A couple of months ago, I talked about HP recognizing a $8 Billion write down, which is really another word for “oops” for its 2008 acquisition of EDS.
Yesterday, it experienced another $8.8 Billion “oops” for its much more recent Autonomy acquisition, this time not because someone overestimated the future benefits from an acquisition, but because HP actually believes that Autonomy cooked the books!
Here’s what HP CEO Meg Whitman had to say about it on its recent earnings call, via a CNET article:
These in improprieties were discovered through an internal investigation after a senior member of Autonomy’s leadership team came forward following the departure of Mike Lynch on May 23rd.
Based on this information, HP initiated an intense internal investigation into the allegations including a third party forensic review of Autonomy’s historical financial results. HP has contacted the SEC’s enforcement division and the UK’s serious fraud office. We have requested both agencies open criminal and civil investigations into this matter.
In addition, HP intends to seek regress against various parties in the appropriate civil courts to recoup what we can for our shareholders. I want to stress that we remain 100% committed to autonomy and its industry leading technology. We will continue to fully support our new and existing customers and we believe autonomy technology will play a significant role in our growth strategy over the long term.
The last paragraph is interesting because it indicates that HP is going to try to recoup some of this – which is very important for HP because when you buy someone for $10 Billion and you write down $8.8 Billion shortly thereafter, on paper at least, that’s a lot of money down the drain. So its good they are going to try recoup some of that, but I am not 100% sure to what extent HP will be successful. Good luck to them with that.
The other point here is that even someone like HP that can be expected to perform due diligence and go over the financials of acquisition targets with a fine tooth comb wasn’t able to find these “irregularities”. Quite surprising, in my view. Will this have any repercussions for HP’s M&A team? And was it the same team that overestimated EDS synergies to the tune of $8 Billion in 2008?
I am sure they can always point to Deloitte, though I am not sure how this nugget fully absolves the HP M&A team:
Ms. Whitman said H.P.’s board at the time – which remains the same now, except or the addition of the hedge fund investor Ralph V. Whitworth – relied on Deloitte’s auditing of Autonomy’s financial statements. As part of the due diligence process for the deal, H.P. also hired KPMG to audit Deloitte’s work.
Neither Deloitte nor KPMG caught the accounting discrepancies. Nigel Mercer, the Deloitte accountant listed on Autonomy’s last annual report, did not return calls seeking comment.
And finally, how, exactly did Autonomy misrepresent things to the tune of an astounding $8.8 Billion?
From HP’s press release, we find this:
- The mischaracterization 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.
- 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.