous improvement."

Harking back to his upbringing in India as the son of an army officer, the CEO says: "How can you be in the military and not be goal-driven? People want to know, 'What do I need to do to get ahead in this company?' We tell them. People appreciate knowing what's expected of them."

Goal-setting is a top-down process. Every fall Sidhu and his top lieutenants specify targets for the following year in everything from growth of loans, deposits and fee income to sales of investment products to control of expenses. One objective for '05: a P/E ratio of at least 13. The bank benchmarks itself against high-performing regional banks that Sidhu admires, including BB&T Corp. in Winston-Salem, North Carolina; Cincinnati-based Fifth Third Bancorp; and Buffalo, New York's M&T Bank Corp., by comparing such things as loan, deposit and fee-income growth and stock performance. "We're comparing the numbers, and we're trying to learn from what they're doing," declares Sovereign chief operating officer Lawrence Thompson Jr. "We'll never say, 'Let's just accept being flat and do what we did last year.'"

Proclaiming goals is one thing; preparing systematically to achieve them is another. Some criticize Sovereign for lackluster operational strategy. A consultant who has worked with the bank contends that its approach is undistinguished, undifferentiated and muddled, a patchwork of unoriginal tactics, tools and catchphrases with no obvious cohesion. The company's vow to provide community-bank-like service on a big-bank scale -- "to outlocal the nationals and outnational the locals" -- comes from the Wells Fargo & Co. playbook and is duplicated word for word by dozens of other large and midsize banks, including FirstMerit Corp. in Akron, Ohio, and Huntington Bancshares in Columbus, Ohio. A "red-carpet service guarantee" that pays $5 to customers who suffer such inconveniences as a broken ATM or waiting too long in line is a U.S. Bancorp staple that has been adopted by Sovereign.

Another consultant, John Carusone, president of the Bank Analysis Center in Hartford, Connecticut, says this lack of originality hurts Sovereign's "competitive identity" in a Northeast banking market filled with tough rivals like J.P. Morgan Chase and Bank of America Corp. "It's very important for banks to differentiate themselves in this kind of environment, and Sovereign's not doing that," Carusone says, adding that most of his banking clients view Sovereign as "a second-rate competitor."

Sidhu says, speaking broadly, "We are copycats and proud of it." He doesn't see the need to reinvent the wheel, especially in a commodity business like banking. On the other hand, he hastens to add, Sovereign does have some specialty businesses that break banking's usual mold, such as asset-based lending, health care lending, employee benefits consulting and precious-metals consulting.

How well does the bank execute its admittedly derivative strategies? Take that $5 service guarantee. In 2004, Sovereign paid out $10,500 in guarantees, indicating 2,100 instances across its hundreds of branches and 1,000-plus ATMs-- weak follow-through, some marketing experts say, for so heavily promoted a program. Sidhu responds that Sovereign's service quality is simply better than that of other banks.

Nevertheless, the company has just adopted a regional organization model (borrowed from Fifth Third) that divvies up profit-and-loss responsibility along geographic rather than business lines among ten market CEOs -- one for Bucks and Montgomery Counties, one for Philadelphia, one for Connecticut and western Massachusetts and so on. Each has his or her own P&L and authority over facets of the business that used to be much more centralized, such as approving large loans, setting deposit rates and signing off on advertising.

The idea behind this "flat organizational structure," Sidhu says, is to "get big by being small" -- and use an incentive system to back up that ambition. Market CEOs who exceed their profit and growth goals can earn bonuses of up to 75 percent of their base salaries of $145,000 to $300,000; branch managers, who are paid $45,000 to $60,000 annually, can pick up as much as $15,000 more. Frontline workers can share in the spoils, too: A typical branch gets about $1,000 per quarter in bonus money that the manager is free to parcel out as he or she sees fit.

The departure from the past is that everyone in a given market sinks or swims together; this should encourage cross-selling and result in deeper, more profitable customer relationships, COO Thompson says. "If the commercial lenders in a local area don't meet their goals, then the retail folks don't get a bonus, and vice versa," he notes.

Will such moves bring better performance and higher valuations -- without forcing Sidhu to curb his deal making? Perhaps. But he's still under pressure to reform his acquisitive ways. Relational Investors' Whitworth says he recently had a tense meeting with Sidhu and Sovereign's lead director, Daniel Rothermel, CEO of private holding company Cumru Associates and former general counsel of Carpenter Technologies Corp. The investor's blunt message: Set aside the empire-building and focus instead on performance and corporate governance.

Sidhu, who will probably never be asked to appear in a best-of-business anthology on investor relations, can become heated on the subject of restive shareholders. (He himself owns 4.3 million Sovereign shares, or about $96 million worth.) "If they don't trust us, then they should sell the goddamned stock and never ask another question!" he shouts. "We will always do what is right. That's what we believe in. That's what we live. And those who don't believe in that, they should go invest in something else and get the hell out of our stock!"

But investors have another item in their bill of indictments against Sidhu -- that he keeps introducing confusing wrinkles to Sovereign's accounts. In January, for example, the CEO said the bank would depart from standard reporting practices and highlight an "operating and cash earnings" figure that strips out noncash charges, such as intangible amortization and employee stock ownership plan expenses. Analysts, who have complained before about one-time charges and other hard-to-parse noise in the company's earnings statements, howled that the change would prevent them from comparing Sovereign's bottom line with those of most other banks on an apples-to-apples basis. "The lack of clarity is going to make your P/E suffer," analyst Laurie Hunsicker of investment bank Friedman, Billings, Ramsey Group warned Sidhu during the January conference call.

"The analysts are behind," Sidhu retorts. He notes that a handful of other banking companies, including $53 billion-in-assets M&T, which has a forward P/E of 14, report in similar fashion. "The one thing we're looking at internally is cash earnings," he explains, calling that the equivalent of cash flow at a nonfinancial company. "So that's what we're going to report. But we'll also give you enough information so that if you want to calculate your own definition of operating earnings, you can."

Other skeptics mutter that Sovereign's operating numbers are none too impressive -- in return on assets, for instance, it's at the bottom of a group of peers tracked by RBC Capital Markets -- and that its corporate strategy could be a lot clearer, even to people who work at the bank. Another sticking point: The bank's seven-member board includes four relatively long-serving directors, Sidhu included, and they have endorsed tough poison-pill and supermajority voting provisions. "When you can't find anything else, it's very easy to take potshots at corporate governance," Sidhu tartly observes. He regards Sovereign's governance practices as quite strong compared with those of other banks.

ANOTHER SOURCE OF SOVEREIGN'S OFF-PRICE P/E leaves Sidhu especially exasperated. The bank is by charter a thrift, and thrifts tend to trade at a discount vis-à-vis commercial banks because of their heavy exposure to mortgages. Sidhu, however, admonishes the company's detractors to look at Sovereign's decidedly commercial-bank-like balance sheet: Only 24 percent of its $40 billion loan portfolio is in residential real estate, with the remaining 76 percent split almost evenly between commercial loans and nonmortgage consumer loans.

"I'm talking about a transformation to a full-out commercial bank," the CEO says. "It hasn't been done before, and people don't understand it."

Nonetheless, he isn't prepared to scrap Sovereign's thrift license, calling it "the best financial services charter in the U.S." For a start, he points out, it's more flexible than a commercial bank license, permitting the company to more easily "export" products across state lines. Then there's the matter of cost: The state of Pennsylvania taxes commercial banks' deposits but not those of thrifts. Sidhu reckons that this distinction saves Sovereign $9 million a year.

All the same, he would prefer that investors ignore the inconvenient fact that the company is, in law and in fact, a thrift. "Our hope is that over time Sovereign will be viewed as a commercial bank, because that's the kind of balance sheet we have," he explains. "If that doesn't happen, we can always flip the charter in 90 days. But once you do that, you can never go back."

Sidhu has long had to put up with grumbling from investors and analysts, but the cacophony increased markedly with his first big deal, back in 1999. It was a huge gamble: He shelled out $1.4 billion in cash to buy 280 branches from FleetBoston Financial Corp., which had to divest them as a regulatory condition of merging Fleet Financial Corp. with BankBoston Corp. The largest purchase of branches in U.S. banking history, the transaction overnight gave Sovereign a foothold in four New England states, plus $12 billion in assets and $9 billion in deposits.

But the deal also drained Sovereign's cushion of reserves, driving its capital ratio below 1 percent of assets -- a perilous level. Sidhu had to jet as far away as Dubai to line up financing. The bank's debt was downgraded to junk status. Sovereign's share price, meanwhile, dropped, from $11.75 the week before the FleetBoston deal was announced, to less than $7 when it closed seven months later. Critics in the investment community said Sidhu was overreaching -- that he lacked the ability to integrate the branches and was stretching Sovereign's resources too thin.

On the whole, Sidhu's FleetBoston strategy appears to have been vindicated. The branches have long since been assimilated into Sovereign's operations and are contributing to the company's growth. The bank's capital ratio has rebounded to above 5 percent, more than high enough to meet regulatory requirements. And most of the debt from the FleetBoston deal has been repaid or refinanced at lower rates; Sovereign regained its investment-grade rating on January 16, 2004.

"We are two years ahead of the plan," Sidhu says of the balance-sheet replenishment, adding: "We have built the entire foundation -- the infrastructure, the culture, the people, the systems, the skill sets, the strategy. There is no question we will be a high-performing company."

Sidhu developed his supreme confidence early. The son of a colonel in the Indian army, he attended nine different schools as his family followed his father's postings. At 17, Sidhu and a friend hatched a plan to hitchhike across Europe. He recalls that his mother opposed the idea, "but my dad said, 'I know you'll be optimistic and cautious at the same time. As long as you covered those things, go ahead.'"

The young man left with only $100 in his pocket, and for three and a half months in 1969, he and his pal did the grand tour, only not so grandly. They traveled from India to Iran and then covered Turkey, Greece, Italy, Switzerland, France, England, Belgium, the Netherlands and Germany. "We went up to Denmark, back to Germany, then to Austria, to Yugoslavia, Czechoslovakia, back to Yugoslavia -- it was Yugoslavia at the time -- and Albania and back to Turkey," recalls Sidhu. The peripatetic pair slept on footpaths in Paris, ambled the streets of Frankfurt and stayed in a youth hostel in Istanbul. "The trip taught me humility at a very young age," says the CEO.

The freedom, and the uncertainty, of the journey indeed left a deep impression on a youth who had spent his formative years in a regimented military environment. "We never knew what would happen next," Sidhu says. "Would we get a ride? Where would we end up? Where would we stay? It was a totally unstructured experience -- highly liberating. It gave me the confidence that nothing is impossible, that if you put your mind and energy into something, it will work out."

On his return Sidhu obtained an undergraduate degree in business administration from India's Benares Hindu University. He came to the U.S. in 1971 on an MBA scholarship to Wilkes College in Wilkes-Barre, Pennsylvania. (In 2003 he donated $3 million to Wilkes to help found the Jay S. Sidhu School of Business and Leadership.) On graduating in 1973 he was referred by the school's chairman to the president of First Valley Bank in nearby Bethlehem, who was looking for a sharp management trainee.

The financial services industry was a natural for someone with Sidhu's analytical mind, and he quickly learned the ins and outs of an S&L industry on the brink of massive consolidation. After rising to vice president of corporate planning and development at First Valley (now part of Bank of America), Sidhu left to become head of marketing for Horizon Bancorp (now part of J.P. Morgan Chase) in Morristown, New Jersey, from 1979 to 1983. But he always kept one eye peeled for the next big chance.

While attending a corporate strategy conference at Dartmouth College in 1981, Sidhu sat next to Paul Wieand, then CEO of Independence Bancorp in Perkasie, Pennsylvania. As Sidhu recounts the meeting, the two got into a debate over what was the most important element of execution. "He thought it was finance; I thought it was customers and people," Sidhu remembers. Two years later a headhunter called on Wieand's behalf. The Independence CEO "was now convinced that I was right and offered me a position," says Sidhu, who became executive vice president of Independence subsidiary Bucks County Bank & Trust Co. (now part of Wachovia Corp.).

When three years later, in 1986, Wieand landed a job as CEO of Penn Savings Bank, a struggling, $500 million-in-assets real estate lender in Wyomissing, Pennsylvania, Sidhu tagged along as his chief operating officer. Like a lot of thrifts at the time, Penn had overextended itself; its portfolio bulged with variable-rate loans from Texas, Florida and even Hawaii. Some 10 percent of the portfolio was officially nonperforming.

Sidhu identified three urgent priorities: cleaning up the loan portfolio, finding more capital and ditching unprofitable operations. "We had to turn it around very quick," he says. That they did. Barely five months after Sidhu joined Penn (Wieand had signed on several months earlier), the bank had cleaned up the loan mess sufficiently to go public. Sidhu got a batch of shares -- he can't remember how many -- in the successful $24 million offering.

When Wieand, whose strong-willed style rankled with Penn's board, left by mutual consent in 1989, Sidhu, then just 38, became president and CEO. He had his star vehicle, though it didn't look particularly promising at the time.

"Jay picked a miserable little thrift in Wyomissing and decided to make something of it," says Anat Bird, a former banker who is president of SCB Forums, a for-profit Granite Bay, California, firm that organizes groups of bank executives (including those of Sovereign) to confer about management issues.

One of Sidhu's first moves was to rename the bank, which was in a well-to-do but out-of-the-way suburb of Reading. The name "Sovereign" testified to the CEO's vision of transforming the humble thrift into an umbrella for multiple banks, each operating with a degree of local autonomy. The company's first acquisition, just before Sidhu became CEO in 1989, gave it three branches and $65 million in assets in Philadelphia's Bucks County suburbs. In 1991, Sovereign bought two failed New Jersey thrifts from Resolution Trust Corp. A year later it added 14 branches around Toms River, on the Jersey Shore.

During the 1990s, Sovereign completed 22 bank or branch purchases, bringing in more than $17.5 billion in assets. These included a 1998 deal for 93 branches in Pennsylvania and New Jersey divested as part of the merger of First Union Corp. (now Wachovia) and CoreStates Financial Corp.

"When we do deals it's because that's the best way to put our capital to use and grow value for the long term," Sidhu says, not at all defensively. Acquisitions "are often the best strategy available to use for deploying capital." In short, the CEO sees deal making in opportunistic terms, not as a means to amass size for its own sake. "We believe we have already reached a level where we can enjoy economies of scale," he says.

One of the most serious challenges Sidhu faced during the 1990s stemmed from a different kind of deal. In 1993, Frederick Jaindl, a turkey farmer who was Sovereign's chairman and biggest shareholder, tried to sell the company without the consent of the full board or management. A power struggle ensued, and Sidhu filed a lawsuit against Jaindl on behalf of the bank. The matter was settled out of court, but the hard feelings didn't subside. Jaindl resigned in 1995, citing an "ineradicable sense of mistrust and hostility" at Sovereign, typified by the CEO's unwillingness to consider selling the bank.

Sidhu's take on the affair a decade later: "When you have a public fight like that, it makes people uncomfortable. Fred was uncomfortable. He was an entrepreneur at heart, but his strength wasn't working with people."

The Sovereign CEO's abilities as a merger-inclined banker were stress-tested by the Fleet branch acquisition, which closed in 2000. Fleet's then-CEO, Terrence Murray, joked before the forced divestiture that he wanted to sell those branches to "Medford Savings Bank" -- code for a weak bank that wouldn't pose a challenge to Fleet's dominance in the region. When Murray chose Sovereign he dumped many of his most tired, least desirable locations on what he plainly judged to be an inferior competitor.

Sidhu was determined to show Murray just how wrong he was, by outdoing him in his own backyard. He spent heavily on marketing to introduce the Sovereign brand to New England and on consultants to avoid integration missteps. According to Federal Deposit Insurance Corp. figures, Sovereign's deposits in Massachusetts jumped an impressive 9 percent between June 2003 and June 2004 (without benefit of an acquisition). By comparison, during the same period Fleet's Massachusetts deposits dropped nearly 8 percent.

The demonstrable success of the Fleet deal -- and of the bulk of Sovereign's 29 other whole-bank or wholesale branch acquisitions since 1989 -- has not silenced Sidhu's critics. They disagree with his aggressive growth-by-acquisition mind-set. For one thing, they say, the continual buying drains capital and diverts management's attention from what the CEO himself calls "our discipline of blocking and tackling."

Investors have paid a price for Sidhu's serial deal making, contends James Ackor, an RBC Capital Markets analyst based in Portland, Maine. He calculates that since 1997, Sovereign has taken a total of $2.63 per share in nonoperating charges. Of that, 98 cents is directly attributable to mergers, and much of the rest is indirectly related to them, according to Ackor. Over that same period, he says, the company paid out only 70 cents in dividends. Sovereign just upped its quarterly dividend by a penny, to 4 cents, producing a dividend yield that still looks pretty paltry, particularly by bank standards: 0.72 percent. The bank also bought back 2 million of its shares in the first quarter, as part of a 20 million-share buyback program.

Sidhu in part blames purchase accounting for the widely shared assumption that Sovereign's deal making has hurt its stock price. "Any time a company does an acquisition," he points out, "you're reducing the return on equity, because you have to consider the entire acquisition price as equity." The CEO says a more meaningful metric is operating return on average tangible equity, which for Sovereign was 27 percent in 2004.

The bank's net income of $454 million last year was up 12.9 percent from 2003's level, notes Ackor, but the per-share figure -- the one most investors care about -- dropped 2 cents, to $1.36, largely because of two acquisitions paid for with stock. Moreover, says the analyst, Sovereign's average return on assets last year was 0.9 percent, ranking it dead last among eight regional banks and thrifts tracked by RBC. Sovereign's return on equity of 10.7 percent put it at No. 7; and its operating ROE -- considered by many a better measure of a company's direction -- of 13.3 percent landed it in sixth place.

"We're not satisfied," concedes Sidhu. "We believe we have a strong foundation in place. The next two to four years -- depending on the external environment -- we should see some significant improvements in our operating performance numbers."

In any case, the state of Sovereign is not nearly as grim as RBC's mini­league table makes it sound. As Ackor himself points out, if one excludes most of the bank's noncash charges last year -- including two one-time, acquisition-related expenses and an impairment charge from holdings of preferred stock in beleaguered Fannie Mae and Freddie Mac (16 cents per share in all) -- Sovereign's operating earnings were up a robust 14 percent, to $1.68 a share. What's more, organic growth -- excluding the effects of acquisitions -- was 28 percent in consumer loans, 10 percent in commercial credits and 4 percent in core deposits. Sovereign's efficiency ratio (basic costs as a percentage of revenues) improved by 98 basis points, to 50.33. Nonperforming assets amounted to a respectable 0.29 percent of total assets.

Add it all up, and Sovereign could conceivably be poised for a breakout year. RBC's Ackor projects operating earnings this year of $1.90 a share, which would be a nearly 13 percent gain. He rates the stock outperform and asserts that Sovereign ought to be trading at about 13 times estimated 2005 earnings, or $25; it opened at $20.43 on April 26. Ackor figures into his estimate Sovereign's "improved scarcity value" from having the best remaining acquirable banking franchise in the Northeast.

Ryan Beck's Gilbert, who also rates Sovereign outperform, maintains that if the bank could just give investors a year's worth of clean quarters, with no special charges or other distractions, its earnings potential would shine through and its valuation would inevitably rise. Relational Investors' Whitworth, who has owned the stock for most of the past three years (he dipped out briefly during a run-up last spring when a rumored deal with Barclays Bank boosted the price), argues that shutting down the bank's acquisition machine would not only go a long way toward restoring trust in Sovereign, and in Sidhu; it would also allow the bank to focus on "execution of the core business." If that were to happen, Whitworth reckons, Sovereign's shares could soar as high as $36 by year-end.

Sidhu isn't about to commit to any such thing. "We'll be disciplined," he asserts, "but I'm not going to say that under no circumstances are we going to do a deal. That would be stupid." The CEO bristles at the notion that he might be deal-happy. His critics are wrong, he says, explaining away the bank's three most recent deals as "not material," even though they boosted Sovereign's balance sheet by 25 percent and cost one third of the company's market cap, which is now $7.6 billion.

"Everybody has a different definition of 'material,'" Sidhu insists. "We haven't done any material acquisitions. We've done a lot of small acquisitions." All, he adds, met a standard that they be accretive to earnings and represent "the best use of capital."

Sidhu is nonetheless stung by the snickering about his purported deal dependency. And when he feels he has been attacked, he can retort sharply. Consultant Carusone faulted Sovereign last year for lacking "any identifiable strategic focus that can provide a true competitive advantage." Sidhu tells II the criticism was "a stupid comment" from someone who "doesn't know anything" about the company. "It's so darned easy to be an 'expert,' to be critical and shoot arrows at someone else," he complains.

Some of those arrows have struck home, however. There is no denying that Sidhu gets a charge out of M&A. He contends that he brings strong instincts to deal making -- a nose for "authenticity" in personal and business relationships.

Perhaps the only activity he enjoys more than wheeling and dealing is golf. The two pastimes sometimes overlap. COO Thompson says his favorite image of Sidhu is on the golf course, putter in one hand, cell phone in the other. "Jay really loves to deal," says Thompson, 52. John Arnold, a director of the company's Sovereign Bank subsidiary and CEO of Harrisburg, Pennsylvania­based Petroleum Products Corp., a $200 million-in-sales operator of oil and gas pipeline terminals, calls Sidhu "one of the best one-handed putters I know."

Arnold recalls that he was once involved in bidding for an acquisition and sought Sidhu's counsel. Sidhu concluded that cash was the seller's primary motivation, and he suggested that Arnold sweeten the cash portion of the deal.

"I was thinking of going the other route, but I took Jay's advice and won the deal," says Arnold. "Jay's mind is very, very good transactionally. He has a sixth sense for deals."

And an instinct for survival. Sidhu relies for critical perspective on what he calls a "personal board of directors," an ad hoc committee of eight confidants who are themselves entrepreneurs and top executives and can relate to a CEO's travails -- "the kind of people I can call in the middle of the night," he says. Along with Sovereign director Arnold, the group includes the founder of a magazine that he sold to Gannett Co. (like most others, he didn't want his name used), the head of an engineering consulting firm and the former boss of a big global trading company who now runs a mortgage firm. Sidhu met them 15 years ago when they were all members of the Young Presidents Organization. In February the gang went to Spain for a weeklong golf outing.

Can Sidhu control his deal demon? In his January conference call, the CEO said that he might deploy some of the $800 million in excess capital he expects Sovereign to earn this year toward further share buybacks -- a move that investors would of course applaud. But then he hedged his remarks, saying, "Tomorrow it could be different." The analysts listening chuckled.