HP’s Plunge

By Patrick Corby

In 2011 when Hewlett-Packard’s chief executive Leo Apotheker announced the acquisition of Autonomy not only did share prices crash 20% in response; investors later forced Apotheker out of his position less than a year after being in the job.

The price Apotheker paid held a somewhat inflated premium of 79% 10 times prospective revenue for the company.

In hindsight the market may have been right to panic. On Tuesday 20th HP took a $8.8 billion writedown, HP stated that $5bn of the writedown was due to “serious accounting improprieties, disclosure failures and outright misrepresentations” by Autonomy, something suspected by the market since 2009.

The company’s shares plunging 12 percent to a 10-year low of $11.71 this week in response to the shock.

(HP Share price plunges on Tuesday)

Inflated Financials

HP has accused Autonomy of misrepresenting $200ml, 12% of recorded revenue. Claiming gross margins were a high 45% instead of being in the realistic 30% range and prematurely recording future license deals with partners according to their general council.

In an interview on Wednesday former chief executive Mike Lynch admitted that Autonomy had sold computer hardware at a loss and took it as a marketing expense. HP claims that 10 – 15% of their ‘revenue’ came form such manipulations.

The situations probably reveals past doubts over Autonomy’s results which were pointed to by a number of sources. In 2009 hedge fund manager Jim Chanos showed concern that Autonomy had been recording double digit growth while most other firms were struggling.

The company was traded far in excess of most larger technological companies at a price/ earnings ratio of 32. Marc Geal an analyst of Deutsche Bank warned that Autonomy been trading like a ‘start-up’. Non of which had any affect on now former chief executive Leo Apotheker strategic acquisition.

If the allegations are true not only did that have been underlying for 6 months within HP but were missed by Deloitte, the auditor for Autonomy, and it’s banks; Qatalyst, Goldman Sachs, Citigroup, UBS, Bank of America, and JPMorgan.

Mr Moreland at Peel Hunt stated of the $5bn hole that “If i could spot it from going through public accounts, then it’s shocking that someone in [HP’s] position could not”

It would be an embarrassing scandal if such a gross misconduct in balance sheets had occurred right in front of these astute number-crunchers eyes.

PwC has been called in to undertake a forensic review of Autonomy’s financial data and accounting practices designed to inflate the company’s financial position.

HP is now taking legal action against the misleading information of Autonomy at the U.S Securities and Exchange Commission and the U.K’s Serious Fraud Office to offset some of the loss for shareholders. HP blames Deloitte which audited Autonomy’s accounts for the gross errors and may cause authorities to look at the role played by Deloitte in the deal.

Robert Enderle, a tech analyst at the Enderle Group, has stated that if the allegations are true then HP could be in for huge sums in punitive damages for ‘misstatement at this level’ reflecting Worldcom or Enron sized fraud.


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