Hewlett-Packard Is Accused of Misleading Holders


April 24, 2002


By STEVE LOHR


WILMINGTON, Del., April 23 - Lawyers representing the
dissident director Walter B. Hewlett delivered a sweeping
attack today on the integrity and credibility of the
management of Hewlett-Packard, contending that it had
repeatedly misled shareholders about the projected gains
from its planned purchase of Compaq Computer even as senior
executives inside the companies became increasingly
pessimistic.


The main evidence presented in court by the lawyers for Mr.
Hewlett was a series of documents prepared by the teams
from Hewlett-Packard and Compaq who were planning how to
merge the companies smoothly to achieve the cost-saving and
profit-enhancing goals that justify the merger.


In a report on a meeting in late February, for example, the
chief financial officer for Compaq, Jeff Clarke, described
sales projections for the second half of 2002 as "a pure
disaster" while the estimates of operating profit for 2003
were more than $1 billion below their goals. In an e-mail
message on March 12, Mr. Clarke, assessing recent sales
estimates, said, "It is ugly." He added that "both
companies are deteriorating" in a weak economy and partly
as a result of customer uncertainty about the controversial
merger.


An entry in the personal journal of Michael D. Capellas,
the Compaq chief executive, mentioned a "sobering thought"
as the two companies were about to embark on the largest
merger in computing history. "At current course and speed,
we will fail," he wrote, as the document was quoted in
court.


Mr. Hewlett, who led a costly and acrimonious proxy fight
against the Compaq merger, is challenging the shareholder
vote, which Hewlett-Packard apparently won by a slender
margin.


A lawyer for Hewlett-Packard scoffed at the allegations,
saying the company's management and board was being
"dragged through the mud in the courtroom and in the
national media" armed with nothing more than a biased
selection of excerpts from documents and "pure
speculation."


But in his opening remarks, Mr. Hewlett's lawyer, Stephen
C. Neal, said the documents that he began to introduce on
the first day of the three-day trial came mostly from the
"joint chiefs of staff of the integration effort, not the
privates on the front line." The documents showed growing
concern among those planning the merger details, Mr. Neal
said, even while the Hewlett-Packard management team, led
by Carleton S. Fiorina, its chief executive, continued to
make "public statements that things were going swimmingly."



The gloomier assessments, Mr. Neal said, were never made
public. "None of it," he said in his opening remarks, "was
disclosed to the shareholders and none of it was disclosed
to the H.P. board. That alone should prompt the court to
throw out the vote."


The emphasis on allegations that Hewlett-Packard's
management made misleading statements and withheld
important information from shareholders seems to be
somewhat of a shift of tactics for Mr. Hewlett's side. When
the suit was filed in late March in Delaware, where
Hewlett-Packard, like so many companies, is incorporated,
the featured allegation was a vote-buying claim.


The claim was that Hewlett-Packard illegally persuaded a
large institutional shareholder, Deutsche Bank Asset
Management, to switch 17 million shares to vote in favor of
the deal at the last minute. In the complaint, Mr. Hewlett
charged that "H.P.'s clandestine use of corporate assets" -
promising to give or withhold future banking business - to
get Deutsche Bank to switch "tainted more than enough
votes" to tip the closely contested vote in favor of the
deal.


Last week, however, the independent inspectors making the
official count in the proxy fight said their preliminary
tally gave Hewlett-Packard the edge by some 45 million
shares - a slender but significant margin. It meant that if
the Delaware court decided to nullify the Deutsche Bank
share votes or take them from the company and put them on
Mr. Hewlett's side of the ledger, the arithmetic still
would not give Mr. Hewlett a victory.


The vote-buying claim is still very much a part of Mr.
Hewlett's suit, but it is not the pivotal allegation.
Today, Mr. Neal termed the Deutsche Bank element of the
case "circumstantial, but it is powerful."


For the judge hearing the case, William B. Chandler III, to
nullify the shareholder vote on March 19, he would have to
find that the voting process itself was corrupted. That is
a high threshold of proof for Mr. Hewlett's side to try to
reach, according to legal experts. But the wide-ranging
assault on the integrity of the Hewlett-Packard management,
they say, is the plaintiffs' best chance.


The first witness to take the stand was Ms. Fiorina, and
Mr. Neal repeatedly tried to show that her confident public
statements were contradicted by the internal documents. Yet
Ms. Fiorina, speaking softly but firmly, proved a difficult
witness to corner. When presented with documents showing
pessimistic projections, she would typically reply, "Yes,
that is what the document says." Or "Yes, your math is
correct."


But during four and a half hours of testimony today, Ms.
Fiorina consistently portrayed the seemingly damaging
documents as showing the business units in both companies
struggling to meet internal "stretch" targets. The whole
point of the process, she said, was to try to make the
businesses strain to maximize gains, so that the combined
company would "underpromise and overdeliver."


When asked if the internal integration documents in
question were ever presented to the board or shareholders,
Ms. Fiorina replied, "No, it would have been irresponsible
to do so."


Later, she added: "It is like trying to tell a whole movie
with a single snapshot, or frame. That can provide a very
misleading picture."


This afternoon, Compaq said the journal was taken "out of
context and refers to a comment at an internal staff
meeting on a single issue and not the merger as a whole."
Mr. Capellas, the statement added, is confident the merger
will prove a success.


http://www.nytimes.com/2002/04/24/technology/24HEWL.html?ex=1020658504&ei=1&en=acd90807e9fdb032



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

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