Clash of the Sandbags : Carly, Walter go to court

It's the HP wa-hey

Even in her dotage, we suspect, Carly Fiorina will feel some trepidation before answering the doorbell. Instead of the regular Meals on Wheels guy, or the home help, there will be Walter B Hewlett delivering a severed horse's head.

Hewlett Jr tacitly accepts that it lost the SirCam merger vote, but only by a whisker. Nevertheless he continues to pursue the case through the courts, and for Carly, the torment continues. Hewlett has filed suit in Delaware, alleging that HP misled shareholders in the run-up to the final vote, and so obliging Fiorina to take the stand. Hewlett's trawls through HP and Compaq mail servers have produced a paper mountain of doubt expressed by senior executives - including the rock and rolling Compaq CEO himself.

"At our speed and progress, we will fail," wrote Capellas in a diary entry , shortly before Hewlett Jr began his expensive campaign of newspaper advertisements. (It's hardly a indication of confidence in Compaq's own PocketPC that Mike committed these thoughts to paper, not a PDA. And we don't blame him).

A lower ranking executive in HP's finance office confirmed that there was little upside for Hewlett Packard shareholders in the deal - a point Walter had consistently made since publicly dissenting last fall. It doesn't require a Harvard MBA to see that such leviathan technology mergers have historically failed to produce shareholder benefit. And that's Hewlett's strongest card.

Although the Capellas memo is supposedly the most "shocking", the duller analysis by the junior executives are actually far more damaging. Capellas' memo can be justified on the grounds of due diligence, although he'll hardly thank Carly for her contribution on the witness stand yesterday claiming that as he was writing his pessimistic note, the merger was actually "ahead" of scheduled. Either Carly's not quite telling the truth, or the respective CEOs were singing from different hymn sheets.

Two days before the final vote, HP executives were panicking that the deal did not have enough backing from shareholders, having discovered that Deutsche Bank was going to vote against the Sircam Merger.

Hewlett alleges that as an inducement to back the merger, HP promised Deutsche Bank business for a extending a credit arrangement. This mirrors the practice of investment bankers whoring for business while privately believing their investments were worthless, which the New York state attorney detailed earlier this month in this report [126k PDF].

"The agreement was never disclosed publicly, was never disclosed to the board of Hewlett-Packard. And it was never apparently even disclosed to the chairman and CEO of the company,'' said Walter B Hewlett's attorney, cited in the Mercury.

But in spite of a voicemail from Fiorina to the Bank in which she said that she looked forward "to doing business", Walter needs to produce the smoking pistol as innuendo isn't good to be enough. He might have it - but we haven't seen it.

However, as we note earlier, the detailed analysis from the Hewlett Packard CFO office may be enough to convince the judge that HP was engaging in a deception, saying one thing publicly, and another privately. HP memos suggest the merger would drive down the share price ten per cent, rather than up by twelve to thirteen per cent, that combined losses would be far higher than publicly stated, and that an $800 million charge was missing from the public prediction, too.

Carly said these were the result of "sandbagging". Now "handbagging" we're familiar with - in the 1980s it was the name coined by the press to describe Prime Minister Mrs Thatcher's admonitions of her male cabinet colleagues. Which were frequent and very public).

More than the Capellas memo, and even more than alleged Deutsche Bank backhander, Carly's sandbag - a deception of HP shareholders - could be fatally damaging. ®

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