Hewlett Suit Heats Up

That was the charge leveled in a Delaware court Tuesday as trial opened in a lawsuit by dissident H-P director Walter Hewlett who alleges H-P improperly pressured a big customer to change at least some of its votes in favor of the $19-billion purchase.

The allegations about H-P’s prior knowledge came from opening statements by Hewlett attorney Stephen Neal as Neal cited internal company memos and personal documents, according to an Associated Press report.

For example, a personal journal entry Compaq CEO Michael Capellas made in late February or early March was headed “sobering thought” and said, “at our course and speed we will fail.”

Chancellor William Chandler, who is hearing the trial without a jury, was also presented with a series of charts which Hewlett lawyers said showed that H-P and Compaq managers knew that the benefits of merging the two companies were steadily lessening compared to when the deal was first unveiled.

Neal said H-P’s internal projections showed the deal would likely reduce the combined company’s earnings per share by as much as 25% rather than boost them, at least in the near term.

Neal also showed Chandler an e-mail from a member of the H-P finance staff who had studied the potential financial effects of the merger and had written to H-P chief financial officer Bob Wayman “The attached is a frightening reality check. I see little realistic upside and I am not alone. I sincerely hope we all start acknowledging the realities soon.”

Fiorina Testifies First

H-P chairwoman and chief executive Carly Fiorina took the stand first, insisting that the company’s original projections were based on the best estimates at the time and that it was known that they were subject to change.

Speaking in a voice so soft, she was asked to speak up several times, Fiorina testified that she did not disclose the updated projections to shareholders because “it would be irresponsible to do so.”

The official certification of H-P’s shareholder vote on the deal, first announced seven months ago, is expected within days, but Hewlett is asking a Delaware Chancery Court judge to invalidate those results.

Hewlett first fought the deal in a public relations battle with H-P on the grounds that buying Compaq was too risky and would bog H-P down in the weak personal-computer market at the expense of its profitable printing division.

In his lawsuit, he contends H-P won its slim majority in the shareholder vote by threatening to take business away from at least one big investor, Deutsche Bank, in addition to hiding unflattering information about H-P and Compaq’s ability to carry out the merger.

Neal claimed Deutsche Bank was promised $1 million bonus if deal was approved. That payment was approved by Wayman without Fiorina’s knowledge, Neal told the court.

Fiorina personally thanked the head of Deutsche Bank for “going to bat for us” with the bank’s proxy committee, Neal said, citing a voice-mail, which Fiorina ended by saying, “I look forward to doing business with you” in the future.

Hewlett-Packard has denied wrongdoing, and Deutsche Asset Management has said it merely voted the shares it controlled in the best interests of its investment clients.

H-P attorney Steven Schatz said the sign-off was typical for any conversation with an investment bank and said there are other memos showing the merger plan was ahead of schedule.

“The shareholders vote should be honored,” Schatz said. “Management integrity has been impugned on the flimsiest of bases.”