Nature of the Case
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Facts
(Sorry but there was no way to get around the facts of this case) HP began to consider the prospect of acquiring and merging with Compaq. The HP board met thirteen times to discuss the proposed merger before it finally voted unanimously in favor of the merger on September 3,200l. HP engaged McKinsey & Company to assess its strategic alternatives. At a board meeting on July 17, 2001, McKinsey made a presentation to HP’s board. HP management, including CEO and Chairwoman Carleton S. Fiorina, CFO Robert Wayman, and others, believed that the integration of the two companies would be vital to the ultimate success of the merger. On September 3, 2001, HP and Compaq entered into a merger agreement, effective September 4, 2001. The merger was announced publicly on September 4. Management emphasized the projected cost synergies of $2.5 billion and noting a projected revenue loss of less than 5%. Integration planning focused on four main pillars: product roadmaps, go-to-market, financial accountability, and launch. A team of employees, through its access to this information, was able to start immediately identifying and estimating specific cost synergies (such as those related to procurement), determining what products and services the new company would offer, and working on plans to market those products and services, among other things. Fiorina and Wayman then attended a meeting in New York with Deutsche Bank. They discussed the merger and their commercial relationship. Deutsche Bank attempted to convince HP that Deutsche Bank should be a co-lead bank on the merger along with Goldman Sachs, echoing the requests of “virtually every other bank” at the time.” HP indicated that it would be happy to continue its dialogue with Deutsche Bank about expanding their commercial relationship but informed Deutsche Bank that it did not want to have multiple colead banks for the merger. On November 6, 2001, Hewlett publicly announced his opposition to the merger. At that point, Wayman arranged to meet with Robert Thornton (a managing director of Deutsche Bank) and other Deutsche Bank representatives to discuss what Deutsche Bank proposed to do for HP. HP paid Deutsche Bank $1 million, with an additional $1 million to be paid in the event the merger was consummated. While HP and Deutsche Bank were negotiating the engagement with respect to the proxy contest, negotiations for HP’s new revolving credit facility were also ongoing. The credit facility negotiations appear to have been entirely separate from and unrelated to any negotiations pertaining to the merger. Deutsche Bank signed a commitment letter to participate in the facility in December 2001, ultimately committing several hundred million dollars as a co-arranger of the multi-billion dollar facility. The first formal and intelligent estimates of the value of the merger started to come in and indicated that the initial projected effects of the merger remained accurate and were, in fact, conservative. The projected revenue loss arising from the merger remained at or below 4.9%, and the estimated synergy target increased substantially. On December 19, 2001, HP filed with the SEC, pursuant to Rule 425, the contents of a presentation to HP stockholders. It contained the same information about cost synergies and revenue loss that HP consistently presented since its first public announcement in September 2001. It also contained examples of the effects of these numbers based on management’s September 2001 forecasts for fiscal year 2003, as well as analysis based on the then-current Wall Street estimates for that same period. On January 17, 2002, HP announced that it had established January 28, 2002, as the record date for a special meeting of its shareholders to consider and vote upon the issuance of shares required for the proposed merger. The meeting date was set for March 19, 2002, and management’s final joint proxy statement/prospectus (the “S-4”) was mailed to shareholders on or about February 6, 2002. The final version of the S-4 included the same relevant financial information that appeared in the public announcement of the merger on September 4 and also in the December 19 425 Filing. It contained the same numbers that had already been widely published. All the while the integration process continued. HP had completed substantial detailed plans and, for the first time, “unclean” members of the business units were to be involved in the integration process. Positive reports, especially with respect to cost synergies and revenue loss goals, continued to flow in from managers in HP. Cost synergies were well in excess of HP’s public target of $2.5 billion. The supply chain value capture team had identified significant additional procurement synergies. Revenue loss assumptions were validated as being conservative. Procurement savings were estimated to be between $1.2 to $1.8 billion which was 2-3 times what was originally estimated. Detailed business plans were being drawn up for the new company. Bottom-up numbers generated by the business units were being forecasted. The next several internal updates dated February 14, February 28, and March 14-all reflected growing gaps between the top-down and bottom-up numbers. Each VCU was worse than the previous one, and by March 14 the bottom-up numbers were significantly below the numbers implied in the S-4. HP explained the differences from the fact that people are grappling for the first time with their new businesses, for which they will be held accountable, and not only have they not had as much time, not only are they not fully familiar with all that has gone into this, but as well, as is the human dynamic in this, they want to come up with a set of numbers that they think they can knock out of the park, because they know ultimately they will be held accountable. This testimony was substantially corroborated by evidence in the record. Management was aware of additional cost and revenue synergies that the business teams were not including. Management identified specific problems with the group reports; for example, every group assumed that it would lose market share, an assumption not shared by management, and the group plans still did not include cost synergies from two key functional integration teams, information technology, and facilities. There were also assumptions being made at this time by business units which were unrealistic and overly pessimistic about gross margins, about market share, about a whole host of things. Top HP management was receiving negative financial information at this time from other sources as well. They retorted that February was a soft month for both companies. It was a soft month for the technology industry in general. Also, it was shown that those generating the 'bad' news were in the process of learning what was going on. While management was receiving some bad news based on the process, Hewlett and HP were actively engaged in the proxy contest, and each was trying to secure as many votes as possible. Institutional Shareholder Services, Inc. issued a report to its subscribers recommending that HP shareholders vote in favor of the merger. ISS focused on the integration process and how that process would affect long-term value. ISS concluded that it would be “hard to remain unimpressed in the face of such enthusiastic attention paid to the integration effort,” and that “management has done everything it can to maximize the chance that integration will be a success. Hewlett contends that HP obtained ISS’s endorsement by misrepresenting the financial benefits of the merger and the progress of the integration efforts. Hewlett also alleges that HP improperly enticed or coerced Deutsche Bank to vote in favor of the merger by using the “carrot” of potential future business. Rumors that Deutsche was voting against the merger. Deutsche met telephonically with Hewlett and Fleischer at 6:30 a.m. Pacific Time and then with Fiorina and Wayman at 7:00 a.m. They decided to vote in favor of the merger. During the conference call, no one from HP used any threats or inducements regarding future business relationships in an attempt to persuade Deutsche to support the merger. Fiorina and Wayman argued HP’s case entirely on the merits. Shareholders had approved the proposed merger by a “slim but sufficient” margin, which currently appears to be approximately 45.2 million votes (subject to successful challenges to individual votes in the “snake pit” process) out of 1,644,78 1,070 shares present at the special meeting. This lawsuit was then filed on March 28, 2002.
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