Carley on the Stand: Details from HP / Compaq Merger Trial

Associated Press
Fiorina: Shareholders Not Deceived
By BRIAN BERGSTEIN
AP Business Writer

Hewlett-Packard's Carly Fiorina Says She Didn't Deceive Shareholders About Compaq Merger

WILMINGTON, Del. (AP) -- Fighting to save the biggest merger in high-tech history, Hewlett-Packard Co. chief Carly Fiorina testified Tuesday that she didn't deceive shareholders about the prospects of the Compaq Computer Corp. (NYSE:CPQ - news) purchase and never bullied big investors to vote for the deal.

Fiorina's four-plus hours on the witness stand came immediately after lawyers for dissident director Walter Hewlett said company memos and a personal diary showed that HP executives knew the Compaq deal was likely to work out far worse than what the companies were publicly touting.

Inside the stately, wood-paneled courtroom, with a standing room only crowd, Hewlett attorney Steven Neal kicked off what could be the final chapter in Hewlett's spirited attempt to sink the $19 billion deal.

Neal said internal memos show the Compaq deal would likely reduce the combined company's earnings per share by as much as 10 percent rather than boost them 12 or 13 percent, as the company claimed in Securities and Exchange Commission filings.

The company even maintained charts that showed growing gaps between the latest revenue and earnings projections and the figures HP had promised to investors.

Suggesting that HP tried to whitewash some evidence, Neal said that the company's integration planners stopped including the gaps in its integration planning charts after the judge hearing the case let Hewlett's lawsuit proceed.

"The attached is a frightening reality check," said one e-mail that was sent to HP's chief financial officer from a staff member and read in court by Neal. "I see little realistic upside and I am not alone. I sincerely hope we all start acknowledging the realities soon."

A preliminary tally released last week found that 51.4 percent of HP shares were voted for the Compaq deal, and 48.6 percent came out against. That translates into a lead for HP of 45 million shares.

Hewlett hopes Chancellor William Chandler III negates the election either by voiding certain votes or by determining that HP corrupted the entire process. The case was brought in Delaware Chancery Court because HP, as a company incorporated in Delaware, must abide by the state's laws for corporate governance.

If Chandler agrees with the company that nothing untoward happened, HP and Compaq are prepared to begin officially working together May 7.

Neal revealed that in late February or early March, Compaq CEO Michael Capellas wrote of a "sobering thought" in his personal journal. Noting that HP and Compaq were about to embark on a historic episode in business history, he wrote, "At our course and speed we will fail," according to Neal. Compaq said in statement that the entry was taken out of context and refers to a comment made at a meeting on one issue, not the entire HP deal.

And in a Feb. 14 memo to his fellow executives on the HP-Compaq integration planning team, Compaq chief financial officer Jeff Clarke wrote: "We have a mile to go on this. Second half of 2002 is a pure disaster in terms of (earnings per share). Need more actions."

Neal displayed the memo on a large board so only the judge could see it -- part of an agreement to protect sensitive internal HP information.

But under questioning from Neal and then an HP attorney, Fiorina meticulously challenged the claim that HP misled investors, saying Neal had taken the charts and memos out of context and overlooked other reports showing the deal well on track. Fiorina said HP made conservative estimates so as to "underpromise and over-deliver."

In fact, she said, she not only stands by the projection that the deal will generate $2.5 billion in cost savings in 2004 but now would be "very disappointed if we don't do better than that."

Fiorina added that the job cuts resulting from the merger likely will be around 13,000 instead of the 15,000 HP previously anticipated. Hewlett had HP had hid the fact that 24,000 might be necessary.

Fiorina also denied a key element of Hewlett's case: that she or other top HP officials threatened to withhold lucrative business from Deutsche Bank if Deutsche's investment arm did not vote 17 million shares for the deal at the last minute.

In addition to a $4 billion line of credit that Deutsche Bank helped arrange for HP just days before the shareholder vote, Tuesday's hearing revealed that the bank also agreed during the proxy fight to help the company with "market intelligence." In fact, Deutsche Bank was promised a $1 million bonus if the deal was approved. Fiorina said chief financial officer Robert Wayman struck the deal without informing her or the board of its details.

Even so, she said, there was nothing improper about the arrangement and added that it played no role in the Deutsche investment division's last-minute vote switch.

She added that her now-infamous suggestion to Wayman that they "do something extraordinary for" Deutsche Bank and another investor -- a comment that emerged in a voice mail leaked to the San Jose Mercury News -- was an innocent reference to giving Deutsche money managers an in-depth, in-person presentation to pitch the deal.

Until then, she testified, Fiorina and Wayman had assumed Deutsche Bank would vote for the deal.

Neal also tried to make hay out of another Fiorina voice mail. A few days after the March 19 shareholder vote, Neal said, Fiorina left a message for Deutsche Bank vice chairman Benjamin Griswold thanking him for "going to bat for us" and saying she looked forward to doing business together in the future. Someone at Deutsche Bank advised Griswold to delete the message, Neal said.

Fiorina said she was thankful for Griswold's efforts to arrange a last-minute conference call between her, Wayman and Deutsche money managers, and called the signoff innocuous.

Fiorina was due to resume testifying Wednesday morning of what is expected to be a three-day trial.

Arbitrageurs who buy and sell stock based on their expectations of how the judge will rule packed the courtroom and paid local couriers hundreds of dollars to save them places in line outside the courthouse beginning around midnight.

In trading Tuesday on the New York Stock Exchange, shares of Palo Alto, Calif.-based HP fell 23 cents to close at $18.04. Shares of Houston-based Compaq lost 53 cents, or 5 percent, to $10.20.

Talk about a one sided headline! AP really blew it on this one, with: "Fiorina: Shareholders Not Deceived". Did they also run: "OJ: Didn't Kill Her". I think not. What's amazing here is that we have Carley admitting that while here co-conspirators talked among each other about how far they were going to miss the numbers, they continued to let those bogus (and very positive) numbers sit as the official forecast with the SEC. However this is "not deceptive".

Not mentioned here is that both the SEC and District Attorney for Southern District of New York have separate investigations going.

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