Judge to Consider Whether Hewlett Bombshells Can Sink HP

A Delaware judge began considering that question Thursday, and promises to rule soon on Hewlett's request that he overturn the March 19 shareholder vote that apparently gave HP approval to buy Compaq.

HP executives and lawyers left expressing confidence they had knocked down Hewlett's allegations that HP misled investors about the chances the Compaq merger would generate its promised financial benefits.

They also predicted Hewlett would fail to convince the judge that the company got Deutsche Bank's investment division to vote for the deal by threatening to withhold future business.

"The evidence produced in that courtroom showed Hewlett-Packard acted totally properly, and this case was without merit," HP attorney Steven Schatz said outside court Thursday.

Wall Street seemed to agree, dramatically reducing the "spread"--the difference between Compaq's stock price and the price implied by the terms of the acquisition.

Still, some observers cautioned against predicting victory for HP.

"In business trials there are very few smoking guns. They really don't exist," says Charles Elson, director of the Center for Corporate Governance at the University of Delaware. "It's more like a series of facts and what kind of picture [the judge can put together with them. You can assemble them in a lot of different ways.'

Regardless of how the judge rules, Elson says, "I don't think anyone comes out of this thing overwhelmingly happy with the picture that got painted here."

Indeed, there were some disturbing allegations.

In addition to the voice mail that surfaced before the trial in which HP CEO Carly Fiorina suggested doing something extraordinary for Deutsche Bank, she was recorded in another conversation telling Deutsche money managers their vote was "of great importance to our ongoing relationship."

She said "extraordinary" referred to the last-minute presentation HP made to sell the deal, and called the "ongoing relationship" remark a normal signoff for a conversation with an investment bank, especially one that buys a lot of equipment from HP.

The deep ties between the bank and the company also became apparent when CFO Bob Wayman acknowledged Deutsche Bank provided "market intelligence" during the proxy fight for $1 million, with a $1 million bonus if the shareholders approved the deal.

Hewlett lawyer Stephen Neal pointed out that an HP proxy solicitor wrote on a chart that HP had a "carrot" to use in lobbying Deutsche Bank. Exactly what that referred to was not made clear. Fiorina denied ever seeing the carrot notation.

Neal also revealed that in an internal call that was recorded, Deutsche's chief investment officer told the proxy team that controlled Deutsche's vote on the deal: "You may or may not be aware we have an enormous banking relationship with Hewlett-Packard."

A preliminary tally released last week found that 51.4 percent of HP shares were voted for acquiring Compaq, with 48.6 percent against. That amounts to a lead of 45 million shares, which means Chancery Court Judge William B. Chandler would have to do more than erase Deutsche Bank's 17 million votes to overturn the deal.

To that end, Hewlett's team also tried to show that HP corrupted the entire proxy fight by refusing to release updated internal projections showing the merged companies falling far short of their publicly disclosed financial targets.

Hewlett's side introduced internal memos from Compaq CFO Jeff Clarke calling the projections "ugly" and "a disaster" and saying the integration team had "a mile to go."

And a personal diary entry by Compaq CEO Michael Capellas said he found it sobering that HP and Compaq were about to embark on a historic deal for the industry, and noted: "At our course and speed we will fail."

But Fiorina and Wayman testified that the documents showing the shortfalls were taken out of context, and drawn up by HP and Compaq managers who intentionally set low targets they knew they could beat.

Clarke testified Thursday that his nasty-sounding comments were merely motivational messages, and said he is as confident as ever the merger can be a financial success. For example, $3.5 billion in cost savings are possible by 2004, well ahead of the publicly touted figure of $2.5 billion, Clarke says.

Walter Hewlett contended that HP not only failed to disclose the weak internal projections to shareholders, but to its board. That notion was dismissed by the trial's final witness, Boeing chairman and CEO Phil Condit.

"I have never participated in a board that was more fully informed," said Condit, who has been an HP director for four years.

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