HP accuses Autonomy of accounting improprieties
The New York Times reported today that HP was taking an $8.8 billion accounting charge to account for what HP (NYSE: HPQ) has called accounting improprieties and "outright misrepresentations" related to its purchase of Autonomy in August 2011.
Those are some serious accusations and if they prove true, Autonomy officials are going to have some serious explaining to do. According to the BBC, the former management team at Autonomy has "flatly rejected the allegations."
Reuters was reporting the write-off was $5.5 billion, but whatever the price, it was a lot, and it's made worse because it comes on the heels of another write-off for another deal gone bad. Just last quarter, HP wrote off a hefty $11 billion for a charge related to its purchase of EDS.
As for the allegations, Matt Rosoff, editor at CITEworld, summarized the issue nicely in a tweet: "Autonomy allegedly booked hardware sales as software, long-term license deals as short-term, and sold to VARs with no end customers."
You may recall that HP spent $10 billion to buy Autonomy in August 2011. It was a price tag that shocked industry experts at the time. Craig Carpenter from Recommind pointed out to FierceContentManagement that the purchase was nine times over market value. The price-value differential also surprised Irina Guseva from Real Story Group who told FierceContentManagement at the time, "The first shocker is the $10B sticker price, which looks to be hugely overpriced," she said.
She also wondered about the shift from infrastructure to software and services, but that played into the strategy that short-lived CEO Leo Apotheker was hoping to implement. But he would be gone just one month later before the strategy ever had time to kick in.
It's worth noting that according to a statement he made to The Wall Street Journal, Apotheker vigorously defended the deal, claiming they did all of their due diligence and that he was "stunned and disappointed" to hear the news of the allegations.
Meanwhile, Autonomy founder Mike Lynch also had his say in a separate Wall Street Journal piece with Lynch clearly shocked, saying he had been ambushed with no prior warning of the allegations. "The figures are just mad. You are talking about handing them an asset worth $12 billion and they are saying $9 billion of that they are taking off. That would be such an obvious massive thing with 300 people and all these firms doing due diligence, how could you possibly not spot it?" he wondered in the Journal interview.
Whatever accounting issues existed, that will be for courts and regulators to work out in the long term, but in the short term, it's a serious issue for HP, which has been bleeding for some time and announced last spring it would be laying off 28,000 employees over the next two years.
It's hard to know what's going on at HP or who is to blame for its issues with Autonomy, but something is clearly amiss. Regardless, it was clear HP paid too much for Autonomy at the time, and it seemed to be a poor match. This is going to drag out for a while and probably won't end well, but then it never seemed it would.
For more information:
- see The New York Times article