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[Update] HP Charges Autonomy with Massive Fraud
It claims it was the victim of accounting improprieties and disclosure failures made by the publicly held British company
By: Maureen O'Gara
Nov. 21, 2012 08:00 AM
HP Tuesday morning charged its Autonomy acquisition with massive fraud.
It claims it was the victim of accounting improprieties and disclosure failures made by the publicly held British company prior to its acquisition last year by HP and downright misrepresentations made to HP in connection with the ultimately $12 billion and something acquisition.
As a result HP will write off most of the inflated purchase price and take an $8.8 billion non-cash charge, worse than the $8 billion goodwill charge HP took this summer on its EDS acquisition.
HP has turned the case over to the SEC and the UK's Serious Fraud Office for civil and criminal prosecution. HP CEO Meg Whitman said the company would also press its own civil and criminal charges against certain unnamed individuals seeking redress for its benighted stockholders. She expects it all to take years.
HP said that after Autonomy founder Mike Lynch was fired earlier this year because the unit was significantly underperforming an unidentified senior member of Autonomy's staff blew the whistle on the company's inflated margins and phony growth rates, and the slight-of-hand that got it so overvalued.
A seven-month internal investigation ensued, leading HP to conclude that Autonomy was overvalued all along.
That investigation is still going on but it found that Autonomy misstated its financial performance, including its revenue, core growth rate and gross margins, and misrepresented its business mix.
Margins were inflated from 28% to 45% by passing low-end hardware sales off as IDOL software license sales; VAR license fees were paraded as revenue when no end customer existed at the time of the sale; VARs paid high up-front fees in exchange lower future fees; and revenues were pulled forward. The idea was to suggest better growth than existed.
"This appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers," HP said in a statement. "These misrepresentations and lack of disclosure severely impacted HP management's ability to fairly value Autonomy at the time of the deal."
Whitman said HP's board, which voted to make the Autonomy acquisition, "feels terribly" about all this but depended on financials audited by Deloitte and re-audited by KPMG before doing the deal. "You have to depend on audited results," she said, although neither accounting firm tumbled to what had been going on.
Apparently PricewaterhouseCoopers' forensics team finally caught it after in was brought in in May.
According to Meg, "blogs" at the time of the acquisition questioned Autonomy's revenue recognition and what it called a sale but Autonomy's management was allowed to run the reports to ground with the pair of original auditors and claimed there was nothing to them.
After listening to the HP conference call Tuesday morning Lynch "flatly rejected" HP's allegations, "which are false."
Meg blamed her predecessor Leo Apotheker and former head of R&D and strategy Shane Robison. Due diligence at HP no longer reports to M&A, as it was when Apotheker was therem but it's kind of late in the day to give it to the CFO.
Robison has yet to be heard from, but Apotheker, who orchestrated the Autonomy acquisition, issued a statement to the Wall Street Journal saying he was "stunned and disappointed" to learn of thr alleged accounting improprieties and defended HP's due diligence as "meticulous and thorough."
He pointed out that since Autonomy was a public company "much of the process relied on public financial reports - accounting statements approved, filed and backed by Autonomy's leadership, board and auditors" and offered to make himself available "to assist HP and the appropriate authorities to get to the bottom of this."
Autonomy's shenanigans account for $5.3 billion of the charge; the rest stems from HP's declining stock price, which has been in free fall since Apotheker said it was buying Autonomy and disposing of HP's PC unit in order to turn HP into a software company. The company quickly disposed on Mr. Apotheker, replacing him with Whitman, who went through with the Autonomy acquisition and decided to keep PCs. Most outsiders couldn't understand the Autonomy buy.
Although Autonomy's long-term financial performance is expected to be impacted by the mess, Whitman says the company is "100% committed to Autonomy" and expects it to play a "significant role" in HP's recovery.
The disclosure was part of Hewlett-Packard's quarterly report. It lost $6.85 billion, or $3.49 a share, compared to a profit of $239 million, or 12 cents a share, this time last year. Revenue was $29.96 billion, down 4%. Adjusted EPS was $1.16. Analysts were expecting adjusted earnings of $1.14 a share, on revenue of $30.44 billion.
HP said revenue from its PC unit was down 14% since commercial revenues dropped 13% and consumer revenue plunged 16%. Revenue in the enterprise, servers, storage and networking segment dropped about 9%. Printing sales fell about 5%. Services fell about 6%. Software revenue was up 14%.
HP's battered shares were down 12.48% to $11.64 in pre-market trades on the news, dropped further as the market woke up and then recouped slightly to $11.87, down 10.68%. Its stock has lost over 48% this year and the company had $21.8 billion in long-term debt at the end of its fiscal fourth quarter
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