HP-Compaq Deal Clears Court Hurdle

A Delaware judge Tuesday cleared Hewlett-Packard Co. of allegations it acted improperly in the vicious proxy fight over the Compaq Computer Corp. acquisition, likely paving the way for completion of the high-tech industry's biggest merger.

Thus Hewlett-Packard Co. CEO Carly Fiorina, the most powerful and visible woman in American business, emerged both victorious and vindicated as the court upheld her $18 billion plan to buy Compaq, ruling she had not lied to shareholders or bought votes.

The court ruling means that the merger can go through next week as planned, nearly eight months after the deal was announced, and with Fiorina at the helm of a global technology powerhouse that she says will challenge No. 1 computer maker IBM Corp.

Fiorina had staked her career and reputation on the success of the merger during a hard-fought proxy battle that pitted her against founding family scion and merger opponent Walter Hewlett and that took on the dimensions of a major political campaign.

When Hewlett sued on March 28, accusing HP of buying votes and covering up information damaging to its case for the merger, Fiorina took the allegations personally. HP lawyers asked the court to clear her name, something it did Tuesday.

After a three-day trial last week in Wilmington, Del., Chancery Court Judge William B. Chandler ruled that Hewlett failed to support his charges that HP bullied a big investor into supporting the Compaq deal and lied to investors about the progress of the merger plans.

"The evidence demonstrates that HP's statements concerning the merger were true, complete and made in good faith," Chandler wrote.

Hewlett can challenge the ruling in the Delaware Supreme Court. The HP heir said in a statement he was disappointed with the decision but planned to review it closely before deciding on his next step.

Palo Alto-based HP and Houston-based Compaq plan to begin working together May 7.

"Clearly we're gratified," HP spokeswoman Rebeca Robboy said. "We look forward to moving on."

Chandler's ruling concluded another contentious chapter in Hewlett's fight to stop the acquisition.

After HP narrowly won its shareholder vote on the Compaq acquisition, Hewlett tried to block the deal by suing the computing giant, which his father, William Hewlett, co-founded in 1939. He sued in Delaware because HP is incorporated there, as are many Fortune 500 companies.

That step so angered HP management and its other directors that Hewlett was not re-nominated for another term on the board, leaving the Silicon Valley institution without a Hewlett or Packard in its boardroom for the first time.

Hewlett's statement said he would maintain his involvement with the company and monitor it "to ensure that it acts in the best interests of all stockholders."

The Securities and Exchange Commission and federal prosecutors in New York also have been looking into how HP acted in the proxy fight.

"This has been an astonishing sequence of events," said Gartner Inc. analyst Martin Reynolds. Because of all the scrutiny on the deal since it was announced Sept. 3, "I really believe this is one of the best planned mergers we've ever seen," Reynolds added.

A preliminary tally released two weeks ago found that HP won its shareholder vote 51.4 percent to 48.6 percent. That amounted to a lead of 45 million shares — likely enough even if the judge had disqualified the 17 million to 24 million shares voted by Deutsche Bank, the investor Hewlett claims was coerced.

The tally is not yet official because both sides are challenging individual ballots, a process known as "the snake pit."

The Delaware trial featured 10 hours of testimony from HP's top two executives, Fiorina and chief financial officer Robert Wayman.

Hewlett alleged that HP threatened to withhold future investment banking business from Deutsche Bank unless the investment firm canceled its vote against the deal and voted for it at the last minute.

In a voice mail for Wayman two nights before the March 19 shareholder vote, Fiorina suggested they do something "extraordinary" for Deutsche Bank. Then in a conference call with Deutsche money managers about an hour before the shareholder vote began, Fiorina said their decision was "of great importance to our ongoing relationship." Hewlett attorneys also said HP's proxy solicitor had noted on a planning chart that HP had a "carrot of future business" to use in lobbying Deutsche Bank.

Deutsche Bank was performing a variety of services for HP, including giving "market intelligence" advice for $1 million, with a $1 million bonus contingent on the deal's approval. Deutsche's top investment official was recorded saying the firm's vote on the HP-Compaq deal was highly sensitive and needed to be changed "as fast as humanly possible."

Fiorina and Wayman said they asked Deutsche money managers to support the deal on its merits and did not resort to coercive tactics.

The judge agreed, saying, "The plaintiffs can point to nothing in those exchanges that indicates a threat from management that future business would be withheld by HP from Deutsche Bank."

However, Chandler added that the evidence raised troubling questions "about the integrity of the internal ethical wall that purportedly separates Deutsche Bank's asset management division from its commercial division."

To support his claim that HP misled investors about the chances the Compaq merger would generate its promised financial benefits, lawyers for Hewlett cited internal projections that showed the deal falling far short of its publicly disclosed targets.

Hewlett introduced internal memos from Compaq's chief financial officer, Jeff Clarke, calling the projections "ugly" and "a disaster" and saying the integration team had "a mile to go."

The plaintiffs also found a personal diary entry by Compaq CEO Michael Capellas in which he wrote of the "sobering thought" that HP and Compaq were about to embark on a historic deal. "At our course and speed we will fail," Capellas wrote.

But Clarke, Fiorina and Wayman testified that the negative comments were motivational ploys. They also said the weak projections were drawn up by HP and Compaq managers who intentionally set low targets they knew they could beat. Fiorina called the process "sandbagging" and said it happens all the time.

Hewlett testified he saw the opposite happen in his 15 years on the HP board — that division leaders tended to be too optimistic about what they could produce. But another HP director, Boeing Co. chairman and CEO Phil Condit, disputed that account, saying sandbagging is all too common.

Chandler said he found HP's explanation "compelling" and "corroborated by evidence in the record."