Posted on 04/24/2002 10:12:37 AM PDT by Jack Black
Another Round in Carly vs. Walter
By Monica Rivituso
April 23, 2002
IT STILL ISN'T a done deal. Hewlett-Packard's (HWP) proposed acquisition of Compaq Computer (CPQ) has been a tough sell ever since it was announced back in September. The $20 billion deal championed by Chief Executive Carly Fiorina met bitter resistance from Walter Hewlett, an H-P board member and son of the late co-founder William Hewlett. And now, after aggressive campaigning by both sides, a close shareholder vote and a declaration of victory by H-P, the contest has landed in court.
In this merger battle's latest twist, Hewlett is challenging the H-P shareholder vote. He's picking a couple of bones with the computer-hardware maker, and Judge William Chandler III, who's overseeing the matter in the Delaware Chancery Court, has decided there's enough meat on them to warrant a hearing. While few observers expect the merger — which gained shareholder approval by about 45 million votes, or a slim 2.8% of the total, according to a preliminary tally — to be derailed, the legal battle could nevertheless weigh on H-P and Compaq.
For starters, it's likely to prove something of a distraction from the complex and difficult process of combining the two companies. "It's one thing to contest the merger; it's another thing to drag it into overtime," says Roger Kay, director of client computing at market research firm IDC.
But what could prove even more disruptive would be more confidence-eroding disclosures as internal emails, memos and voice mails get aired at the hearing. This struggle has already been characterized by a caustic, he-said, she-said dynamic, which observers think will only get worse. "I'm expecting that there will be some ugly revelations over the next three days in the trial," says Paul McGuckin, vice president and research director of Gartner Dataquest.
Officially, the hearing will focus on two key issues. First, Hewlett contends that the company coerced certain financial institutions into voting for the merger. At the heart of the complaint is a block of 25 million Deutsche Bank votes, which Hewlett asserts were originally cast against the merger. Using "enticements and coercions," H-P persuaded the bank to switch a significant number of votes — 17 million — just before polling was closed on the day of the shareholder meeting, Hewlett's complaint states.
On this point, a phone message that Fiorina left for Chief Financial Officer Bob Wayman two days prior to the shareholder vote will likely be discussed. In the voice mail, first reported in the San Jose Mercury News, Fiorina expressed concern that Deutsche Bank wouldn't vote for the merger. She told Wayman they had to contact the two firms "and see what we can get, but we may have to do something extraordinary for those two to bring 'em over the line here." Wayman and H-P have both stated that no improper coercion was implied by that message.
The second key issue is Hewlett's assertion that H-P "knowingly misrepresented" the success of the integration's progress ahead of the merger's closing. Because of the representations, the complaint states that Institutional Shareholder Services, an independent shareholder advisory firm, recommended voting in favor of the merger. The firm's recommendation carries quite a bit of sway in proxy votes, and institutional shareholders holding as much as 23% of H-P stock subscribed to ISS's recommendation, according to the complaint. Again, H-P has denied that it misrepresented anything. "We welcome the opportunity to present our case in front of the Chancellor," an H-P spokeswoman said Tuesday. "When the evidence comes to light it will be clear that H-P acted properly in all cases."
In opening arguments on Tuesday, Hewlett's attorneys charged that H-P's projections of the financial benefits from the merger were off by as much as 25% and that the company knew its numbers were wrong. H-P says its projections were conservative, and it could be tough for Hewlett to prove any deception. Nevertheless, the issue of adequate disclosure is a lightning rod in the post-Enron (ENRNQ) world. If it's revealed that crucial information about the integration effort wasn't disclosed but should have been, it could very well mean that the judge will call for a revote, says Ronald Jay Gilson, a professor of business and law at Columbia University.
H-P and Fiorina have had some other mud thrown their way over the course of this fight. In late February, for example, it was revealed that the company at one point considered a lavish, two-year $70 million pay package for Fiorina if the merger went through. That plan was aborted, however. And last week, Fiorina said the company had fired an employee who'd admitted leaking two internal memos to the press, a controversial move that comes at a time when employee morale at H-P is already reportedly at a low ebb.
Meanwhile, those employees are engaged in the delicate and exhausting process of integrating H-P's and Compaq's operations. With competitors waiting to swoop in the moment any customers feel that process isn't working to their advantage, H-P can ill afford such distractions. "Postmerger integrations are fatiguing enough," says Mark Sirower, head of the mergers-and-acquisitions practice at Boston Consulting Group. "You'd rather that [a lawsuit] not be in the mix."
The fact that her voice mail was hacked and given to the press shows that there is a serious problem inside the company. This is the worst civil war I've heard of since Compaq bought DEC.
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