Hewlett-Packard Co. Chairwoman and Chief Executive Officer Carly Fiorina told a packed courtroom in Delaware Tuesday afternoon that she did not tell shareholders or her board of directors about a series of internal HP documents that said the HP/Compaq Computer Corp. merger would not meet publicly released financial projections.
However, Fiorina also insisted that releasing the data would have been "irresponsible" because it did not reflect the entire financial picture surrounding the merger between the two companies.
Fiorina's testimony came on the first day of a hearing prompted by a lawsuit filed last month by Walter Hewlett, a dissident HP board member seeking to block the merger.
Under relentless questioning by Hewlett's attorney, Stephen C. Neal, Fiorina admitted that the math in the documents was correct, but she refused to place any significance on it.
The documents suggest that internal sources at HP knew the merger would lead to greater losses than first believed and that instead of a 12 percent to 13 percent accretion rate for company shares there would actually be a 10 percent loss.
Neal went line by line through the documents and each time Fiorina admitted the math was right while downplaying the documents' significance. At one point Fiorina seemed to get frustrated with Neal.
"Now if we go to line ...," Neal said, beginning a question.
"I'm sure your math is correct," Fiorina said.
"Do you want to say my whole opening is correct then?" Neal asked throwing up his arms.
"Absolutely not," Fiorina shot back.
In his opening remarks, Neal said that the documents show that HP's management knew there were financial problems with the merger that they did not tell shareholders. And he said they knew this while appearing on television and meeting with shareholders and analysts to assert the merger figures released last fall were more or less correct.
Neal buttressed that argument in his opening remarks this morning by releasing an exerpt from Compaq CEO Michael Capellas' personal journal where he questioned the success of the merger.
Following a one-hour lunch break, Fiorina was slated to return to the stand for more questioning. Based on the other arguments made in his opening statement, Neal is expected to focus on HP's relationship with Frankfurt-based Deutsche Bank AG.
In his opening, Neal said documents show that Deutsche Bank's commercial side had gone to HP and asked to help it with the merger. In addition, the documents show that Deutsche Bank would have received a $1 million success fee if the merger went through.
Despite this, other Deutsche Bank managers had originally cast the bank's 25 million shares against the merger. It was only after Fiorina and HP Chief Financial Officer Robert Wayman made a last-minute pitch to the bank in a conference call that it decided to switch 17 million shares. Bank managers working with HP and those overseeing how the bank would vote were present, and Neal has suggested that there was an erosion of the "ethical wall" between the two groups.
Earlier, Hewlett's lawyer pointed to journal entries made by Capellas in which he wrote that the merger would be a case study for business students for years to come and that under its "current course and speed, we will fail."
Neal went on to present a variety of documents that he said showed an internal HP/Compaq committee had a much bleaker financial outlook on results of the merger than those made by managements' public statements.
HP's attorneys contended in their opening statements that those documents were out of context and purposefully conservative.
In addition to Fiorina, Wayman and HP board member Phil Condit, who is chairman and CEO of The Boeing Co., are scheduled to testify in the trial to determine whether HP's management tried to buy the votes of Deutsche Bank.
The trial, being presided over by Delaware Chancery Court Justice William B. Chandler III. In the lawsuit, Hewlett maintains that HP management persuaded Deutsche Bank to switch 17 million votes it had originally cast against the merger by making the bank the co-arranger in a multibillion-dollar line of credit.