Hewlett-Packard Writes Down £5.5 Billion on Its Autonomy Acquisition

on Nov 21, 2012

Shares in Hewlett-Packard (NYSE:HPQ) fell to a decade-low of $11.71 after the company announced it is writing down $8.8 billion (£5.5 billion) from the value of one of its acquisitions.

**Accounting fraud or Mismanagement?**
HP bought out Autonomy in 2011 for about $11 billion (£6.91 billion) and according to Reuters the deal was facilitated by some 15 different legal, financial and accountancy firms. These included Deloitte and KPMG, two of the big four auditing firms, and banks such as Goldman Sachs, Citibank, UBS, JPMorgan, Bank of America and Barclays. No concerns were expressed by any of the facilitators – “Neither of them [Deloitte and KPMG] saw what we now see after someone came forward to point us in the right direction,” said HP’s Chief Executive Meg Whitman.

According to Ms Whitman senior executives at Autonomy used various accounting tricks to make their company appear more profitable and get a larger premium on the shares. The scheme was revealed after Mike Lynch, founder of Autonomy, left the company and a person from the management team pointed out to HP the irregularities in their acquisition, prompting an extensive internal investigation. Mr Lynch, a non-executive director of the BBC, at one point named Britain’s answer to Bill Gates, denied the allegations and accused HP of mismanaging his former company. “The figures are just mad. Things would have to have gone pretty badly to justify writing down $8.8bn,” he said in an interview with the Financial Times. “It is utterly untrue. We reject this as utterly wrong. Everything we did we gave correctly to the auditors and was correctly noted by the auditors.”

**HP’s Woes Extend Beyond Autonomy**
In August HP announced another writedown of about $9.2 billion (£5.78 billion), largely related to its acquisition of Electronic Data Systems (EDS). Following yesterday’s announcement, many investors have lost their trust in the board of directors at the tech company. The Autonomy takeover was approved by 10 of the current 11 directors on the board, including Ms Whitman, who at that time was not yet CEO at the company. “When I talk to investors, that is what they are concerned about: the credibility of the board,” said Sterne Agee, an analyst at Shaw Wu, as quoted by Bloomberg. “There already has been a lot of turmoil at this company, but maybe they still need more change.”

!m[Lack of Due Diligence, Accountancy Fraud and Mismanagement Weigh Heavy on HP’s Stock](/uploads/story/862/thumbs/pic1_inline.png)It took HP more than a year to realise that Autonomy accelerated, miscategorised and “created” more than $200 million (£126 million) in revenue over two years. John Shultz, Hewlett-Packard’s general counsel, said in an interview that the British company resold Dell laptops and desktops and recorded those sales as software revenue. Deloitte, the auditor of Autonomy, “obviously didn’t catch these issues at the time”. The auditing firm declined to comment apart from stating it will fully cooperate with authorities on any investigations.

The whole fiasco is yet to be unravelled and experts believe the impending lawsuits will take years to be resolved.
**The Man Who Saw It Coming**
Jim Chanos, founder of Kynikos Associates, was one of the few investors who weren’t caught off-guard following HP’s writedown on Tuesday. The hedge fund manager was short on Autonomy before it was bought out and went short on HP after it acquired the British software firm. Mr Chanos noted that top executives, including Leo Apotheker, HP’s former CEO, resigned soon after the deal, which made the fund manager even more suspicious of the value of the newest acquisition.
Mr Chanos was also critical of HP’s takeover spree – over the past five years the company has spent $37 billion (£23.3 billion) but its investments haven’t paid off as its core businesses continue to struggle. CNBC quotes Jim Chanos to have said that the tech giant was engaged in “value destruction through acquisition,”