Judge Rules Hewlett-Packard-Compaq Deal Can Continue

Judge William B. Chandler ruled that former HP director Walter Hewlett failed to support his charges that HP bullied a big investor into supporting the $18.4 billion deal and lied to investors about the progress of the merger plans.

"The evidence demonstrates that HP's statements concerning the merger were true, complete and made in good faith," wrote the Chancery Court judge, who presided over the three-day trial last week in Wilmington, Del.

Hewlett can challenge the ruling in Delaware Supreme Court. The HP heir says he is disappointed with the decision but planned to review it closely before deciding on his next step.

Hewlett says he will maintain his involvement with the company.

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Palo Alto, Calif.-based HP and Houston-based Compaq have said they plan to begin working together May 7. An HP spokeswoman did not immediately return a call Tuesday seeking comment.

Chandler's ruling concluded another contentious chapter in Hewlett's fight to stop the acquisition.

After HP narrowly won its shareholder vote on the Compaq acquisition, Hewlett tried to block the deal by suing the computing giant, which his father, William Hewlett, co-founded in 1939. He sued in Delaware because HP is incorporated there.

That step so angered HP management and its other directors that Hewlett was not renominated for another term on the board, leaving the Silicon Valley institution without a Hewlett or Packard in its boardroom for the first time.

A preliminary tally released two weeks ago found that HP won the shareholder vote 51.4 percent to 48.6 percent. That amounted to a lead of 45 million shares--likely enough to withstand the disqualification of the 17 million to 24 million shares voted by Deutsche Bank, the investor Hewlett claims was coerced.

The tally is not yet official because both sides are challenging individual ballots.

The trial in Delaware featured 10 hours of testimony from HP's top two executives, CEO Carly Fiorina and CFO Robert Wayman.

Hewlett alleged that HP threatened to withhold future investment banking business from Deutsche Bank unless the investment firm canceled its vote against the deal and voted for it at the last minute.

In a voice mail for Wayman two nights before the March 19 shareholder vote, Fiorina suggested they do something "extraordinary" for Deutsche Bank. Then in a conference call with Deutsche money managers about an hour before the shareholder vote began, Fiorina said their decision was "of great importance to our ongoing relationship."

Deutsche Bank was performing a variety of services for HP, including giving "market intelligence" advice for $1 million, with a $1 million bonus contingent on the deal's approval. Deutsche's top investment official was recorded saying the firm's vote on the HP-Compaq deal was highly sensitive and needed to be changed "as fast as humanly possible."

Fiorina and Wayman said they asked Deutsche money managers to support the deal on its merits and did not resort to coercive tactics.

The judge agreed: "The plaintiffs can point to nothing in those exchanges that indicates a threat from management that future business would be withheld by HP from Deutsche Bank."

To support his claim that HP misled investors about the chances the Compaq merger would generate its promised financial benefits, lawyers for Hewlett cited internal projections that showed the deal falling far short of its publicly disclosed targets.

Hewlett's team introduced internal memos from Compaq's chief financial officer, Jeff Clarke, calling the projections "ugly" and "a disaster."

But Clarke, Fiorina and Wayman testified that the negative comments were motivational ploys. They also said the weak projections were drawn up by HP and Compaq managers who intentionally set low targets they knew they could beat.

The judge said he found HP's explanation "compelling" and "corroborated by evidence in the record."

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