Regardless of how Delaware Chancery Court Judge William Chandleron the case, the actions and arguments of both sides appeared flawed, said some trial spectators. Hewlett and HP will file closing briefs by 9 p.m. PDT Friday, and Chandler said he will make a decision "very quickly."
For dissident HP board member Hewlett, his proxy fight and the rationale against the merger was poked and prodded to the point where he acknowledged that much of his case wasand documents of dubious origins. Hewlett also stumbled his way through several answers ("I'm sorry, I flipped out while you were asking the question," he said at one point).
Meanwhile, Hewlett's lawyer, Stephen Neal, built his case by arguing that HP misled investors by not disclosing "value capture" reports that indicated integration plans weren't going smoothly. Neal also argued that HP bought Deutsche Bank votes to help win shareholder approval of the deal.
For HP, its defense was partly based on "sandbagging," a term referring to the practice of setting low expectations so they can be topped later. HP CEO Carly Fiorina said business unit heads indicated they couldn't meet financial targets for the combined companies because they didn't have enough information and didn't understand the complexities of the merger. Because of sandbagging, Fiorina said, the reports often showed that HP was going to fall short of its financial goals.
No matter who officially wins, doubts were planted about both sides.
"Both of them have some failings," said John McFadden, a 68-year-old HP retiree. McFadden, who was rooting for Hewlett, said HP executives "came across as evasive," but acknowledged Hewlett's arguments weren't that strong.
Nevertheless, Hewlett's lawyers did make some inroads by displaying a barrage of e-mail documents.
While the parties were bickering over whether the internal HP reports were concrete forecasts that should have been disclosed or just "snapshots" in a long planning process, spectators were reaching their own conclusions.
Many people at the trial said Hewlett lacked a smoking gun, but did manage to raise a few eyebrows with his evidence.
"I personally don't buy Fiorina's argument, but from a legal perspective Hewlett has nothing," said one observer representing a hedge fund who did not want to be named. "It still doesn't take away the fact that some documents could have been disclosed."
Sandbagging and employees
During three days of testimony, Fiorina used the term sandbagging early and often as she largely dismissed reports from business units indicating the integration wasn't going smoothly.
After a few hours, however, Fiorina began to backtrack. She said she wanted to be clear that she wasn't making her business unit leaders take a fall.
"There's a human element here," she said. "People want numbers where they can knock them out of the park."
She said it was her job to push the needle and look at the big pictures. Although executives leading key divisions are intelligent, they don't have the broad view that top management has because they have to stay focused on day-to-day business.
Compaq CFO Jeff Clarke also brought up the sandbag issue, noting that he was frustrated when he fired off a March 12 e-mail in which he said the company's combined financial prospects were "ugly." Clarke testified that the statement reflected his frustration with slow progress from various business units.
"I was frustrated by the work we had done in the business groups," Clarke said.
Although HP argued that the reports were merely a part of a planning process, they still indicate the company has a lot of integration work ahead. Neal, in cross-examination of HP CFO Bob Wayman on Wednesday, crystallized HP's challenge if merger architects such as Fiorina and Wayman don't sync up with its business units.
Neal: "Is it possible, is it not, that you and Ms. Fiorina may have believed at the outset and continued to believe, in the achievability of the plan you put forth to shareholders, and yet faced a situation where people within your business groups were coming up with numbers that suggested different conclusions? Correct?"
Neal: "Perhaps...the best thing to do would be to say to shareholders, 'We continue to hold our aspirations but you ought to know the data coming in from the business groups week after week, month after month, does paint at least an alternative possibility which is materially worse than our hopes and expectations?' Correct?"
Wayman: "I think I agree with that with one condition. And that is it would have to be more mature than what these numbers are at this point in time from the business groups. We would have to be closer to the completion of the planning process."
The Wall Street game
The three-day trial also provided some insight to the games companies have to play on Wall Street.
Although Hewlett's argument that HP bought merger votes from Deutsche Bank failed to produce a "gotcha" document, testimony and transcripts revealed three simple truths:
So-called Chinese walls rarely exist at investment banks;
Publicly stated targets shared with Wall Street may not match internal projections;
The goal is often to underpromise and overdeliver.
The emergence of a conference call transcript between HP and Deutsche Bank Thursday may have not proved HP bought votes but it did show that business relationships are often intertwined.
"The transcript was the most damaging part, but I'm not sure it rises to the level of buying votes," said a lawyer watching the trial.
On the conference call, Fiorina told Deutsche Bank their vote was "of great importance to their ongoing relationship."
HP CFO Wayman amplified that testimony Wednesday.
Wayman testified that he had been surprised to learn that Deutsche Bank was thinking of voting its shares against the deal. He said he had believed that the bank's computer analyst, George Elling, was bullish on the deal.
"I was agitated and frustrated," Wayman said during questioning by Neal, the attorney for Hewlett.
In addition, Wayman said, on Feb. 22 HP had signed a deal for Deutsche Bank to provide merger-related "marketing intelligence" services. Under the deal, the bank was to be paid $1 million and, if the Compaq merger was completed, an additional $1 million.
Under questioning from Neal, Wayman said he wouldn't have retained Deutsche Bank if he'd thought it was going to vote against the deal. "I would not want someone not supporting the deal to work with investors," he said.
It was also clear that HP is very conscious about being able to hit its stated financial goals. Executives didn't want to get pinned down on a hard revenue number. HP's financial targets include $2.5 billion in cost synergies, 4.9 percent in lost revenue from the combined companies and operating margins between 10 percent and 12 percent.
Fiorina was adamant about not giving an outlook for future quarters, but executives nevertheless noted "upsides" to their targets.
In testimony Thursday, Compaq's Clarke said he was confident that the combined companies could save costs through procuring parts. Clarke said the official target is to save $600 million in procurement, but in reality that sum could be higher. The company has publicly targeted $2.5 billion in total cost savings, but the internal figure has been as high as $3.9 billion.
The merger benchmarks are "consistent with managing estimates," Clarke said.