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Fiorina fires back against charges

After a terse first day, Hewlett-Packard CEO Carly Fiorina is more talkative, drawing analogies and holding her ground against forays by the opposition's attorney.

WILMINGTON, Del.--In her second day of testimony, Hewlett-Packard CEO Carly Fiorina held her ground against forays by the opposition's attorney.

See special coverage: A Fight to the Finish A day after responding to questions with a host of terse answers, Fiorina was more talkative, drawing analogies and making attorney Stephen Neal rephrase questions regarding the significance of reports in February and March that suggested HP would fail to hit its financial targets after merging with Compaq Computer.

Neal, acting for dissident board member Walter Hewlett, who wants to block the $20 billion merger with Compaq, tried to pin down Fiorina, but she refused to budge.

When asked why HP didn't disclose what its so-called value capture teams were reporting, Fiorina replied, "Mr. Neal, let me draw an analogy that may be helpful. You are a lawyer; you plan a trial. Three days later, you get boxes of documents. Do you know what your case is going to be? No," she said. "You have a gap, and you know it will be closed."

The exchange was part of a line of questioning into Hewlett's charges that HP misled investors by overstating the financial strength of a merged HP-Compaq.

Hewlett is asking a Delaware judge to throw out votes cast in favor of the deal or order a new vote, alleging that HP essentially bought the vote of a key shareholder and that the company misled shareholders by failing to disclose that its integration efforts were faltering. Later in the morning testimony, HP Chief Financial Officer Bob Wayman spoke to those issues as well.

Last week, HP said that an independent tally showed a narrow margin of victory for the deal of 45 million shares, out of some 1.6 billion votes cast in the March 19 shareholder vote. Hewlett has asked for a recount and has said he may challenge some of the ballots.

Investors appeared to be more convinced that the deal could go through, despite Hewlett's charges.

The difference between where Compaq shares are trading and what they would be worth if the merger goes through--a metric known as the "spread" of a deal--narrowed Wednesday after having widened during the opening day of the trial.

Compaq shares were trading at $10.36, up 16 cents, or 1.5 percent. Based on the current $17.49 share price of HP, Compaq shares would be worth $11.06 if the deal went through, a difference of about 6 percent. The spread had widened to 11 percent on Tuesday.

A question of disclosure
The Hewlett team seems to be hinging its case on the issue of whether HP failed to disclose integration problems, and in early morning testimony Wednesday, Neal spent little time on the issue of Deutsche Bank. On the eve of the shareholder vote in March that narrowly approved the merger, Deutsche Bank threw its support behind the merger, drawing allegations of backroom dealing by HP executives.

Asked about whether HP tried to buy votes by offering to do more business with the bank, Fiorina said, "We were clear with every shareholder that we didn't want them voting against the merger. That's not news."

In other questioning about the value capture reports, Fiorina came back to the legal analogy, saying they were simply part of the planning process, "the same as when your paralegal says, 'We can't possibly prepare for this trial.'"

Fiorina also noted that the reports weren't a forecast but rather an assessment by business unit heads to have them focus on day-to-day business and not the integration effort like the "Clean Team," the group that has been working on integrating the two companies.

"These documents are not a forecast," she said. "Because it's not a forecast, I don't know why you think they should be disclosed."

Neal: "Let me ask the questions."

Fiorina: "You're accusing the CEO of a publicly traded company of lying."

Neal: "I'm only asking the questions right now."

Neal started again with questions about whether HP could meet its financial targets, which included achieving $2.5 billion in cost savings and operating margins of between 8 percent and 10 percent.

Neal tried to force Fiorina into giving revenue projections into fiscal 2003. She said she hasn't given those projections, and she won't. "I will not sit here and make estimates for the second half of this (calendar) year when we're going through this process.

"I do not want every newspaper in the world to walk out of here with a forecast for (fiscal) 2003 when we haven't had an opportunity to put these companies together."

"Agitated and frustrated"
Later in the morning, HP CFO 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.

"I had assumed since September (when the merger deal was announced) that Deutsche Bank would likely vote for the deal," Wayman said.

But on March 15, the proxy committee of the bank's Deutsche Asset Management unit voted 3-to-1 to oppose the Compaq merger, according to court records.

When Wayman learned of the unit's opposition to the merger, he called the bank's vice chairman, Benjamin Griswold. Their conversation led to a March 18 conference call in which HP officials said the company made its first in-depth presentation to the bank.

On the morning of March 19, the proxy committee held another vote, this time voting 4-to-1 in favor of the deal. Wayman testified that he believes 17 million votes were cast in favor of the deal as a result, although early estimates were that Deutsche Bank might have switched as many as 24 million votes.

Wayman's testimony also touched on a March 10 e-mail that was referred to during Neal's opening argument. In the e-mail, Ken Wach, the executive tapped to head finance for HP's Enterprise Systems Group, said that his unit might not be able to reach its estimates.

"I see little realistic upside, and I am not alone," Wach wrote in the e-mail.

Wayman pointed out that Wach was new to his role and still learning the Compaq side of the business.

In the e-mail, Wach also wrote that he hoped the company "acknowledged reality soon." His sentiments were outlined in a March 14 report by one of the integration effort's value capture teams.

Like Fiorina, Wayman also emphasized that the teams' reports were planning exercises and not forecasts.

The CFO's measured testimony was in contrast to Fiorina's firm, sometimes combative, tone. Wayman appeared nervous at first, but eventually warmed up and began adding context to his answers. As Wayman began his testimony, Fiorina took notes.'s Ian Fried contributed to this report.