It sucks, but it happens.
Incidentally, this is exactly why a large portion of the Valve handbook is devoted to hiring. Letting questionable people into your company will poison the place from the inside, and then from the outside. This is a perfect example of that.
Valve wanted to get into the hardware field. Then the way she went about hiring people made it clear that it was a mistake to hire her in the first place. What else was there to do except layoff the entire hardware team, or let her ruin the company culture by acquiescing to her demands for "let these engineers work here, or this project can't work"? And maybe it couldn't. But preserving company culture is far more important than this particular project, especially at a place like Valve.