U.S. Opens Probes Into HP Conduct in Deal Vote

Federal investigators have opened inquiries into reports that Hewlett-Packard Co. may have improperly pressured Deutsche Bank and Northern Trust Corp. to vote in favor of the computer maker’s $19-billion acquisition of Compaq Computer Corp., HP said Monday.

The probes renewed doubts that the largest technology merger in history--pending the results of a shareholder vote last month--will be consummated. Such federal probes are highly unusual in large corporate mergers.

“If in fact HP top management made a credible threat to Deutsche Bank to withdraw business unless they voted HP’s way, that would be a serious breach of fiduciary duty,” said Reinier Kraakman, professor of law at Harvard University. “It’s akin to stuffing ballot boxes.”

Just before the March 19 voting deadline, Palo Alto-based HP announced a $4-billion line of credit that would be co-arranged by Deutsche Bank. Then Deutsche Asset Management, the bank’s investment unit, switched 17 million votes to favor the merger, according to a lawsuit filed to block the deal.

HP acknowledged receiving a subpoena April 10 from the U.S. attorney’s office for New York’s Southern District demanding information about the company’s interactions with Deutsche Bank, Northern Trust and other parties. Experts said a subpoena from the U.S. attorney’s office points to a criminal investigation by the Justice Department.

In a separate civil action, the San Francisco office of the Securities and Exchange Commission requested similar documents regarding Deutsche Bank but has not alleged any legal violations, HP said.

The company denied any improprieties but declined to comment further. Representatives of the U.S. attorney and the SEC also declined to comment.

Last month, HP claimed victory in the merger vote by a razor-thin margin; final results could be certified as early as this week.

The federal actions may have been prompted by claims by dissident HP director Walter Hewlett, who filed a lawsuit challenging the legality and fairness of the merger vote. A representative for Hewlett declined to comment on the federal investigations. A trial for that suit is to begin April 23 in Delaware’s Court of Chancery.

Hewlett, a major shareholder and son of late company co-founder William Hewlett, claims that HP officers orchestrated improper efforts to persuade large shareholders to support the merger plan.

The allegations of impropriety gained steam last week when a voicemail message from HP Chief Executive Carly Fiorina to Chief Financial Officer Robert Wayman was surreptitiously forwarded to a San Jose Mercury News reporter.

“We’ve seen a piece of [Northern Trust’s] votes move against us, and we’re nervous,” Fiorina said in the message. “We may have to do something extraordinary for [Deutsche Bank and Northern Trust] to bring them over the line.”

HP confirmed the message’s authenticity and is investigating how the company’s voicemail system was apparently breached.

Jesse Choper, a law professor at UC Berkeley, cautioned against reading too much into Fiorina’s voice message, noting: “There are all kinds of lawful ‘extraordinary’ measures that could be taken.”

Other experts on corporate governance said that such investigations are rare despite frequent allegations of impropriety.

“There are reports of deal making and back scratching in any kind of close campaign,” said Nell Minow, co-founder and editor of the Corporate Library, a shareholder watchdog group. “There has to be a gun, if not a smoking gun,” to justify an investigation, she said.

Against the backdrop of continuing controversy, “the SEC had to do something,” said Paul McGuckin, research director for Gartner Inc., a technology market researcher.

“It can’t look like it’s sitting on its hands in case something ugly comes out in the trial next week,” he said.

Analysts said the federal investigations probably would focus primarily on vote-buying issues.

“[If] HP engaged in vote buying and the use of corporate resources to compel Deutsche Bank to vote its way,” said Harvard’s Kraakman, “the outcome would be overturned and require a new election.”

In investigations involving friendly takeovers, employees typically don’t cooperate happily. But substantial employee opposition to the merger could create serious problems for HP, experts said.

“Discovery and depositions [for the Hewlett suit] will uncover some ugly things, because there are some disgruntled HP employees who will want to talk,” McGuckin said.

Such investigations often take weeks or months. But in light of the fast-moving developments in the merger controversy, federal authorities may try to expedite the process. Experts also said HP’s difficulties reflect a new enforcement posture following the Enron Corp. scandal.

“It’s very likely that something that would have been seen as acceptable 12 months ago will not be seen as acceptable here,” said Rob Enderle, an analyst with Giga Information Group.

But proving illegal manipulation of the merger vote may prove difficult, experts said. The closeness of the contest suggests that shareholders could have been convinced--and then changed their minds--based on reasonable arguments by either side. Deutsche Bank and Northern Trust could not be reached for comment.