Feds Probe HP Coercion Allegations

Two federal agencies have launched investigations into whether Hewlett-Packard Co. coerced two major shareholders to vote in favor of its proposed $19 billion buyout of Compaq Computer Corp.

Two federal agencies have launched investigations into whether Hewlett-Packard Co. coerced two major shareholders to vote in favor of its proposed $19 billion buyout of Compaq Computer Corp.

The probes, confirmed by HP today, come on the heels of a lawsuit filed by Walter Hewlett that accuses the company of threatening to withhold business from an institutional investor if it failed to back the buyout, and follows a newspapers report last week that quotes Chairman Carly Fiorina saying before the vote that the company would have to "do something extraordinary" to assure the support of two key investors.

HP contends it won the shareholder vote—although official results have yet to be released—and has repeatedly denounced claims it acted improperly in lobbying voters.

But in apparent concern over the allegations, the U.S. Attorneys Office for the Southern District of New York subpoenaed HP to turn over information related to its dealings with Deutsch Bank and Northern Trust Corp., two investors HP heavily lobbied shortly before the shareholder vote on March 19.

HP, which said it received the subpoena Wednesday, said today it will cooperate with the federal investigation.

"We understand that this inquiry is in response to press accounts concerning the vote on the merger proposal," said a statement issued by HPs headquarters in Palo Alto, Calif.

In addition, the Securities and Exchange Commission last week also asked HP to voluntarily turn over documents and communications it had with Deutsch Bank, the investor Hewlett claims was coerced into supporting the merger.

In his lawsuit filed March 28, Hewlett alleges HP threatened to withhold business from Deutsch Bank if its subsidiary, Deutsch Asset Management, failed to back the Compaq deal. As a result, the suit says, the subsidiary voted 17 million shares it controls in favor of the buyout.

Hewlett contends the contested votes may have provided HP with the margin of victory it needed to proceed with the acquisition.

HP has denounced Hewletts suit as baseless and without merit, but a judge last week rejected the companys bid to have the case thrown out.

The suit is set to go to trial April 23 in the Delaware Chancery Court in Newark, Del.

The investigation by the U.S. Attorneys Office apparently was spurred by the release of a transcript of a voicemail Fiorina left for a senior colleague two days before the shareholder vote in which she discussed efforts to get Deutsch Bank and Northern Trust to support the merger.

The San Jose Mercury News published a transcript of the voicemail, which said it received the message from an anonymous source.

In the message sent the night of March 17, less than two days before a special shareholder meeting in Cupertino, Calif., Fiorina urged Bob Wayman, HPs chief financial officer, to contact a representative of Deutsche Bank.

"If you dont get the right answer from him," Fiorina says, "then you and I need to demand a conference call, an audience, etc., to make sure that we get them in the right place."

Fiorina also acknowledged that she was worried about how another major investor, Northern Trust, might vote.

"Weve seen a piece of their votes move against us, and were nervous," she tells Wayman in the phone message.

Fiorina says the company may have to "do something extraordinary" to win over the two institutional investors, but the voicemail doesnt reveal any further details as to what those actions might be.

Wayman issued a statement Thursday confirming the message was authentic, but he denounced the release of confidential messages as illegal and vigorously denied the company had done anything improper in lobbying its investors.

"I find these allegations both insulting and infuriating," he said. "Neither Carly nor I would ever act improperly in any business matter—much less use business assets to secure votes."

Controversy has swirled around HP since it first announced plans to acquire Compaq in September. Shortly after the deal was disclosed, the stocks of both companies plummeted as shareholders and industry analysts publicly criticized the proposed merger as misguided.

In November, Hewlett, a member of the companys board of directors and son a late company co-founder William Hewlett, declared his opposition to the deal, and launched proxy fight to overturn managements decision.

Lobbying efforts for both sides became increasingly bitter as the debate grew beyond discussions of the deals merits and degraded into personal assaults on Fiorina and Hewlett.

After months of angry exchanges, the battle appeared to be over March 19 when Fiorina declared the company had garnered enough shareholder support in a vote that day to proceed with the buyout. However, Hewlett refused to concede, declaring the vote too close to call.

Although HP declared victory and is moving ahead with its integration plans, already announcing more than 150 senior managers who will oversee the merged company, official results of the election have yet to be released by IVS Associates Inc., a Newark, Del., company hired to oversee the tallying of the votes.

The release of the election results was apparently delayed by the filing of Hewletts lawsuit March 28. In court documents, Hewlett contends that HPs margin of victory may amount to less than 1 percent of all votes cast, meaning the contested votes could sway the elections outcome.