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APRIL 25, 2002 NEWS ANALYSIS By Peter Burrows Walter Hewlett's Last Stand? While HP CEO Fiorina came off as polished, the dissident board member seemed unprepped. The courtroom buzz: HP is winning
As Neal repeatedly went through calculations designed to prove that HP's public financial targets for the deal were overly optimistic, Fiorina never budged. "Your math is correct," became her oft-repeated mantra, sometimes with a flash of impatience. Then she would follow with a wealth of context as to why Neal's math had no connection to Hewlett's key assertion. Then Walter Hewlett took the stage. Appearing a tad rumpled in a nondescript suit, he seemed uncomfortable in the spotlight, forgetting some basic details -- he didn't mention he's on the board of Harvard's Overseers when asked about his activities, and he couldn't confirm the background of fellow board member Sam Ginn, onetime CEO of Airtouch Communications. LITTLE PROGRESS. If Fiorina was never caught off guard, Hewlett was just the opposite. In the midst of a barrage of questions, he asked that one be repeated, saying "I'm sorry, I flipped out while you were asking the question." Sensing Hewlett's unease, HP attorney Steve Schatz roared in with tough questioning. While Hewlett answered honestly and simply, he took some heavy shots -- such as admitting that many of his concerns about the integration team were based on "rumor." As the courtroom cleared, watchers could be heard to mutter "That was painful to watch." Added one HPer: "I wish I'd gotten a chance to ask questions." Several legal experts watching the drama in the courtroom thought Hewlett's lawyers made precious little progress on either of the plaintiff's main charges. Hewlett alleges that HP bought the vote of shareholder Deutsche Bank by promising future banking contracts, and that HP knowingly lied about its ability to hit the key financial milestones of the deal: cost savings of $2.5 billion, with revenue decline of no more than 4.9%. OVERLY PESSIMISTIC. Most still see some remaining problems for HP on this last count, however. Documents received from HP's integration team show that the four key businesses are well off their targets in terms of revenues and earnings -- and that the gap had grown appreciably from last November through Mar. 14, the last time management got an update from the so-called Value Capture team responsible for assessing the financial impact of the deal. Fiorina and Chief Financial Officer Bob Wayman argued that such gaps in estimations are to be expected over time, whenever a big company undertakes a massive planning project. What's more, they argued that Value Capture teams often comprise people who have just begun dealing with integration issues. In the case of HP, they were being overly pessimistic, so as to set an easy bar for success. In possibly the only relevant part of his testimony to the charges, Hewlett argued that just the opposite is true. In his 15 years as a board member, he says, "In almost every case, [the internal teams] were overoptimistic, and it was the responsibility of management to give [the plans] a haircut." "GREAT IMPORTANCE." The drama heightened during testimony on Apr. 25, however. With a transcript in hand of the phone call between HP management and Deutsche Bank executives on the morning of the shareholder vote, Neal surprised the courtroom by calling Fiorina and CFO Wayman back to the stand. He grilled both of them about the call, which had been hastily arranged so HP could try to convince Deutsche to switch its votes in favor of the deal. At the end of the call, Fiorina declared that the Compaq merger was "of great importance to our ongoing relationship," according to the transcript. On the stand, she dismissed the import of her words, saying she often uses that phrase in discussions with bankers, in part because HP has been trying to increase its technology sales to Deutsche. Most legal analysts at the trial didn't see any hard evidence of actual vote-buying -- although observers suggested that Deutsche may have still some explaining to do to federal regulators about why it changed its votes. The Securities & Exchange Commission and Justice Dept. have sought information from HP and Deutsche Bank about the proxy vote. It's unclear what impact, if any, the SEC probe will have on the merger going through, separate from the Hewlett case. "UGLY" EFFORTS. Hewlett's charge that HP lied about the financial promise of the merger seems to have lost steam during the hearings -- largely due to the testimony of Compaq Chief Financial Officer Jeff Clarke. He headed the Value Capture effort on the integration team. And on Mar. 12, he sent e-mail to Compaq CEO Michael Capellas and HP's Wayman saying the results of the value-capture effort were "ugly." On the witness stand, however, Clarke insisted the team was on track, and he said his e-mail was written out of frustration that he couldn't get conservative business managers to commit to more aggressive revenue goals. HP board member Phil Condit, CEO of Boeing, testified that business units always submit low sales targets so that they'll be easy to hit. Of course, the judge hearing the case could have a completely different view. But barring bombshells, Walter Hewlett's crusade to kill the Compaq deal may be close to an end.  Burrows is covering the case in Delaware Edited by Douglas Harbrecht Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | APRIL |
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