HP: Autonomy overinflated its accounts and we have to foot the $8.8bn bill

Nov 20, 2012
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HP: Autonomy overinflated its accounts and we have to foot the $8.8bn bill

HP has reported its Q4 and full-year 2012 results, and there's an unpleasant $8.8bn hit on the balance sheet over alleged "serious accounting improprieties" at Autonomy prior to its acquisition. The writedown has been blamed on claims that Autonomy execs inflated the value of the firm so as to drive up HP's bid, and has referred the case to the US SEC's Enforcement Division and the UK's Serious Fraud Office for civil and criminal investigation.

"HP recorded a non-cash charge for the impairment of goodwill and intangible assets within its Software segment of approximately $8.8 billion in the fourth quarter of its 2012 fiscal year. The majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP's acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term. The balance of the impairment charge is linked to the recent trading value of HP stock. There will be no cash impact associated with the impairment charge." HP financial results, Q4 and full year 2012

HP claims that its internal investigation discovered evidence that Autonomy "mischaracterized" low-end hardware sales with "little or no associated software content" so as to make them look more impressive and as if they contributed to ongoing licensing revenue. In fact, the negative-margin sales amounted to 10- to 15-percent of Autonomy's revenue. Autonomy execs also used "licensing transactions with value-added resellers to inappropriately accelerate revenue recognition" HP says, "or worse, create revenue where no end-user customer existed at the time of sale."

Unsurprisingly, however, former Autonomy chief executive Mike Lynch has denied any such misbehavior, telling Reuters that HP's due diligence process was watertight. "The former management team of Autonomy was shocked to see this statement today, and flatly rejects these allegations, which are false" a spokesperson said on behalf of Lynch and the former Autonomy chiefs.

"HP's due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and Perella Weinberg" the spokesperson continued. "HP's senior management has also been closely involved with running Autonomy for the past year."

The issues arose, so HP tells the story, following Lynch's replacement in May this year, when "a senior member of Autonomy's leadership team" blew the whistle on "a series of questionable accounting and business practices."

As a result of that financial fudging, HP overpaid when it splashed out $10bn for the company it now claims, with CEO Meg Whitman saying during the company's financial results call today that former HP CEO Leo Apotheker and former CSO Shane Robison are to blame for not identifying the errors. "HP is preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders" the firm said in a statement, indicating it plans "to aggressively pursue this matter."

Nonetheless, the current chief executive says that HP still sees a future for the acquired firm. "We remain 100 percent committed to Autonomy and its industry-leading technology" Whitman insisted.


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