Posted on 04/24/2002 7:05:09 AM PDT by Jack Black
Reuters Technology
Hewlett Says H-P Lied on Merger, Tainted Vote
By Caroline Humer
WILMINGTON, Del. (Reuters) - Deutsche Bank AG's 11th-hour decision to back Hewlett-Packard Co.'s (NYSE:HWP - news) takeover of Compaq Computer Corp. (NYSE:CPQ - news) stemmed from its concerns for its investment banking relationship with H-P, lawyers contesting the merger charged on Tuesday.
Top executives of the computer and printer maker, including Chairman and Chief Executive Carly Fiorina, faced off in a wood-paneled Delaware courtroom against Walter Hewlett, a dissident board member and son of the company's co-founder, who has fought the merger in a proxy battle.
Asking that the March 19 vote be thrown out, Hewlett has charged that Deutsche Bank changed its votes to secure future business with H-P. Compaq shares sank in value relative to H-P's merger offer on Tuesday, a sign shareholders were more concerned the deal may not close.
Hewlett's lawyers focused in opening statements on allegations that H-P lied to shareholders in order to pass the deal, covering up reports that they were not on track to meet stated financial targets once the company was merged.
H-P says it played fairly and won the merger vote by a narrow margin. Deutsche Bank added on Tuesday that its asset managers had not considered Deutsche's banking business when deciding how to vote their shares.
The German bank confirmed on Tuesday that it had been hired in January as a ``secondary'' merger advisor to H-P.
Asset managers and investment bankers working at a single firm are supposed to work separately, although the so-called ``Chinese walls'' have come under heightened scrutiny recently.
``The Deutsche Bank evidence is circumstantial. But it is powerful. It is potent,'' Hewlett lawyer Stephen Neal said.
Fiorina testified that she had done nothing wrong and had not called for anything underhanded in a voicemail to Chief Financial Officer Bob Wayman in which she said they might have to do something ``extraordinary'' to win over Deutsche Bank.
That voicemail was leaked to the press and was considered something of a smoking gun by merger opponents, but Fiorina denied any wrongdoing. Asked what she meant by ``extraordinary'' she replied, ``I wasn't sure precisely, but I was trying to convey a sense of urgency and a sense of priority.''
She also said H-P had given its standard pitch rather than coercing or bribing Deutsche Bank officials in a last-minute call on the morning of the vote that allegedly led Deutsche Bank to change its vote.
H-P lawyer Steven Schatz, said Hewlett ``has dragged Hewlett-Packard officers and directors through the mud both in the courtroom and in the national media based on nothing but speculation and supposition, not fact.''
STRATEGY SWITCH?
H-P's recent claim of a 45-million-vote margin of victory --according to a preliminary count that Hewlett expects to challenge -- could mean the merger would stand if the judge threw out 17 million contested Deutsche votes.
Analysts said Hewlett appeared to be moving his focus to potentially more powerful allegations that H-P did not disclose problems with early integration planning, misleading shareholders.
``I'd say that Walter's odds were negligible yesterday, but they're meaningfully higher than negligible now. I still think the deal will get done,'' said one arbitrager, who makes money betting on whether merger deals will go through.
The trial, planned for three days, injected a new sense of unease into the market. The deal's spread -- or the difference between where the deal values Compaq shares and where the market currently values them -- widened to about 11 percent.
The spread had narrowed significantly after Hewlett-Packard announced last week that it won shareholder approval by a three percent margin. Deal spreads of five to 10 percent are generally considered ``safe'' by merger arbitragers.
Hewlett lawyer Neal alleged that H-P executives knew that internal forecasts showed the merged company would not fare as well as it had publicly stated, pointing to operating profit forecasts for 2003 made by company business units that taken together were 25 percent below H-P's external forecasts.
``Your math is correct,'' Fiorina told Neal, but she said that managers tended to underestimate or ``sandbag'' numbers to insure themselves success. ``Business units are making assumptions that are far below what is achievable.''
Neal also quoted a note titled ``sobering thought'' in a personal journal from mid-February or early March by Compaq Chief Michael Capellas, saying ``case studies show at our course and speed we will fail.'' Neal, who did not disclose how he got the journal, alleged Capellas referred to integration planning.
The Securities and Exchange Commission and federal prosecutors are also investigating issues surrounding the shareholder vote.
Deutsche Bank said in a statement on Tuesday it had been retained by Hewlett-Packard in January 2002, four months after the deal was announced, in a secondary role as a merger adviser. Goldman Sachs was H-P's lead financial advisor.
``Deutsche Asset Management's proxy committee did not consider and was not influenced by any banking relationships with Hewlett-Packard,'' the bank said in a statement.
Deutsche Bank's advisory relationship was never disclosed by H-P in regulatory filings related to the merger.
Shares of H-P fell 1.26 percent to $18.04 and Compaq lost 5 percent to $10.20 on the New York Stock Exchange.
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