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Merger may hinge on Capellas journal

A short but shocking missive could play a pivotal role in dissident shareholder Walter Hewlett's efforts to block the planned merger of computer giants Hewlett-Packard and Compaq.

A scintillating look into the psyche of a top executive or a meaningless memo ripped out of context?

See special coverage: A Fight to the Finish Ultimately a judge will decide which explanation is closest to the truth regarding a mysterious journal entry by Compaq Computer CEO Michael Capellas. The short but shocking note could play a pivotal role in dissident shareholder Walter Hewlett's legal efforts to block the planned merger of computer giants Hewlett-Packard and Compaq.

In opening statements Tuesday, Hewlett attorney Stephen Neal said that Compaq and HP executives debated whether the $20 billion merger would actually benefit shareholders. In a packed courtroom of the Delaware Chancery Court in Wilmington, Del., Neal presented a barrage of internal e-mails, charts and other documents in an attempt to prove that executives were publicly exaggerating the potential benefits of a merger.

One e-mail from an employee who worked under HP Chief Financial Officer Bob Wayman included a variety of financial calculations and concluded: "The attached is a frightening reality check...I see little realistic upside and I am not alone. I sincerely hope we all start acknowledging the realities soon."

The most startling evidence came in the form of a personal journal entry Capellas jotted in late February or early March, headed, "sobering thought." The handwritten message in a spiral-bound notebook said, "at our course and speed we will fail."

Executives' confidence in the merger's benefits is a key metric in Hewlett's case to stymie the deal. HP has repeatedly stated that it can meet key financial objectives in merging with Compaq, including $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.

But if a judge determines that executives were misleading shareholders, the merger's narrow victory on March 19 could be tossed out.

Compaq issued a statement late Tuesday, saying Hewlett's attorney had ripped Capellas' writing "out of context" and that subsequent testimony would show that Capellas was "confident" of the merger and its potential for success. One source at Compaq said that the scribbling was part of a notebook of thoughts and ideas that Capellas took to meetings--not a "methodical, play-by-play chronology" of his emotions at the time.

It's unclear if Capellas will defend or explain the journal entry in court. He was not included in a roster of executives slated to testify, and he was not in the Delaware courtroom Tuesday.

Intimate glimpse into thoughts
Lawyers around the nation interested in the courtroom debate couldn't discern whether the journal entry was particularly damning or innocent. But lawyers and business experts agreed that it was a highly unusual look into a senior executive's thoughts during a stressful situation.

Such an intimate glimpse in a journal is also rare, given that Capellas and other senior executives likely received hours of training from company attorneys. In general, attorneys and their trainers recommend that senior executives refrain from writing or publicly stating negative, definitive emotions precisely because they could be subpoenaed or leaked to third parties--and misconstrued by opposing legal counsel.

"Unfortunately, an innocent remark written at the time, when viewed in hindsight, can be made into something it was not intended to be by a skillful trial attorney," said Scott Vernick, a trial lawyer who counsels and represents attorneys and law firms in legal ethics for the Philadelphia office of Fox Rothschild O'Brien & Frankel.

"You must understand that litigation is as much a part of business as effective communication or anything else, and you should be mindful that at some point your writing could be subpoenaed," Vernick said.

The journal entry was the latest in a string of embarrassing peeks inside what could become the largest merger--or largest collapsed merger--in the computer industry. Because of Hewlett's vocal opposition to the merger and anti-merger sentiment from a number of large shareholders and employees, executives faced enormous pressure to drum up support earlier this year.

Meanwhile, the media has been scrutinizing every twist and turn in the drama--in some cases publicizing embarrassing comments never meant to be public. Earlier this month, the San Jose Mercury News reported that HP CEO Carly Fiorina left a voice mail to Wayman two days before the shareholder vote stating that the company might "have to do something extraordinary" to sway two large stakeholders to approve the deal.

Open to interpretation
Hewlett's attorneys and others interpreted the voice mail to mean that HP improperly influenced an institutional shareholder by holding its banking relationship with the company as leverage. Wayman then scrambled to deny the charge, branding the mere allegations "both insulting and infuriating."

Cynics might argue that Capellas and other top executives publicly advocated the deal, regardless of their private misgivings, simply to fatten their nest eggs. Although compensation figures for top executives have not been finalized, Hewlett revealed a proposed compensation package in February that could have netted Fiorina and Capellas more than $115 million combined, in the event the deal was completed.

Others said the Capellas note could have been a totally innocent jotting.

"What it seems to imply or connote (is) that if we continue the way we're going, we're not going get the votes we need to merge with HP," said Warren Bennis, a professor and leadership expert at the University of Southern California's Marshall School of Business.

"What is either damaging or helpful about that statement? Sounds to me like a reflective midcourse question about how things are going," Bennis said. "I have no idea--and leave it to those who get a kick out of trying to make sense of legal arcana--how that would help or hinder the Compaq-HP merger."

Legal experts say the bizarre entry should be a lesson for all executives in careful note taking. Judges and juries often give extra credence to journal entries or other statements provided in the midst of struggle--particularly as lawyers are showing a willingness to subpoena e-mail and instant messages.

Such written or taped testimony typically carries more weight than subsequent testimony on the witness stand, when executives have had more coaching and come off as more polished and less genuine.

"People aren't thinking about being sued or being witnesses in lawsuits, so they don't worry about what they write in e-mail or in a journal," said Robert M. Bloom, a law professor at Boston College Law School. "Maybe these kinds of cases that get all this publicity force people to think twice. If you anticipate litigation, you'll be careful."