Walter Hewlett goes to court to block the merger

Caroline Humer and Peter Henderson

NEW YORK/SAN FRANCISCO: Hewlett-Packard Co. dissident board member Walter
Hewlett went to court on Thursday to stop the company’s merger with Compaq
Computer Corp., charging that HP management coerced votes and misled a key
adviser to seal the largest merger in computer industry history.

Hewlett-Packard said the suit in a Delaware Chancery Court was baseless and
false and vowed to vigorously defend the March 19 shareholder vote, which it
believes it won by a slim margin. The unexpected court challenge revives a
bitter four-month battle by Hewlett, a son of HP co-founder Bill Hewlett, to the
$19 billion plan set out by HP Chief Executive Carly Fiorina, who has tied her
own future to the deal.

Fiorina says the merger will create a giant able to compete with
International Business Machines Corp. by offering everything from large business
computers to personal computers to printers and services, while Hewlett says it
will weigh down HP’s profitable printer business with Compaq’s low-profit PC
business.

Swing vote in nick of time
In his lawsuit, Hewlett alleged that HP had used its corporate assets "to
entice and coerce" shareholder Deutsche Bank to reverse position and
support the merger, and that HP had succeeded in the nick of time, on the
morning of the vote.

"HP’s clandestine use of corporate assets to induce or coerce votes in
favor of the proposed merger tainted more than enough votes to swing the
election in favor of the proposed merger," Hewlett said in the filing,
asking the court to declare the merger defeated or to order a new shareholder
vote.

The official count of the March 19 vote is not expected for weeks, but
Hewlett calculates that management won by less than one percent of the vote,
which would roughly equal the 17 million plus shares Deutsche Bank allegedly
changed. Deutsche Bank declined to comment on the matter.

HP closed a multibillion-dollar credit facility with Deutsche Bank and other
institutions just a few days before the shareholder vote. An HP spokeswoman said
the suit was meritless. "We find it regrettable that Mr. Hewlett has chosen
to resort to baseless claims without regard to the impact of his false
accusations on HP’s business reputation and employees," she said.

But mergers and acquisitions lawyer Andrew Ross, a partner at law firm Loeb
& Loeb, said the suit could have a chance since it involved alleged
information which should have been made known to all shareholders.

The Delaware Court that the suit was filed in was established to rule on
business law in Delaware, the legal home of many corporations, including HP.
"Issues regarding lack of disclosure of material facts can impact the
outcome of a proxy vote, and certainly Hewlett appears to be raising significant
concerns that the court has the right to hear," Ross said.

Hewlett and HP fought intensely for months for shareholder support, barraging
investors with newspaper ads and proxy materials. In his lawsuit, Hewlett also
alleged that HP misrepresented its progress in the integration of the two
companies during a Feb. 27 meeting with analysts.

HP had said it expects cost savings of $2.5 billion from the merger and
anticipates cutting 15,000 employees. Hewlett also alleged that at meetings of
the merger integration team it was clear that savings and revenues were not as
great as expected and that the team had discussed firing 24,000 employees rather
than the 15,000 publicly announced.

The rosy outlook had persuaded influential proxy adviser Institutional
Shareholder Services to back the deal, securing a huge block for management,
Hewlett said.