HP dissident sues to block merger vote

His suit claims company won bank's proxies after giving it some business


SAN FRANCISCO - Walter B. Hewlett, who has fought bitterly to keep the company his father helped create from merging with Compaq Computer Corp., took his fight to court yesterday in an effort to block the deal that Hewlett-Packard Co. says it has won.

In papers filed in Delaware Chancery Court, Hewlett claims that Hewlett-Packard's managers used corporate assets to "entice and coerce" a large institutional shareholder into switching its votes in favor of the merger, initially valued at $24 billion, during the final moments of polling on March 19.

The suit also alleges that the company misled shareholders with inaccurate predictions about the post-merger company, including overestimates of profits and underestimates of employee layoffs.

Hewlett, a director of Hewlett-Packard who has not conceded defeat despite victory cries by the company, requested that the votes of the institutional investor, a subsidiary of Deutsche Bank AG, be thrown out. Going further, he also asked the court to disqualify all votes cast in favor of the deal, and to declare either that Hewlett-Packard lost its merger bid or to force a revote.

The lawsuit is the latest chapter in a sometimes harsh campaign by a dissident director to quash a friendly merger. Carleton S. "Carly" Fiorina, chief executive of Hewlett-Packard, said after the shareholder vote that she had won by a "slim but sufficient" margin.

Though the final results of an official count, under way in Delaware, are not expected for several weeks, leaders from Hewlett-Packard and Compaq have stepped up efforts to integrate the computer giants.

"A true count of the validly cast and properly solicited votes at the HP March 19, 2002 special meeting would show that the proposal to issue shares in connection with the Proposed Merger was defeated," says the lawsuit, filed by Hewlett and Edwin van Bronkhorst on behalf of the William R. Hewlett Revocable Trust, a leading shareholder.

Hewlett-Packard called the lawsuit without merit and said it would defend itself vigorously.

"We find it regrettable that [Walter] Hewlett has chosen to resort to baseless claims without regard to the impact of his false accusations on HP's business reputation and employees," it said in a statement.

The suit asks the court to expedite the case and, in the meantime, enjoin the company from closing the merger. Hewlett-Packard's shares rose 17 cents yesterday to close at $17.94, and Compaq's shares fell 15 cents to $10.45.

Representatives from Deutsche Bank and its subsidiary, Deutsche Asset Management, did not respond to requests for comment.

With the 18 percent stake held by the Hewlett and Packard families united against the deal, Fiorina faced an uphill battle in the pursuit of the merger. As the vote approached, Fiorina and Hewlett engaged in a furious campaign of advertising, mailings and personal phone calls to shareowners.

Even as the political jostling took place, hundreds of employees from the two companies were developing plans for integrating their computer products, employees and cultures.

In recommending shareholder approval of the deal, an influential proxy firm, Institutional Shareholder Services, pointed to those extensive integration efforts as signs of confidence that the companies could pull off the complex merger.

But all the while, the lawsuit claims, the integration team knew that it was falling behind the publicly stated projections. Hewlett claims that team members discovered that the deal would start adding to profits in 2004 instead of 2003; earnings per share would be 30 cents a share, or $1 billion, less than predicted; and as many as 25,000 employees might lose their jobs, instead of 15,000.

HP management knowingly misrepresented the conclusions and progress of the pre-closing intercompany integration efforts being undertaken jointly by HP and Compaq, the suit says, calling the omissions part of a series of deceptions that breached the company's fiduciary duties.

The full-court press on investors continued until the final moments of voting. Four days before the vote, Hewlett-Packard announced that it had secured a $4 billion credit facility to pay for merger costs. Deutsche Bank was named as a co-arranger.

Deutsche Asset Management had already cast 25 million votes against the merger. The next business day after helping to arrange the credit line, the suit alleges, Deutsche Bank began to fear Hewlett-Packard's reaction to its decision.

"Deutsche Bank was led to understand that if it did not switch its votes to favor the Proposed Merger, its future business dealings with HP would be jeopardized," the suit says.

On the morning of the vote, the bank quickly arranged conference calls with both sides. Hewlett-Packard delayed the start of the shareholder vote by 30 minutes. While the company says it was waiting for shareholders to find parking, the lawsuit says Fiorina was waiting for Deutsche Bank to make up its mind.

The management firm finally switched up to 17 million votes in favor of the deal. As soon as she learned that its votes were cast, the suit says, Fiorina ended the meeting.

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