Fiorina Under Fire

HP Chairman Carly Fiorina acknowledged in court Tuesday that while reports being used against her and HP by Walter Hewlett were being taken out of context, her team did withhold certain reports from HP's board and shareholders.

WILMINGTON, Del. -- Denouncing allegations her executive team misled shareholders to win support for its controversial buyout of a rival, Hewlett-Packard Co. Chairman Carly Fiorina today testified that internal documents being used to support those charges were being taken out of context.

Fiorina took the stand today to refute claims made in a lawsuit by dissident HP director Walter Hewlett that company officials misled and illegally pressured shareholders into supporting a controversial $19 billion buyout of Compaq Computer Corp. Hewletts lawsuit, being tried in the Delaware Chancery Court, could ultimately block the takeover.

In questioning the chief executive, Hewlett attorney Stephen Neal cited several internal company reports as evidence of its claims that the company understated expected acquisition costs in order to portray the buyout in a more favorable light to investors.

For example, according to two reports compiled in February and March as part of HPs and Compaqs joint integration team, the merged companys operating losses were projected to amount to $7.4 billion in 2003, more than $2 billion higher than estimates the two computer makers made public in reports to shareholders and federal regulators.

But a combative Fiorina said the documents were essentially "status reports" and failed to take into account the companys full-range of integration plans, such as cost-cutting efforts.

"It was a snapshot of where these business units were," she said. "They didnt project a full picture of where we should and shouldnt achieve."

Fiorina acknowledged, however, that the reports were never made available to HPs board of directors or its shareholders, but denied they were withheld in an attempt to conceal damaging information.

During his opening statements, Neal accused HP of hiding such reports in order to misled shareholders into thinking the acquisition was more attractive than it actually was.

"At same time that it was getting this internal data, it was out making public statements that things were going swimmingly," Neal said. "It knew that the issue of integration was a critical one, and they didnt blush about saying publicly that it was going great."

To further support Hewletts allegations, Neal also revealed a comment Compaq Chairman Michael Capellas jotted down in a personal journal in March.

"Sobering thoughts," the entry, made on an unspecified date, begins. "We are about start one of the most historic periods in business history. Case study for years. At current course and speed we will fail."

Fiorinas testimony continued late Tuesday afternoon. After Fiorina, Hewletts lawyers are expected to call to the stand Bob Wayman, HPs chief financial officer and a member of the companys board, who helped lobby major institutional investors to support the merger.

Attorney Steven Schatz, representing HP, told the court in his opening argument that HP acted properly and that the Hewlett lawsuit is "based on nothing but speculation, not facts."

Schatz said that many of the documents referred to by Neal were taken out of context, and in fact, HP execs were much more conservative in their public statements than they were privately.

For example, HP execs were aware of some $1.1 billion in cost savings that would be realized as a result of the merger that were never mentioned as part of the deal, he said. Such conservatism was part of an effort to put achievable goals before the public and to push groups within the integration team to find as many cost savings as possible.

At the end of his opening argument, Schatz urged the judge to rule against the suit, saying Hewlett was "unfairly casting aspersions on HP management and that the shareholders should be honored."

In weeks leading up to the suit, much of the medias focus has been on Hewletts allegations that HP executives pressured Deutsch Banks investment arm into voting for the deal by threatening to withhold business from the company. Specifically, Hewletts suit contends the banks subsidiary, Deutsch Asset Management, voted 16 million shares in favor of the buyout after being coerced by HP.

HP, based in Palo Alto, Calif., has vigorously denied those claims.

But in opening arguments today and early questioning of Fiorina, Hewletts lawyers have focused more on other allegations made in the suit that the company inaccurately portrayed the financial costs and benefits of the merger in order to win over investors.

The apparent change in emphasis may be as a result of HPs release last week of preliminary results of its shareholder vote that showed the merger passed by a 45 million vote margin out of approximately 1.64 billion shares voted. Given that the margin of victory well exceeded the number of disputed votes, Hewletts lawyers are now focusing more on their contention that the company misled shareholders, rather than strong-armed one investor.

In addition to this weeks trial, HP has its own hurdles to clear before it can acquire Houston-based Compaq. Last week, HP said that both the U.S. Attorneys Office for the Southern District of New York and the Securities and Exchange Commission initiated investigations into HPs lobbying of both Deutsche Bank and another investor, Northern Trust.

The investigation by the U.S. Attorneys Office apparently was spurred by the release of a voice message Fiorina left Wayman two days before the March 19 vote, saying she was concerned about how Deutsche Bank and Northern Trust would vote on the deal and that HP may have to "do something extraordinary" to win over the two investors.