HP attorneys claim merger deception

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Posted 12:14PM on Tuesday, April 23, 2002

WILMINGTON, DELAWARE - Lawyers for dissident Hewlett-Packard Co. shareholder Walter Hewlett cited internal company memos in court Tuesday as evidence that HP executives deceived investors about the financial prospects of the proposed $19 billion purchase of rival Compaq Computer Corp. In opening arguments in Hewlett's attempt to overturn a shareholder vote approving the deal, Hewlett lawyer Stephen Neal claimed HP executives knew as late as a few days before shareholders were set to vote on the deal last month that internal projections showed the financial benefits would fall well short of what HP publicly touted. A personal journal entry Compaq CEO Michael Capellas made in late February or early March was headed ``sobering thought'' and said ``at our course and speed we will fail.'' Neal said HP's internal projections showed the deal would likely dilute earnings rather than boost them, at least in the near term. He also suggested that HP suddenly found a way to make the numbers work once the judge ruled to let Hewlett's suit go to trial. The official certification of HP's shareholder vote on the deal, first announced seven months ago, is expected within days, but Hewlett is asking a Delaware Chancery Court judge to invalidate those results. Hewlett first fought the deal in a public relations battle with HP on the grounds that buying Compaq was too risky and would bog HP down in the weak personal-computer market at the expense of its profitable printing division. In his lawsuit, he contends HP won its slim majority in the March 19 shareholder vote by threatening to take business away from at least one big investor, Deutsche Bank, in addition to hiding unflattering information about HP and Compaq's ability to carry out the merger. Neal claimed Deutsche Bank was doing work for HP to help the company with ``market intelligence'' and was promised $1 million bonus if deal was approved. That payment was approved by HP chief financial officer Bob Wayman without HP chairwoman and chief executive Carly Fiorina's knowledge, Neal told the court. Fiorina personally thanked head of Deutsche Bank for ``going to bat for us'' with the bank's proxy committee, and she ended a voice mail left for the bank's head Benjamin Griswold with ``I look forward to doing business with you'' in the future. HP attorney Steven Schatz said the signoff was typical for any conversation with an investment bank. Hewlett-Packard has denied wrongdoing, and Deutsche Asset Management has said it merely voted the shares it controlled in the best interests of its investment clients. Before the start of the trial, in a scene normally reserved for popular sporting events and concerts, about 100 people - mostly attorneys, investors and journalists - lined up outside the courthouse. Some had paid others to stand in line overnight to ensure they would get inside the courtroom. ``This is a such high profile case, everybody's afraid they're not going to get a seat for the trial,'' said Rob Campbell, 27, an employee at a local courier service who was paid $20 an hour by a law firm to line up outside the courthouse at 3 a.m. The trial, being heard by one of the court's expert business judges and not a jury, is expected to last three days. The Delaware Chancery Court in Wilmington, which has jurisdiction over the governance of companies that are incorporated in the state, including HP. HP executives are expected to testify, but it's unclear whether Fiorina, who had no visible reaction to Neal's opening statement, will be among them. Fiorina gave a deposition in the case, as did other top brass from HP, Deutsche Bank, Goldman Sachs - HP's banker on the deal - and the firms that advised Walter Hewlett. ``We welcome the opportunity to present our case in front of the chancellor and have the facts come to light,'' HP said in a statement Monday. ``We believe when the evidence is heard, it will be clear that HP acted properly in all cases.'' A Hewlett spokesman did not return a call seeking comment. A preliminary tally released last week by a independent proxy certifying firm found that 51.4 percent of HP shares were voted for the Compaq deal, and 48.6 percent came out against. With more than 1.6 billion shares voted, HP beat Hewlett by 45 million shares. Hewlett hopes Chancellor William Chandler III negates the vote either by voiding certain investors' shares or by determining that HP corrupted the entire process by buying votes. Hewlett believes Deutsche Asset Management originally voted 25 million HP shares against the deal but switched 17 million just before the shareholder meeting, which came days after Deutsche Bank helped arrange a $4 billion credit facility for HP. In trading Tuesday on the New York Stock Exchange, shares of Palo Alto, Calif.-based HP fell 18 cents to $18.09. Shares of Houston-based Compaq lost 37 cents, 3.5 percent, to $10.36.