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Hewlett: Rumor played a part in case

Under cross-examination, dissident director Walter Hewlett concedes that his criticism of the HP-Compaq integration process is based partly on rumors and an anonymous letter.

WILMINGTON, Del.--Under cross-examination by Hewlett-Packard lawyers, dissident director Walter Hewlett conceded Wednesday that his criticism of HP's integration process is based partly on rumors, an anonymous letter to federal regulators, and a letter from Compaq's CEO that was not admitted into evidence.

When asked Wednesday whether he believed that HP bought the vote of Deutsche Bank--Hewlett's other primary claim--Hewlett said that HP executives testified they had not and that he had no reason not to believe them.

Under cross-examination by HP attorney Steven Schatz, Hewlett had to have several questions repeated, and he frequently answered with a simple "yes" or "no." At one point, Hewlett said, "I'm sorry, I flipped out while you were asking the question."

When asked whether Hewlett believed HP had misrepresented various facts, he responded, "I believe HP's numbers are unattainable, but the rest is rumors."

During a series of questions, Hewlett also acknowledged that his evidence includes leaks from unnamed company employees, an unsigned letter to the U.S. Securities and Exchange Commission, and a letter from Compaq CEO Michael Capellas that will not be allowed as evidence.

However, Hewlett countered HP CEO Carly Fiorina's assertion that HP employees were just being conservative when they forecast financial results for the combined company.

Hewlett said Wednesday that from his 15 years of experience as an HP director, the company's business units typically produce forecasts that are "overly optimistic." Fiorina has testified that the units were being conservative and looking to under-promise and over-deliver.

Reports from HP's business units have become a central issue in the case, in which Hewlett is seeking to have the results of the company's March 19 shareholder vote thrown out. Hewlett contends that HP knew its integration efforts were falling short of targets but failed to notify investors. He also claims that the computer and printer maker essentially bought the vote of large investor Deutsche Bank by leveraging HP's banking relationship with the company.

HP attorneys at one point Wednesday entered as evidence a tape of an HP-Deutsche Bank conference call, although it wasn't immediately clear what was on the tape.

"I'm sorry, I flipped out while you were asking the question."
--Walter Hewlett under cross-examination
In testimony stretching into two days, Fiorina repeatedly said that the reports from so-called value-capture teams were not indicative of the company's actual goals. She said that the business teams were "sandbagging" so that they could deliver better-than-expected results.

But Hewlett said that given his experience, he rejected that notion, adding that such behavior is not typical of HP employees.

"In almost every case, the business units came back overly optimistic, and the company had to give them a haircut," he said.

In cross-examination, Schatz asked Hewlett why he didn't come to the board with his concerns. Schatz said Hewlett had a fiduciary responsibility to report issues he had with the merger.

Hewlett said that when he started hearing rumors that the integration process was faltering, he wanted to inform fellow board members, but by that point his lines of communication with them had broken down.

See special coverage: A Fight to the Finish Schatz also asked Hewlett whether he or any of the parties helping him craft his case against the merger ever asked HP management how they reached their financial models. Hewlett replied "no."

When asked by his own lawyer why he was against the merger, Hewlett referred to a familiar refrain, saying the company is trying to do too many things, won't be able to produce double-digit growth, and faces substantial integration risks.

"This will be the end of HP as we know it," Hewlett said. "I still believe that."

News.com's Ian Fried contributed to this report.