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HP takes $8.8bn hit on "wilfully" overvalued Autonomy

Dollars

By Nicole Kobie

Posted on 20 Nov 2012 at 12:58

HP has written off $8.8bn related to its purchase of Autonomy, accusing that firm of "questionable accounting and business practises" to inflate the value of the company.

HP bought Autonomy in 2011 for more than $10bn, while the PC giant was still headed by CEO Leo Apotheker, as part of his plans to shift the company's focus to corporate IT and software.

Today, it announced an impairment charge of $8.8bn in the fourth quarter of the year, more than $5bn of which was directly linked to the accounting issues at Autonomy.

HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures

HP said it launched an internal investigation into the issue after a senior member of Autonomy's leadership team claimed there had been "a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP", meaning it was "substantially overvalued" at the time of the deal.

"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," HP said in a statement. "These efforts appear to have been a wilful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal."

The whistleblower alerted HP after Autonomy's founder Dr Mike Lynch left the firm, and told HP "numerous details" that it was not previously aware of.

Lynch left as part of reorganisation at the firm in May, with several members of senior management following him in the subsequent weeks, complaining about HP's bureaucracy.

The investigation has so far revealed issues with how Autonomy's revenue, margins and growth rate were reported, as well as its "business mix", with "low-end" hardware sales wrongly classified as software products.

HP said it had referred the case to US and UK regulators for civil and criminal investigation, and was planning to "seek redress" from "various parties" in the courts. "The company intends to aggressively pursue this matter in the months to come," it added.

In a statement sent to news agency Reuters, a spokesperson for Mike Lynch said the "former management team of Autonomy was shocked to see this statement" and "flatly rejects these allegations, which are false".

"HP's due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and Perella Weinberg. HP's senior management has also been closely involved with running Autonomy for the past year," the statement added.

The news comes as HP announces its latest quarterly results, with net revenue down 6.7% to $29.96 billion for the quarter ended 31 October from $32.12 billion a year earlier.

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User comments

How?

This is almost unbelievable!

When an acquisition of this magnitude occurs the lawyers and bean counters go over every detail of a company - particularly its finances.

How could they miss significant misrepresentation?

By qpw3141 on 20 Nov 2012

@qpw3141

I was thinking the same thing.

Also they saying they will "seek redress" from "various parties" but from case law - if I remembering correctly - they have no leg to stand on.

Still looking the case law up

Mark

By mprltd on 20 Nov 2012

@mprltd

There should be pages of warranties provided by the vendor, so there will be plenty of room for legal action. It would have been unfeasibly expensive to check every last detail. That said most of the value of the business would be based on assumptions of future growth, which HP had to make on their own.

By tirons1 on 20 Nov 2012

Redress?

They may be looking at redress from those who provided 'professional services' and on whose data the valuation of Autonomy was based.

Autonomy would have provided the last few sets of audited accounts, and probably the management accounts for the year to date. Probably all they would have had to do by law.

Autonomy would have little to no forml assets to speak of, just the software and customer base. HP ought to be able to value the former and the latter is a 'goodwill' valuation - and therefore open to interpretation.

As ever when big companies are duped, there's a lot of finger pointing and thrashing around. This is likely to settle out of court. If this were heading for court we wouldn't be earing much of this.

Just an opinion by the way!

By Bolehill on 20 Nov 2012

Not unique

At the time of the takeover the price paid seemed very high, over 40% more than the market price if I remember correctly. So this should not be too much of a surprise. They have also had to write-off most of what they paid for EDS. Previous managements made many other highly-priced acquisitions so there are probably more chickens to come home to roost!

By markwh3 on 22 Nov 2012

Cashflow doesn't lie

If HP, had based their buy price on past free cash flows, i.e. the extra cash in the bank at the end of the year, assumed conservative growth, and by that I mean not the mid 20% that Autonomy had been reporting for years, more like 8% to 10% (still high by normal standards), then proposed a price that matched those figures they would have paid closer to what the stock market was valuing the company at, rather than double. No one asked them to pay that price, and Oracle laughed at them for proposing it.

What is clear from this and the other heavy write downs is that they have a toxic management culture, and rather than bleat about accounting practices, they should come clean on that aspect and explain what they are going to do about it. In an innovation and brain power industry you can’t treat your employees with disdain and disrespect, they leave, and you fail.

By dr_japeel on 22 Nov 2012

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