Fiorina Denies Misconduct in HP Merger
Attorneys for dissident Hewlett-Packard Co. director Walter Hewlett introduced a litany of damaging internal company reports Tuesday that paint HP’s $19-billion merger with Compaq Computer Corp. as a disaster in the making.
But in the first day of the trial over Hewlett’s lawsuit challenging the merger, HP Chief Executive Carly Fiorina denied misleading shareholders about the financial prospects for the combined companies.
And in nearly five hours of carefully choreographed testimony, Fiorina countered allegations that she or other company officers coerced key institutional shareholders into favoring the biggest technology merger in history.
She said the documents introduced by Hewlett’s lawyers do not represent the full picture.
“If all you are showing of a movie is a single frame, that can show a very misleading view of what’s going on,” Fiorina said.
Among the most damaging materials presented by Hewlett attorney Stephen Neal in his opening arguments was a note titled “Sobering thought,” written in late February or early March by Compaq Chief Executive Michael Capellas.
“At our course and speed, we will fail,” Capellas wrote.
Neal excerpted several other internal reports issued shortly before the merger vote, all of which suggested that HP and Compaq executives knew that the integration planning process was not going smoothly and that anticipated cost savings and profit would be far below projections.
A report by a team involved in planning the integration process notes that the “second half of 2002 is pure disaster in terms of earnings per share,” and that further projections were just as discouraging.
An e-mail from a key member of HP’s financial staff implies that executives may be denying harsh realities.
“The attached is a frightening reality check,” the e-mail notes. “I see little realistic upside and I am not alone.... I sincerely hope that we all start acknowledging the realities soon.”
Fiorina responded to Neal’s questions about the case in terse, cryptic comments that could barely be heard in the crowded courtroom of Delaware Chancery Court Judge William Chandler III.
She acknowledged that internal documents from March showed earnings targets for the combined company at 25% lower than previous projections, and that HP never disclosed the more pessimistic projections to its board or to investors.
But Fiorina forcefully defended her actions under cross-examination by her own attorneys. In a carefully scripted interchange reminiscent of Fred Astaire and Ginger Rogers, attorney Boris Feldman walked Fiorina through HP’s elaborate process for planning the integration of the two companies and for validating her estimates of profit and savings, or “synergies.”
Her calculations suggest that “cost synergies were a lot bigger, certainly, than our own publicly stated case,” she testified.
Fiorina also refuted Hewlett’s claim that 24,000 jobs would be cut in the merger, sticking to HP’s original estimate of no more than 15,000.
In the absence of definitive testimony, the credibility of Fiorina’s argument will become key, said Jessie Choper, a professor of law at UC Berkeley.
“Could she reasonably have believed, in the light of other information she had, that the memoranda that her own people generated were not subject to disclosure?” he asked.
Neal also led Fiorina through a series of questions about allegations that HP had engaged in vote buying with Deutsche Bank. Just before the March 19 voting deadline, HP announced that a $4-billion line of credit would be co-arranged by Deutsche Bank.
Almost immediately after, Deutsche Asset Management, the bank’s investment unit, switched 17 million votes to favor the merger.
That situation was enflamed two weeks ago when a voicemail message from Fiorina to Chief Financial Officer Robert Wayman was somehow forwarded to a newspaper reporter.
“We may have to do something extraordinary for [Deutsche Bank] to bring them over the line,” Fiorina said.
The message was innocent, she said on the stand.
“Maybe we had to get on an airplane, maybe we had to get a board member to talk to them,” she said. Fiorina denied that she or any HP officer so much as suggested that any institutional shareholder be enticed or threatened with loss of HP business to secure a favorable merger vote.
HP claimed a narrow victory last week in the shareholder vote to approve the merger. If it loses in court, the merger vote, which should be finalized within a week, could be invalidated.
Interest in the trial drew scores of reporters and attorneys--some of whom paid upward of $20 an hour to young people to stand in line in front of the courthouse beginning at midnight Tuesday to ensure a seat inside.
Fiorina, who will be questioned again today by Hewlett’s counsel, said that HP is on track to launch the merged company May 9 if it prevails in the trial.
The case has been expedited by both sides in light of its potential for disruption in HP’s relations with customers.
“This is a maximum time of uncertainty and a maximum moment of opportunity for our competitors,” Fiorina said.
Shares of Palo Alto-based HP fell 23 cents to $18.04 on the New York Stock Exchange.
