Hewlett's Chief Scoffs at Accusation of Coercion


April 26, 2002


By STEVE LOHR with ANDREW ROSS SORKIN


WILMINGTON, Del., April 25 - The chief executive of
Hewlett-Packard, Carleton S. Fiorina, returned to the
witness stand here today to explain what she meant when she
told a major institutional investor that a vote in favor of
the company's merger with Compaq Computer was "of great
importance to our ongoing relationship."


Walter B. Hewlett, a dissident director who is trying to
overturn a proxy vote in favor of the merger, introduced
Ms. Fiorina's statement in an effort to show that she was
trying to influence the votes of the big investor, Deutsche
Bank, by threatening its banking business with
Hewlett-Packard.


Recorded conversations between the arms of Deutsche Bank
about the Hewlett vote, also introduced into evidence
today, have set off a preliminary investigation into the
bank by the Securities and Exchange Commission, people
close to the inquiry said today. The commission was already
looking at Hewlett-Packard's activities in trying to
persuade investment banks to influence their asset managers
to vote in favor of the deal.


At a time when federal and state regulators are
increasingly investigating the efficacy of "Chinese walls,"
which are supposed to keep a firm's investment analysis
independent from its deal-seeking investment bankers, the
Deutsche Bank evidence raises questions about conflicts.


Ms. Fiorina's testimony, near the end of a three-day trial
in a Delaware court, came after lawyers for Mr. Hewlett
introduced the transcript of a conference call among
Deutsche Bank representatives, Ms. Fiorina and Robert P.
Wayman, the chief financial officer of Hewlett-Packard, on
March 19 - the day of the shareholder vote.


The asset management side of Deutsche Bank held millions of
proxies that it could vote for or against the merger. But
the banking side of Deutsche Bank did business with
Hewlett-Packard as a large corporate client, including
working to help the company win the proxy fight against Mr.
Hewlett.


After a presentation on the merits of the merger of Hewlett
and Compaq, Ms. Fiorina concluded the call by saying the
vote on the deal was "of great importance to our ongoing
relationship."


She added, "We would very much like to have your support
here."


A Hewlett-Packard lawyer, Boris Feldman, later told the
court: "So this is what the bribery charge comes down to
now: a comment made at the end of a conference call."


Ms. Fiorina said that speaking of an "ongoing relationship"
was a phrase she routinely used in speaking to investment
bankers.


When asked whether she intended to link the Deutsche Bank
vote to conducting business with Hewlett-Packard in the
future, Ms. Fiorina replied: "Absolutely not. And I don't
think it was interpreted that way."


But according to an internal call recorded after Ms.
Fiorina's call on March 19 and introduced into evidence
today, Dean Barr, chief investment officer for Deutsche
Bank Asset Management in New York, said to the proxy team
that controlled Deutsche's vote on its shares: "You may or
may not be aware we have an enormous banking relationship
with Hewlett-Packard. Obviously if you don't want to change
your vote, that's your call. I would suggest to you, and
I'm not trying to put undue pressure, but make sure that
you have a very strong documented rationale for why you
voted the way you did as it relates to this merger."


According to the court transcript, Klaus Kaldemorgen,
another executive on the call, replied to Mr. Barr: "I
don't want to be smarter than your people in New York, so
if the majority of you come to the conclusion that it's
better for our customers to vote in favor, I tried to
change our vote here, but I have to see what I can
overcome. All the technical problems. I have to react very
quickly."


Deutsche Bank declined to comment on the S.E.C. inquiry.



In a statement, the bank said that: "Deutsche Asset
Management's proxy committee was not influenced by any
banking relationships with Hewlett-Packard. The committee
cast its votes in favor of the merger solely in the
interest of Deutsche Asset Management's clients, taking
into account the presentations made on the morning of the
merger vote by Walter Hewlett and by Hewlett-Packard
management on the advantages and disadvantages to
shareholders of the proposed merger."


Mr. Hewlett is seeking to have the shareholder vote on the
Compaq merger - which Hewlett-Packard apparently won by a
slender margin - tossed out by court order. He has
contended that the company's management improperly withheld
important information - damaging to the promerger argument
- from shareholders and that the management bribed or
coerced a large institutional investor to switch its vote
in favor of the deal.


The vote-buying allegation is no longer the featured charge
in Mr. Hewlett's suit. The Deutsche Bank shares switched to
vote in favor of the deal, 17 million shares, would not be
enough to change the outcome of the vote. Last week, the
independent inspectors tallying the results of the proxy
contest said Hewlett-Packard had won by about 45 million
shares, based on their preliminary count.


Indeed, the Deutsche Bank evidence at the trial may prove a
greater problem for the bank than for the computer company.



For Hewlett-Packard, the Deutsche Bank evidence was
intended by Mr. Hewlett's side to depict a management
willing to bend the rules to win. Mr. Hewlett's lawyer,
Stephen C. Neal, has called the evidence "circumstantial
but powerful."


Later in the day, Philip Condit, the chairman of Boeing and
a director of Hewlett-Packard, gave a spirited defense of
the role played by the Hewlett-Packard board in supporting
the planned purchase of Compaq Computer. He portrayed board
deliberations as lively, candid and well informed.


Mr. Condit's testimony at the end of the three-day trial in
a Delaware court directly refuted the assertion made by a
lawyer representing Mr. Hewlett that the Hewlett-Packard
board had "abdicated its responsibilities" and passively
approved the plans of the company's management team.


"I've never participated on a board that was more fully
informed," said Mr. Condit, a longtime executive who
personally oversaw Boeing's merger with McDonnell Douglas.
He called the information management supplied to the
Hewlett-Packard board "the most complete data I've seen
going into a merger."


Mr. Condit was essentially a character witness not only for
the management team, led by Ms. Fiorina, but also for the
integrity of the governance process at Hewlett-Packard.
Those considerations of management's credibility and
integrity will be crucial in the deliberations of
Chancellor William B. Chandler III.


Mr. Hewlett's main contention - and best hope for having
the vote tossed out, legal experts say - is the allegation
that Hewlett-Packard consistently withheld from
shareholders information showing that the merger planning
was going poorly.


The information, presented at the trial, came mainly from
the teams inside the two companies, whose reports appeared
to be far more pessimistic than the company's upbeat public
statements.


The executives of Hewlett-Packard and Compaq Computer have
replied in court that the reports were planning documents
that they were working on in the individual business
groups, and not forecasts for the company as a whole. The
business groups, they added, had incomplete information
that did not include large cost savings from areas like
joint procurement of supplies and services.


Jeffrey Clarke, Compaq's chief financial officer, testified
today that one broad-based internal estimate showed
possible cost savings of nearly $4 billion from the merger
instead of the publicly stated $2.5 billion. There was
discussion of disclosing the larger number, but the
management chose not to.


"Ms. Fiorina specifically wanted to be conservative," Mr.
Clarke said.


And Mr. Condit testified that as long as the management
remained confident it could reach its overall financial
objectives, there was no need to bring the business-group
reports to the board or disclose them to shareholders. He
acknowledged that he had never seen the business-group
reports.


"Those reports are part of the process of getting to the
final numbers," Mr. Condit said. "Management has to
exercise some judgment."


http://www.nytimes.com/2002/04/26/technology/26BANK.html?ex=1020821938&ei=1&en=12554077471691e3


Copyright 2002 The New York Times Company

--------------------------------
Tom Brandt
Northtech Systems, Inc.
313 N. 1st Street
Ann Arbor, MI 48103
http://www.northtech.com/

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