Autonomy management accused of inflating revenues prior to acquisition by HP, HP takes $8.8bn charge
Announcing its fourth quarter earnings, HP dramatically announced that it is writing off $8.8bn of goodwill and intangible assets relating to its acquired Autonomy business. Worse, it has accused former Autonomy management of accounting ‘improprieties and misrepresentations", and referred its evidence to the US Securities and Exchange Commission’s Enforcement Division and the UK’s Serious Fraud Office for civil and criminal investigation.
HP said it is preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders. "The company intends to aggressively pursue this matter in the months to come," it said.
The former management team at Autonomy, which includes founder and former CEO Mike Lynch, made this statement in response: ""HP has made a series of allegations against some unspecified former members of Autonomy Corporation PLC’s senior management team. The former management team of Autonomy was shocked to see this statement today, and flatly rejects these allegations, which are false. HP’s due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and Perella Weinberg. HP’s senior management has also been closely involved with running Autonomy for the past year."
"It took 10 years to build Autonomy’s industry-leading technology and it is sad to see how it has been mismanaged since its acquisition by HP," the former management team’s statement read.
But the systems, software and services vendor said it had been impossible to put a fair value on Autonomy prior to its purchase because, "Some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP. These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal."
HP said it started investigating after a senior member of Autonomy’s leadership team came forward, following the departure of founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP. "This individual provided numerous details about which HP previously had no knowledge or visibility," HP said.
HP began an "intense" internal investigation, including a forensic review by PricewaterhouseCoopers of Autonomy’s historical financial results, under the oversight of John Schultz, EVP and general counsel, HP.
"As a result of that investigation, HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of Autonomy’s financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix," HP said.
The firm said its investigation is ongoing, but that examples of the accounting improprieties and misrepresentations include: "The mischaracterisation of revenue from negative-margin, low-end hardware sales with little or no associated software content as "IDOL product," and the improper inclusion of such revenue as "license revenue" for purposes of the organic and IDOL growth calculations. This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue."
It said another example included, "The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale."
HP bought Autonomy for $11.1bn in August last year, which makes HP’s goodwill and intangibles write-down of $8.8bn all the more staggering. It’s not the first time it’s had a huge write-down related to an acquisition in recent times, however. In August it announced that it was taking a write-down of $10.8bn, mostly related to its acquired EDS business; it acquired EDS for $13.9bn.
Victor Basta, managing director of Magister Advisors, which advises technology companies on exit strategies, blamed HP’s acquisition strategy for the current challenges in the Autonomy business: "HP’s pursuit of a "buy software to get out of hardware" strategy has failed. Autonomy was always an off piste deal. Many large businesses will do a series of bread and butter mid-sized deals, but in HP’s case they went for broke," Basta said.
He added, "HP would have been far better off targeting, like IBM and Dell, a range of smaller acquisitions, with more predictable revenue, and which they could gradually build around. It takes a decade, not a year, to achieve this kind of change. HP’s culture has however made it impossible. Transitioning from a hardware business to a software business requires a fundamental shift in corporate culture – and that is something that you simply can’t buy."
HP’s fourth quarter results were below most analysts’ expectations. The company posted revenue of $120.4bn, down 5% year on year. GAAP loss per share was $3.49.