HP Says It Was Hoodwinked By Autonomy, Takes $8.8 Billion Charge11:15 AM EST Tue. Nov. 20, 2012
Hewlett-Packard is taking an $8.8 billion charge against earnings after discovering what the company called "serious accounting improprieties" by Autonomy, the information management software company HP acquired last year for $11.1 billion.
The shocking announcement came Tuesday morning when the company issued fiscal fourth-quarter financial results that included a $3.49 billion loss on a 7 percent drop in revenue to $30.0 billion.
"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," Hewlett-Packard 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 has referred the case to the U.S. Securities and Exchange Commission's Enforcement Division and the U.K.'s Serious Fraud Office "for civil and criminal investigation," HP said. (Autonomy was based in the U.K.) The company also intends to "seek redress against various parties in the appropriate civil courts to recoup what it can for shareholders. The company intends to aggressively pursue this matter in the months to come."
"This is a big financial hit HP is taking as an organization," said Venero. "An $8.8 billion write off would impact even the biggest companies in the world. It could affect a wide range of investments from R&D to the channel."
Venero said it appears that the financial shortcomings of Autonomy were "swept under the carpet" under former CEO Leo Apotheker's tenure to get the acquisition completed.
"Leo's direction was to move away from hardware and more into software and services," said Venero. "He obviously steamrolled [the board] to get this deal done. FutureTech's hope is this is a cleansing of the poor decisions and direction from previous leadership."
One top solution provider executive for a large HP partner, who did not want to be identified, said customer purchase decisions will definitely be impacted by the write off.
"Customers are going to be talking about this and will draw their own conclusions," said the CEO. "It will definitely have a negative impact because of the unknown and uncertainties it creates in the field. As a reseller and customer who loves the products, we have to hope and pray the company comes back. We have to wait and see what happens."
NEXT: Who's At Fault For HP's Autonomy Debacle?
HP's board of directors deserves a large amount of the blame for green-lighting the high-priced Autonomy acquisition. "What was the board thinking?" asked the CEO. "They let this guy Leo came in with a mission to sink the ship. Why would you pay $ billion for this company? The Autonomy guys were laughing all the way to the bank. HP isn't even using Autonomy itself from what I know. It is inexcusable how much they paid for Autonomy. "
HP acquired Autonomy in October of last year. The acquisition was initiated in August by then-CEO Leo Apotheker in a bid to expand HP's miniscule software sales. Apotheker was fired a little more than a month later, but his replacement, Meg Whitman, went ahead with the deal.
While some observers at the time saw the logic of HP's acquiring Autonomy as part of an effort to expand its software product offerings, others criticized the amount HP was paying.
HP CFO Cathie Lesjak had reportedly objected to the deal at the time, citing the high price tag, which was 11 times the revenue of Autonomy.
Oracle CEO Larry Ellison even claimed that Autonomy had been shopped to Oracle, but Oracle decided against bidding for the company. "Autonomy was shopped to us," Ellison said during an earnings call in September 2011. "We looked at the price and thought it was absurdly high. We had no interest in making the Autonomy acquisition."
HP said the $8.8 billion impairment charge related to Autonomy includes $5 billion "linked to serious accounting improprieties, misrepresentation and disclosure failures" discovered by an internal investigation by HP and forensic review into Autonomy's accounting practices," HP said. The balance of the impairment charge is linked to the recent trading value of HP stock "and headwinds against anticipated synergies and marketplace performance," HP said.
HP launched the internal investigation "after a senior member of Autonomy's leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP. This individual provided numerous details about which HP previously had no knowledge or visibility," HP said in its statement.
As a result of the investigation "HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to misstatement of Autonomy's financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix," HP said.
"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.
STEVE BURKE contributed to this story.
PUBLISHED NOV. 20, 2012