HP Merger Trial Opens with Bitter Accusations

They traded fire over whether HP had misled shareholders in an attempt to get them to approve its US$20 billion merger with Compaq.

Hewlett has been a vociferous opponent of the merger from the beginning. Last month, he filed suit to block the deal.

According to HP, shareholders approved the merger by 51.4 percent to 48.6 percent, with a margin of 45.3 million votes. If the judge in the case rules in favor of Hewlett, that vote could be overturned.

Tough Call

According to Giga Information Group research fellow Rob Enderle, the court's decision will not be an easy one.

"If they support HP, they now have strong evidence that the merger is not going well, and should it fail, it will reflect poorly on the court," Enderle told the E-Commerce Times.

"If they support Walter, it sends a chilling message about the court to corporations that might reconsider incorporating in Delaware."

Dirty Dealings

In his suit, Hewlett accused HP of using improper methods to convince institutional shareholder Deutsche Bank to vote for the deal, and of misleading shareholders about the planned integration of the two companies.

HP has said Hewlett's claims are "without basis."

But Hewlett's lawyers expanded on those claims in court Tuesday, providing evidence in the form of e-mail messages and other documents that the company may indeed have misled shareholders about the implications and progress of the deal.

Hidden Documents

According to reports, Hewlett's lawyer, Steve Neal, claimed HP promoted the deal in public while hiding documents that indicated integration between the two companies was lagging behind projections by as much as 25 percent.

Of particular interest was a personal journal entry about the integration written by Compaq CEO Michael Capellas that stated, "At our current course and speed, we will fail."

Compaq said the statement was taken out of context.

Reasonable and Achievable

HP's lawyers countered that the company has done nothing wrong and that its integration goals and sales targets are reasonable and achievable.

HP CEO Carly Fiorina was on the stand for more than four hours, detailing how the company planned to meet its goals and insisting that the company had done nothing untoward in promoting the deal to shareholders.

Fiorina reportedly said that while there was a gap between HP's goals and the actual results, such a difference is not uncommon in deals and likely would have narrowed as the deal reached completion.

Fiorina also denied that HP did anything improper to induce Deutsche Bank to approve the merger.

More Worries

The trial is not the only thing HP has to worry about. According to Enderle, HP's alleged lack of disclosure may be of interest to the U.S. Securities and Exchange Commission, since its rules have tightened in the wake of the full-disclosure mandate and the Enron fiasco.

"They may determine that investors were misled, and if they do, it means a different kind of problem for HP," Enderle said.

Shares of Compaq rose 0.1 percent to $10.31 in early trading Wednesday, while HP shares fell 0.43 percent to $17.61.