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Autonomy write-down shows HP repeated its mistakes

Column Needs to look at itself first
Wed Nov 21 2012, 18:00
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ON TUESDAY, as HP CEO Meg Whitman announced that Autonomy's management had engaged in a "willful effort to inflate the value of the company" prior to its purchase by HP, it seemed another example of the firm making an ill advised multi-billion dollar acquisition and added more evidence of mismanagement at the very top of HP.

HP's dismal fourth quarter financial performance was brushed under the carpet amid claims by HP that it was misled into paying over the odds for Autonomy in 2011. The firm's $6.3bn loss was caused, according to HP, by an $8.8bn write-down of its $12bn purchase of Autonomy after it was made aware of "accounting improprieties, misrepresentations and disclosure failures" by the software firm prior to its sale to HP.

As Whitman and senior members of the HP board made the announcement that it had referred the matter to the US Securities and Exchange Commission and the UK's Serious Fraud Office (SFO), HP has opened the door to years of litigation with several multi-billion dollar firms and avoided mentioning the fundamental problems at the heart of HP's business processes. Whitman might have named only Autonomy in her speech, but given that Autonomy was audited by Deloitte, one of the so-called 'big four' auditing firms, and was advised by other big-name firms such as Barclays Capital, it seems unlikely that the buck will stop at the desk of former Autonomy CEO Mike Lynch.

Lynch has denied HP's claims that he cooked the books and said that the first he had heard of it was HP's press release. Although Whitman didn't use the term "fraud" with regards to the conduct of Autonomy's board, it certainly seems as though the underlying accusation is of that nature, with the FBI reportedly having also started its own investigation.

Regardless of HP's claims of improper conduct at Autonomy, what is blindingly obvious is that the firm grossly overpaid for the company. In the four quarters before HP's purchase of the firm, four quarters for which HP now claims it has uncovered financial malfeasance, the firm had revenues of less than $1bn with profits of around $220m, and even accounting for the firm's reported $3bn in assets, paying more than $12bn for such a company seems not just over the odds but beyond sanity.

What's more, Whitman even alluded to HP having been aware of the rumours that were doing the rounds about Autonomy's financials, coupled with the fact that Autonomy was referred to the SFO back in 2011, but HP said its internal investigation couldn't find any truth to the rumours at the time. Whitman said that if a current HP employee hadn't come forward with detailed information about the alleged swindle, HP would have no clue about it, which is deeply worrying for HP's shareholders. Effectively Whitman spent 10 minutes on a call on Tuesday telling journalists that the firm had no idea of what the firm bought with shareholder's money, hardly a message to inspire confidence in the company.

So HP's board apparently went into the deal knowing full well there were questions over Autonomy's financials, yet it decided to pay what even at the time was seen to be far too much for the firm. Whitman said that HP's statement and its decision to go after those it believes are responsible for overstating accounts isn't buyer's remorse, but the fact is that HP should consider blaming itself first before pointing the finger at other firms.

Last quarter HP wrote off billions from its 2009 purchase of EDS, and before that HP all but killed off its billion-dollar purchase of Palm by doing nothing of note with WebOS, and going back even further there was HP's infamous $25bn purchase of Compaq, which alongside the merger of Time Warner and AOL, stands as one of the most ill-advised mergers in recent memory. The repeated failures of HP's board and whatever due-diligence processes it employs suggest that it is ultimately HP that is at fault for this latest debacle.

 

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