Hewlett, HP Street Fight Spills into Court

Walter Hewlett on Tuesday morning began his last best chance to quash HP's proposed $20 billion buyout of Compaq--in court.

WILMINGTON, Del. — Walter Hewlett on Tuesday morning began his last best chance to quash Hewlett-Packard Co.s proposed $20 billion buyout of Compaq Computer Corp.

Hewlett, an HP board member and fervent opponent of the companys proposed deal to buy the Houston-based computer maker, began presenting evidence in the Delaware Chancery Court here to support his claim that HP executives improperly pressured a large institutional investor into supporting the buyout.

In the first day of testimony in the trial, and with Hewlett, HP Chairman Carly Fiorina and HP CFO Bob Wayman all present, Hewletts attorney, Steven Neal, laid out the suits two-pronged attack. First, Neal claimed that while HP executives and analysts were telling the public and the media that the shareholders would benefit from the merger, they were receiving internal reports from groups within the integration team that the financial picture was more dire.

Neal told the court that in their presentation to analysts and the media, HPs "key building blocks" included 13 percent gains for shareholders over what they would earn from the HP and Compaq separately. Also, officials claimed the merged company would see additional revenues of $2 billion for 2003, Neal said. Meanwhile, reports from within the integration units indicated that revenues and shareholder benefits would be far less than HP was touting, Neal argued.

Neal alluded to various documents from the integration groups created since the beginning of the year that he said will show HPs figures were exaggerated.

"This is not a blip." Neal said. "This is a consistent and persistent...situation in 2002 that did not get better until," the judge denied HPs motion to dismiss the lawsuit.

Neal then referred to Walter Hewletts contention that HP improperly pressured, Deutsche Bank and its subsidiary, Deutsche Asset Management, to vote for the merger. Neal told the court that on March 14, Deutsche Asset Management executives agreed to vote against the deal. As word of that decision reached HP, Fiorina and HP CFO Bob Wayman, called Deutsche Bank several times to get definitive word of the decision and, on the morning of the shareholder vote, called again to pressure executives of both Deutsche Bank and Deutsche Asset Management to support the merger.

It was after that call, that Deutsche Asset Management voted their 17 million shares in favor of the deal, Neal said.

Neal said that HP, as leverage, used the parent companys desire to continue doing business with HP to convince Deutsche Asset Management to side with the merger.

"The Deutsche Bank evidence is circumstantial, but it is powerful," Neal said.

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 in depositions Deutsche Asset Management executives said they voted for the deal because they believed it benefited shareholders, not because of pressure from their parent company or HP. He added that Walter Hewlett was taking "garden-variety" business relationships and putting a nefarious spin on them. The HP attorney pointed out that Hewlett also was present during the March 19 phone meeting with the German bank and its subsidiary.

Regarding the financial statements, 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 his lawsuit filed March 28, Hewlett claims HP threatened to withhold business from Deutsche Bank if it did not convince its subsidiary, Deutsche Asset Management, to back the Compaq deal during the March 19 shareholder vote. Deutsche Asset eventually voted its 17 million shares in favor of the buyout.

HP has called the lawsuit baseless, and earlier this month lost a motion to have the suit dismissed. The lawsuit represents Hewletts last chance to stop the proposed acquisition.

Hewlett, the son of one of HPs co-founders, lobbied hard during a bitter five-month proxy battle to convince investors to vote against the deal.

HP, of Palo Alto, Calif., last week said a preliminary count of shareholder votes showed that investors approved the deal by a margin of 45 million shares out of more than 1.64 billion that were cast. According to IVS Associates Inc., a Delaware firm charged with count-ing the votes, about 51.4 percent of the votes were cast in favor of the deal.

Now Hewlett, who has not been re-nominated to the board of directors because of the lawsuit, must convince Judge William Chandler III to throw out the entire vote.

However, simply tossing out the 17 million shares at issue will not be enough to squelch the deal.

Even still, the challenge at hand is difficult. He needs to show hard evidence that Fiorina and other executives improperly pressured Deutsche Bank, above and beyond the normal lobbying that goes with an acquisition of this size.

But HP has its own hurdles to clear. 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 for HP Chief Financial Officer Bob 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.

While the voice message made headlines in the media, legal analysts have said that it would have little impact on the trial because it did not show that HP executives acted improperly.

Hewlett, Fiorina and Wayman are each expected to testify this week.