WILMINGTON, Del.—In the months leading up to the March 19 vote of Hewlett-Packard Co. shareholders to decide whether to approve the proposed buyout of Compaq Computer Corp., board member Walter Hewlett repeatedly heard reports that the integration effort of the two high tech giants was running into trouble.
Hewlett, who was leading a bitter proxy battle to convince shareholders to reject the $20 billion deal, however, never told other board members of the rumors because he was unsure his colleagues would give the information credence.
"Communication between me and the rest of the board had broken down," Hewlett said Wednesday afternoon in court here Wednesday. "We were in a proxy fight. Whether or not they would take something like this as serious or as a publicity stunt, I wasnt sure."
Hewlett testified during the second day of the trial involving the lawsuit he filed against HP claiming executives with the Palo Alto, Calif., company misled shareholders about the benefits of a merger with Compaq and that they strong-armed a large institutional investor into voting for the acquisition.
During his testimony, Hewlett, the son of one of the companys co-founders, said much of what he was hearing about the struggling integration efforts were in the form of rumors, such as bits of conversations and anonymous messages left on his voice mail. He said he would file those directly to his lawyers.
Later, he said he also received copies of what appeared to be an internal memo from Compaq Chairman and CEO Michael Capellas and an anonymous letter sent to the Securities and Exchange Commission that further called the deal into question. Hewlett acknowledged that the Capellas memo, which was not entered as evidence, could be a forgery.
Still, Hewlett said, he questioned the financial data that HP executives, including Chairman and CEO Carly Fiorina and Chief Financial Officer Bob Wayman, were presenting to shareholders and analysts, and that fueled his proxy battle as well as the lawsuit.
"I certainly didnt believe HPs numbers were attainable and could not understand why they kept saying they could," Hewlett said. "The rest was just rumors."
Those numbers are the key to Hewletts lawsuit. While part of the suit centers around whether HP executives improperly pressured Deutsche Bank and its subsidiary, Deutsche Asset Management, into voting 17 million shares in support of the acquisition, Hewletts lawyers are pushing to show that for months, Fiorina and others gave positive presentations to shareholders while internal reports gave a more dire financial picture of the deal.
According to HP, preliminary numbers indicate that shareholders approved the deal by about 45 million votes. Hewlett will need to convince Judge William Chandler III of the Delaware Chancery Court to throw out the entire vote, not simply those cast by Deutsche Bank.
In questioning Fiorina and Wayman, Hewlett attorney Stephen Neal focused much of the time on internal "value capture" reports from various business unit teams to show that people inside the company had serious concerns about the buyout, but that HP executives never told shareholders or analysts about those concerns.
Fiorina and Wayman, who said they still believe the combined company will meet the key financial goals of $2.5 billion in cost savings and no more than 4.9 percent of lost revenue because of the acquisition in fiscal year 2003, both testified that those reports were simply status reports of how the planning process was proceeding and were not forecasts. They also said that employees traditionally will be conservative in their assessments, which would lead to some of the initial skepticism outlined in reports in February and March.
However, Hewlett testified that in his 15 years as a board member, business units traditionally have been aggressive in their forecasts.
"In almost every case, the business units came back overly optimistic, and the company had to give them a haircut," he said.
When Hewlett decided to initiate the proxy fight, he said he retained financial consultants Friedman Fleischer & Lowe. Initially the group was hired for $500,000 to conduct an assessment of the deal, then given a $3 million fee for financial advice during the proxy fight. The group will be paid $12 million if the acquisition is defeated, Hewlett said.
HP attorney Steven Schatz questioned whether the $12 million bonus would take away the consultants independence. Hewlett denied that.
Spencer Fleischer, a partner in the firm, will testify Thursday morning. Judge Chandler said he hopes to wrap up the trial by the end of Thursday.