The TSC Streetside Chat: Merger Lawyer David Brown
By Rebecca Byrne
Staff Reporter
04/27/2002 09:58 AM EDT
Now that all the mud slinging in the Walter Hewlett vs. Hewlett-Packard (HWP:NYSE - news - commentary - research - analysis) trial has come to an end, the fate of the largest technology merger on record lies in the hands of a single Delaware judge and a decision is expected shortly.
Walter Hewlett's legal team presented some compelling evidence in court this week, alleging that Hewlett-Packard effectively bought votes from Deutsche Bank (DB:NYSE - news - commentary - research - analysis) and that it failed to update investors with new financial projections in order to secure approval for its merger with Compaq (CPQ:NYSE - news - commentary - research - analysis).
But how successful Hewlett was in proving his case and how much mud slung during the trial will actually stick are unclear. So we turned to David Brown, a partner at law firm Alston & Bird, and expert in complex mergers and acquisitions, for some answers.
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TheStreet.com: There were a lot of damning allegations made during the trial, and one was that the firm knew shortly before the March 19 vote that earnings and revenues would be much lower than they'd publicly stated in December, yet they did not reveal that information to shareholders. Is this legal?
David Brown: The short answer is it would not be proper if it were information that was fully developed and it really did conflict with the public statements. One of the things that has come out in the trial, at least from all the third-party reports, is that H-P has insisted that all those internal memos raising questions about whether business units were on track to meet targets weren't really fully developed.
H-P's position would not be to dispute the basic legal rule; their position would be to dispute the maturity of the information. I think everyone would agree, if you knew your projections were false, then yes, there's an unquestionable obligation to update and correct. But H-P's argument is that this is very preliminary, and, in fact, their testimony indicated they think they're going to beat projections, so it's hard to say.
TheStreet.com: It seems some of the evidence was fairly compelling, though. I know they say the information was preliminary, but they seemed to get emails from a lot of people who were in a position to know.
David Brown: I don't disagree with that. One of the things the judge is going to weigh is the language of the emails and the circumstances in which they were made and then the testimony by the people who sent the emails about what they meant. Ultimately, it's up to the judge to decide whether they were credible then, and whether they're credible now.
TheStreet.com: Another allegation is that H-P threatened to withhold business from Deutsche Bank if the deal was not approved, and that it offered to give Deutsche Bank a $1 million bonus if it voted in favor. Again, is this legal?
David Brown: The general legal rule in Delaware, and frankly most other states, around vote buying is you're not allowed to divert corporate resources to influence votes in an improper manner. Of course, what that means is highly fact dependent.
I think the fact that H-P has vigorously argued that no matter what the particular statements that [CEO Carly ] Fiorina may have made, that they were not attempting to influence Deutsche Bank through withholding business, and Deutsche Bank has responded likewise. I think that reflects their view that if they were to stand up in court and say yes, we threatened to withhold business and we're proud of it, they would lose.
So their story, and they're sticking to it, is that's not what happened, and they argued that Deutsche Bank saw the merits of their position. The legal rule is pretty clear; whether their behavior crossed the line, that's for the judge to decide. The other point, of course, is it's not clear that the 17 million votes actually matters in the end; so that point may not end up being as important as the disclosure claim.
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'I do think you acquire deal fever, and it is very difficult to back off of a large transaction even if disappointing news comes to light.'
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TheStreet.com: It seems like there really isn't a smoking gun here; a lot of this seems to fall in a gray area where it's basically up to the judge to decide.
David Brown: Yes, that is nail-biting territory.
TheStreet.com: So it could very easily go either way?
David Brown: Absolutely.
TheStreet.com: Do you believe from what you've read that H-P corrupted the process and misled investors?
David Brown: With respect to the vote-buying claim, probably not. With respect to the disclosure claim, my personal feeling from what I've read is they're probably going to get the benefit of the doubt.
TheStreet.com: This deal was pretty unpopular from the start among analysts and investors. Why do you think the companies went ahead with it anyway? Was it because they really believed in the deal or was it because, as the biggest technology merger on record, it was too hard to backtrack?
David Brown: I think it's a combination of both. I think they probably did truly believe that they needed just sheer mass in order to extract the costs savings necessary to compete in the various businesses, so that strategic rationale I think they just felt wedded to.
I do think you acquire deal fever, and it is very difficult to back off of a large transaction, even if disappointing news comes to light. I've had a lot of clients that proceeded with a transaction even though by the time the transaction closed, it was not as attractive as when they first announced it.
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'I think the real point that comes out of H-P is the importance to the buyer of being able to compellingly articulate the rationale for the transaction.'
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TheStreet.com: If the merger is finally approved, how has this whole trial tainted the deal?
David Brown: I would say for the combined H-P/Compaq, people will forget this trial fairly quickly. I think people will be looking at how they execute.
But for Deutsche Bank, the SEC has announced an investigation that they're going to be joining [New York State Attorney General Eliot] Spitzer's investigation of research analysts' conflicts, and I expect Deutsche Bank will end up not enjoying the next six months to a year.
TheStreet.com: If, on the other hand, the judge rules against Hewlett-Packard, what is likely to happen? Would there be a revote?
David Brown: I would say if the judge concludes there was vote buying, the most likely result would be merely to throw out Deutsche Bank's proxy. It's remotely possible he would find that sufficient grounds to invalidate the [entire] vote, but I doubt that. With respect to the disclosure claim, that is more serious. Under those circumstances, the only likely remedy would be to order a new stockholders' meeting, and we're back to the proxy contest that we've enjoyed for the past two months.
TheStreet.com: Are there any lessons that we can take away from this? Will it change the way companies view a merger, particularly one of this size, in the future?
David Brown: You're not going to see many of this size for a while. Personally, I think the real point that comes out of H-P is the importance to the buyer of being able to compellingly articulate the rationale for the transaction. In the end H-P [probably] squeaked out a victory because it was finally able to articulate it to enough people who believed it. But the fundamental problem here is a large number of people didn't believe the story, including one of their own board members.
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