It has all the earmarks of the next corporate scandal: Autonomy cooked the books, according to Hewlett-Packard, which has taken an $8.8 billion write-down on its 2011 acquisition of the U.K. company for more than $11 billion. The write-down appears in HP's latest quarterly earnings statement.
More than $5 billion of the impairment charge is linked to what HP called "serious accounting improprieties, misrepresentation and disclosure failures discovered by an internal investigation by HP and forensic review into Autonomy's accounting practices prior to its acquisition by HP. The other $3.8 billion is linked to the recent trading value of HP stock and headwinds against anticipated synergies and marketplace performance.
"HP is extremely disappointed to find that some former members of Autonomy's management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy's acquisition by HP," the company said in a statement. "These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management's ability to fairly value Autonomy at the time of the deal. We remain 100 percent committed to Autonomy and its industry-leading technology."
HP launched its internal investigation into these issues after a senior member of Autonomy's leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the HP acquisition. This individual provided numerous details about which HP previously had no knowledge or visibility.
HP initiated an intense internal investigation, including a forensic review by PricewaterhouseCoopers of Autonomy's historical financial results. As a result of that investigation, HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of its financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix.
"This appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers," HP said. "These misrepresentations and lack of disclosure severely impacted HP management's ability to fairly value Autonomy at the time of the deal."
What Does HP Do Now?
HP has referred the matter to the U.S. Securities and Exchange Commission's Enforcement Division and the U.K.'s Serious Fraud Office for civil and criminal investigation. In addition, HP is preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders. The company said it intends to aggressively pursue the matter in months to come.
"Today's write down announcement is the latest chapter in the melodrama around HP's $11.7 billion Autonomy acquisition," said Charles King, principal analyst at Pund-IT "While the company likely hoped the deal would become a cornerstone of then-CEO Leo Apotheker's software-driven market strategy, Autonomy actually took him out of the game.
"Why? Because the deal was announced on the same day that HP delivered a far weaker than expected earnings report, killed its vaunted WebOS products and publicly discussed spinning off its PC products division."
What does HP do now? King said it's imperative for the company to contact core customers directly and apprise them of the situation. The goal, he said, is for HP to be transparent about what's going on and to address any issues or insecurities those clients might have. Just as important, he continued, the company must do everything it can to manage the narrative around these events. If it doesn't, competitors will be more than happy to step in and do it for them.
"Finally, HP needs to be clear about where it's going from here and what customers can expect from and during that journey," King told us. "To date, Meg Whitman has proven that she's capable of talking on unenviable tasks and making difficult, sometimes dreadful decisions.
"If she's smart enough, tough enough and has time enough to bring the company back from this particular brink, her tenure will be remembered fondly by HP customers and shareholders alike."
Posted: 2012-11-21 @ 3:45pm PT
@PK: You're exactly right. HP is a great company but it's tough to believe they could have made a mistake like this.
Posted: 2012-11-21 @ 2:39pm PT
If you are prepared to pay $11B for a company, shouldn't you be smart enough to look at their books and be able to discover these improprieties before you sign a check for such a huge amount?