There was an immeasurable distance between the quick and the dead: they did not seem to belong to the same species; and it was strange to think that but a little while before they had spoken and moved and eaten and laughed - W. Somerset Maugham
HP's stock price has been trading at 10-year lows, and perhaps not surprisingly 2002 is when it bought Compaq. Ignoring inflation, HP's management has managed to do absolutely nothing for shareholders other than to provide dividends, the value of which have barely increased in the past decade. Some would argue that HP is a blue-chip firm that is all about providing steady returns, but firms become blue chip only after showing decades of conservative management and being financially astute, two qualities that have clearly been missing from HP for some time.
Whitman claimed that Autonomy's accounting practices were very hard to uncover but clearly it managed to do it once the whistleblower, who the firm said is still working at HP, came forward. The fact that it took one person to unravel everything is interesting, since HP reportedly had a team of 300 people looking into Autonomy and found nothing, and that speaks volumes not about Autonomy's alleged misdeeds but the ineffective procedures of HP and those it hired to do due diligence.
Both Autonomy and HP hired big names to broker the deal including Barclays Capital, UBS, Goldman Sachs, Citigroup and JP Morgan, none of which seemingly had any clue about what was going on. According to the New York Times, the biggest gains were at boutique law firms that made millions from the deal, all of which will be under pressure from HP, as Whitman and the HP board will likely try to claw back money for HP shareholders.
Then there is Autonomy's auditor, Deloitte. For Deloitte, which has also denied any wrongdoing, HP's accusations should bring up memories of Arthur Andersen and Enron. There is nothing to suggest that Deloitte participated in inflating Autonomy's corporate valuation but even if it gets stuck with the tag of auditor incompetence that will be tremendously damaging. Many firms hire one or more of the 'big four' - Pricewaterhouse Coopers, Deloitte, KPMG or Ernst and Young - because of their reputations that add credibility to accounts, something that Whitman alluded to when she said Deloitte wasn't a "Brand X accountancy firm", perhaps a reference to the no-name accountancy firm hired by convicted fraudster Bernie Madoff to hide his Ponzi scheme.
Deloitte's big-four partner KPMG is also in the frame for its part in the due diligence process that clearly went so wrong. It will be interesting to see if the two auditing firms rip chunks out of each other or stand side by side, effectively claiming that they are both equally incompetant.
Whether or not Autonomy inflated its accounts to attract a higher sale price is really not the fundamental problem for HP and its shareholders. The firm said it will try to recover what it can for shareholders but any rational person knows that even if all of HP's accusations are proven to be true, any money the firm recovers will be far lower than the multi-billion dollar write-down. Worse for Whitman and the HP board is that some of its shareholders might decide to launch a class-action lawsuit against the board for negligence.
The fact is that HP's financials were dire even without the Autonomy write-down. Ironically it was Autonomy that helped HP's software division post revenue growth, while HP's various hardware divisions posted steep drops in sales and operating margins, and Whitman herself has played down hopes for a quick recovery in 2013, so good news might be in short supply at HP for a few quarters yet.
Whitman is facing the unenviable task of untangling a decade or more of mismanagement, and announcing multi-billion dollar write-downs leaves shareholders wondering just how much the paper they hold is really worth. While Whitman might be given the benefit of the doubt for a while longer, some HP board members that were around during the Mark Hurd and Leo Apotheker eras will have to stand down for HP to regain shareholder confidence. µ
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