During the opening day of testimony in Hewlett's attempt to block HP's $19 billion acquisition of Compaq Computer, his attorneys charged that "value capture" teams from HP and Compaq have questioned key financial projections about the merger's impact.
"There are a lot of people involved and a lot of back and forth," Fiorina responded from the stand. "The value capture reports are not a full picture of what we could and should achieve."
When Hewlett attorney Stephen Neal asked why HP didn't disclose the reports from the value capture team to its board and to shareholders, Fiorina shot back, "It would have been irresponsible to do so," again noting that the reports are just a snapshot and not a full picture of the company's targets.
HP has repeatedly stated that it can meet key financial objectives in merging with Compaq--namely, achieving $2.5 billion in cost savings, limiting the amount of revenue lost after the merger to 4.9 percent, and achieving operating margins of between 8 percent and 10 percent.
Fiorina said the value capture reports illustrate the dynamics of planning the integration. A larger number of managers were brought into the planning process, skewing early projections.
"Gaps emerge and gaps are closed," she said. "There's also a human dynamic to this; they want numbers they can knock out of the ballpark."
The projections are one of two issues raised by Hewlett in his lawsuit, which seeks to throw out a March 19 shareholder vote that HP claimed gave it the slim majority needed to complete the merger.
In addition to questioning HP's disclosure about the financial projections, Hewlett contends that HP essentially bought the vote of Deutsche Bank, a large shareholder that had initially opposed the deal.
After the lunch break, Fiorina testified that the "extraordinary measures" HP planned for Deutsche Bank weren't that unusual.
Fiorina said the measures that she mentioned in a leaked voicemail to Chief Financial Officer Bob Wayman referred to such things as visiting Deutsche Bank for a face-to-face meeting, recruiting an HP board member to talk with the bank, or getting Compaq involved.
In the voicemail, which wasto the San Jose Mercury News earlier this month, Fiorina tells Wayman that she is nervous about how Deutsche Bank and Northern Trust were going to vote and says HP might "have to do something extraordinary for those two to bring them over the line."
"By 'extraordinary,' I was trying to convey a sense of urgency," Fiorina said. "We couldn't simply leave it."
However, Fiorina noted that the two weeks before the March 19 shareholder vote were spent almost entirely talking with undecided shareholders, including Deutsche Bank, Northern Trust and Mellon Bank. In her message, Fiorina also referred to Northern Trust, saying, "We've seen a piece of their votes move against us, and we're nervous."
On the stand, Fiorina said she last met with Northern Trust in February. Fiorina said she left a voicemail with Northern Trust but didn't get any calls back.
The HP chief executive also rebutted other Hewlett charges, including the premise that she held up the shareholder meeting to persuade Deutsche Bank to vote for the deal. She added that she didn't know how the bank had voted until after the shareholder meeting.
As for Hewlett's contention that HP will lay off more employees than originally expected, Fiorina said she expects 13,000 to 15,000 positions to be eliminated, not 24,000 as Hewlett had projected. "Head count reductions are not a target, but the result of a plan," she said.
Body of evidence
Fiorina's morning testimony followed in which both sides laid out their case.
Hewlett's attorneys pointed to a number of documents, which, they said, show the integration efforts were not going as hoped. Among the documents was a handwritten note by Compaq CEO Michael Capellas in which he lamented that the HP merger would be a case study for future mergers but that progress was slow.
"At our course and speed we will fail," Capellas wrote.
Compaq said in a statement Tuesday that the quote was taken out of context and that Capellas made the comment at a staff meeting regarding one issue, not the merger as a whole.
"Mr. Capellas was and is confident that the integration process is proceeding well and that the merger will bring substantial benefits to the shareholders of both companies," Compaq said.
As for Deutsche Bank, Hewlett's attorneys contend that the bank was doing some market intelligence work for HP and was offered $1 million if the deal were to go through. Fiorina testified that she was not aware of such an arrangement.
In a statement Tuesday, Deutsche Bank said that it has been acting as an adviser to HP, but that its Asset Management unit made its own decision to vote in favor of the deal.
"In January of 2002, Hewlett-Packard retained Deutsche Bank to play a secondary advisory role in Hewlett-Packard's efforts to merge with Compaq," the bank said. "Deutsche Asset Management's proxy committee did not consider and was not influenced by any banking relationships with Hewlett-Packard."
The bank said its decision was made solely in the interests of its clients, "taking into account the presentations made on the morning of the merger vote by Walter Hewlett and by Hewlett-Packard management on the advantages and disadvantages to shareholders of the proposed merger."
Deutsche Bank's role as an adviser was not mentioned in the proxy that was sent to shareholders. An HP representative said HP considered the Deutsche Bank contract immaterial at the time it was made and therefore not subject to disclosure.
Business as usual?
Hewlett's attorneys also pointed to a voicemail from Fiorina in which she thanked the bank for "going to bat" for HP and said, "We look forward to doing business with you guys."
HP's attorneys contended that the voicemail was business as usual.
"That's the way every CEO ends every conversation with every investment bank," countered HP attorney Steven Schatz. HP said that Deutsche Bank's proxy committee made its decision on the merits of the deal, independent of the bank's other financial interests.
The Delaware courthouse was packed for the latest chapter in the long-running feud between HP and one of its own directors. Peopleseveral hours before the court's doors opened to ensure a seat for the case, which could determine the fate of the biggest technology merger ever.
Hewlett and his attorneys were seated on one side of the courtroom, while Wayman and other HP executives were seated on the left. Shortly after opening arguments began, several people in the audience--presumably stock traders or analysts--dashed to the exits to use the phones.
The trial, before Chancellor William Chandler III, is expected to last at least through Thursday.
According to a pretrial court filing, Hewlett's side also plans to call Wayman, its adviser Spencer Fleischer as well as Hewlett himself. HP plans to call Fiorina; Wayman; HP director and Boeing CEO Phil Condit; HP director and Barclays Global Investors CEO Patricia Dunn; Stanford Professor Bernard Black; Compaq CFO and Integration Chief Jeff Clarke; Deutsche Bank executive Dean Barr; and Hewlett.
In a statement, HP said it believes it had a "solid day" in court. "We believe we demonstrated that there was no evidence presented to support the plaintiff's claim," HP said.
Hewlett will likely need the judge to do more than throw out the 17 million votes that Deutsche Bank is said to have voted in favor of the deal.
Last week, HP said that an independentshowed a narrow 45 million-share victory for the deal, with some 1.6 billion votes cast. Hewlett has asked for a recount and has said he may challenge some of the ballots.
One legal scholar said it is too soon to say whether Hewlett has enough evidence to back up his claims.
"You make allegations and you've got to prove them," said Jesse Choper, a professor of corporate law at Boalt Hall, the University of California at Berkeley's school of law. "You use what you've got, and apparently his side thinks they have enough to make a case."