Hewlett-Packard (HPQ) made big news Tuesday when it announced an $8.8 billion charge related to its 2011 acquisition of Autonomy for about $11.1 billion.
HP is no stranger to writing down the value of a company after it makes a purchase. The company announced an $8 billion charge in August in connection with its $13.9 billion purchase of Electronic Data Systems in 2008. In 2011, the company took a $1.7 billion charge as it shut down the webOS business it bought for $1.2 billion in 2010.
The Autonomy acquisition appears, on its face, to be different. Hewlett-Packard's contention is that Autonomy's accounting was misleading. HP has been careful not to say the word “fraud,” but it has asked regulators in both the U.K. and the U.S. to look into the matter, which suggests the F word could be used in the future.
Deceptive or fraudulent accounting practices at Autonomy may get much of the blame for this deal going bad, but I'm not ready to let HP off the hook entirely. First, there is the company's history of deals, which, to put it nicely, is not good. The company has consistently paid premium prices for things that didn't work out, in fact, only $5 billion of the current charge stems from the accounting issues, the rest come from “headwinds against anticipated synergies and marketplace performance” which means HP thought Autonomy would be more valuable that it is. Second, questions about Autonomy's accounting were around long before HP got involved.
Hedge fund manager Jim Chanos had a short position on Autonomy based on his opinion about the company's books that lost money when HP bought the company. Chanos moved his short position to HP after the deal and claims to have more than made up for his losses. Wall Street analysts had also raised questions about the company's books
Australian fund manager John Hempton also noticed problems with Autonomy's books. This post on his blog explains pretty well why anyone looking at the company's books should have been suspicious.
HP CEO Meg Whitman, who wasn't in charge when the deal closed, but was on the company's board, said the board relied on an audit done by accounting firm Deloitte in approving the deal. That's the same Deloitte that former Autonomy CEO Mike Lynch said his company relied on to get its accounting correct.
For its part, HP hired KMPG to look over Deloitte's shoulder in examining the deal. In addition, Ernst & Young is Hewlett-Packard's auditor and signed off on the deal in the company's 2011 annual report. That means three of the worlds four largest accounting firms looked at Autonomy's books and didn't see anything wrong.
I believe the blame for this mess ultimately lies with Hewlett-Packard. The company will try to pin as much of the blame as it can on Autonomy's former management, who may in fact have cooked the books, but it's clear that there were plenty of warning signs about Autonomy long before it was acquired, yet HP pressed on with the acquisition. Since the deal closed, Oracle (ORCL) revealed that it briefly considered acquitting Autonomy, but thought it was overvalued at $6 billion. HP's leaders apparently looked at the same books and thought it was a good deal at almost double that price.
I'm also confused about the timeline of events at HP. The Autonomy deal closed in October of 2011, but HP says it wasn't aware of the accounting issue at Autonomy until April of 2012 when a whistleblower stepped forward.
Think about that. HP had total control of Autonomy's business for essentially two quarters and the difference between the company's actual performance and the performance HP expected going into the acquisition raised any suspicions? That suggests to me that either everyone at HP must just expect the company's acquisitions to turn out terribly.
From the perspective of a shareholder, which thankfully I'm not, I would be very curious about why the company waited more than six months between being alerted to the issue and disclosing it to shareholders. That seems like the sort of thing the owners of the company would want to know about.
It may turn out that there was some significant wrongdoing on the part of Autonomy, but that doesn't excuse HP here. This issue has pretty much convinced me that the company is so poorly run that it's basically beyond repair at this point. It seems like the company's future will involve either bankruptcy or being sold off in pieces.
This article was edited to correct the price Hewlett Packard paid for Autonomy.
Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at firstname.lastname@example.org.