HP Autonomy row rocks the financial world

21st November 2012

Could this be the financial row of the year? Hewlett Packard has made some really quite astonishing accusations about Autonomy, the firm it bought last year for $11bn as it writes down $8.8bn on the purchase.

The news was also very bad for shareholders with HP's shares falling 12 per cent on Tuesday November 20 and closing at $11.71, its lowest level in a decade. 

Autonomy has alleged serious accounting improprieties at the former British software giant and referred the matter to both the US Securities and Exchange Commission and the Serious Fraud Office in the UK.

The HP chief executive Meg Whitman said an internal investigation had uncovered ‘disclosure failures and outright misrepresentations at Autonomy. In particular, low margin hardware sales were booked as high margin software sales.

The founder of Autonomy Mike Lynch, who made £800m from the deal and who recently left HP, has strongly refuted the accusations. He told the Financial Times: “It is utterly untrue. We reject this as totally wrong.” He says that the write-down is because of HP’s poor strategic leadership.

A lot of reputations are at stake.

It is likely that three of the big four accountancy practices will be caught up in the row. Deloitte were Autonomy’s auditors.   KPMG did due diligence on the deal and in effect on Deloitte's auditors. PwC then conducted the investigation though of course, its reputation is not on the line.

The deal involved a number of global city names and technology specialists. Those advising Autonomy included Frank Quattrone, a renowned silicon valley dealmaker, Goldman Sachs, UBS, Citibank, JP Morgan, and Bank of America. Those advising HP included Perella Weinberg and Barclays.

The story will run and run but Mindful Money looks at some useful links in the story so far.  

This morning’s Financial Times (behind paywall) says in its leader column – “Accounting in software businesses is a slippery area but the idea of miscategorising more than 10 per cent of revenues – as high margin software sales when they came from low margin hardware – is hard to pass off as some oversight or bad judgment call.”

The Wall Street Journal published this question and answer session with Mike Lynch where he refutes all the accusations.

This is the link to the Hewlett Packard press room with all its allegations.

Citywire quotes Artemis fund manager Tim Steer slating HP's judgment. He had been shorting Autonomy before it was bought out, because he did not have confidence in Autonomy's valuation or accounting, though his fund lost out because of HP's purchase.

The WSJ’s MarketWatch section asks who else is to blame. Among other things, it cites a presentation from rival software CEO, Oracle’s Larry Ellison questioning Autonomy’s presentation to his company months before HP bought it.

On specialist website Techcrunch , Alex Williams says the deal and its problems are symptomatic of the business IT market reliant on legacy business and hard sell tactics.

The New York Times Dealbook says the FBI is now investigating.Dealbook also relates the vexed history of poor deals made by HP.

Bloomberg quotes the former chief accountant at the SEC Lynn E. Turner focusing on the $200m misreported sales and asks whether they should really lead to a write-down on this scale. Answer: No and certainly not to the tune of $5bn or more.

Reuters provides the full list of professional advisers facing varying degrees of risk to the reputatio




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