Lawsuit caps acrimonious merger battle

The HP-Compaq Show debuted last September when the companies announced that their respective boards of directors had unanimously approved a $25 billion union that would be the largest ever in the tech industry. A widely circulated video from the press conference showed HP CEO Carly Fiorina and Compaq CEO Michael Capellas touching their clenched fists together, as if they were toasting with champagne glasses.

But the exuberance turned out to be a bit irrational.

Soon after the announcement, Hewlett announced his intentions to fight against the union--and the impact has been like a bride's mother announcing at the wedding ceremony that she disapproves of the groom.

The reason is that Walter Hewlett is no ordinary shareholder--he's a director of the company and son of HP co-founder William Hewlett. Hewlett's opposition was followed a day later by that of David Woodley Packard, son of HP's other co-founder, and later by the David and Lucile Packard Foundation--HP's largest shareholder. Collectively, Hewlett and other members of his family, along with the Packard families and their foundations, own about 18 percent of HP's shares.

During the months that followed, and as the value of the merger ebbed--it now stands at less than $20 billion--Fiorina, Hewlett and Capellas pitched their cases at analyst meetings and with institutional shareholders. Fiorina and Capellas became familiar faces on national television and business news channels, while Hewlett hired a team of advisers to speak against it.

David Packard, son of HP's other founder, remained largely quiet, with only an occasional word on the legacy of his father. He resurfaced late in the game with surveys showing HP workers opposing the deal, but managed to stay clear of HP's crosshairs.

So HP reserved its harsh words for Hewlett, who was bashed in press releases and proxy filings.

"Walter Hewlett, an heir of HP co-founder Bill Hewlett, is a musician and academic who oversees the Hewlett family trust and foundation," the company said in a letter to shareholders in January. "While he serves on HP's board of directors, Walter has never worked at the company or been involved in its management. His motivations and investment decisions are likely to be very different from your own."

Hewlett's ads in the Wall Street Journal, The New York Times, and Washington Post were no less acerbic.

In an ad titled "Know means no," Hewlett lambasted Fiorina, noting that "shareholder value has suffered under the current CEO." He also noted that HP's management has a history of being "overly optimistic and sometimes dead wrong."

HP fired back, calling Hewlett a man with no plan for HP's future.

"It ranks way up there in terms of rancor," said Charles Elson, professor of corporate governance at the University of Delaware.

But this show has been about more than just fiery commercials. Other barbs have focused on how much Fiorina and Capellas could net from the merger or the tens of millions of dollars HP and Walter were spending. As the allegations of impropriety flew, shareholders were deluged with stacks of green and white proxy cards.

HP received a boost when the influential investment advisory firm Institutional Shareholder Services recommended its clients vote in favor of the merger. But just as Hewlett looked outmaneuvered, some of the nation's largest pension funds, which collectively hold a major stake in HP, began to voice their opposition to the deal.

The slugfest seemed to be in the final round last week when HP and Compaq shareholders converged at separate meeting to finally approve or kill the deal. Speaking to a largely hostile crowd, Fiorina spoke confidently about the benefits of the deals, her presentation undercut by jeers from the audience members, many decked in green to show support for Hewlett.

Shortly afterward, though, Fiorina was all smiles as she told reporters that HP had won the day, albeit narrowly, according to a preliminary tally. Hewlett refused to concede defeat as the vote headed into a counting process expected to take several weeks.

Hewlett's lawsuit, alleging payoffs, threatens to push the conclusion of the Sturm und Drang show through the May sweeps period.

Stay tuned.