|H-P Blames $8.8 Billion Charge on Bad Deal |
Updated November 20, 2012, 1:57 p.m. ET
H-P Blames $8.8 Billion Charge on Bad Deal
By BEN WORTHEN Hewlett-Packard Co. surprised investors Tuesday when it claimed it had been duped into overpaying for one of its largest acquisitions, a U.K. software maker, that will result in an $8.8 billion charge.
Hewlett-Packard leveled serious accusations against a software company it bought last year, saying it would take a $8.8 billion write-down after it claimed Autonomy's leadership misrepresented its performance.
The technology giant, whose board has faced withering criticism for its handling of past two CEO ousters, said an internal investigation revealed "serious accounting improprieties" and "outright misrepresentations" with Autonomy, which H-P acquired for $11.1 billion in October 2011.
H-P, already trading near a 10-year low, plunged another 12% on Tuesday.
The write-down—H-P's second straight quarterly multibillion-dollar charge—resulted in a nearly $7 billion loss for the Palo Alto, Calif., company.
H-P said Autonomy—before it was acquired—mischaracterized some sales of low-margin hardware as software and recognized some deals with partners as revenue even when a customer never bought the product.
H-P Chief Executive Meg Whitman said H-P has alerted the U.S. Securities and Exchange Commission and the U.K. Serious Fraud Office and requested that they open an investigation. The company said it's also seeking recourse through private litigation, though Ms. Whitman stressed any such outcome could take years.
Of the $8.8 billion charge related to the write-down, more than $5 billion is related to the accounting issues.
The SEC is launching an investigation into the fraud allegations, according to a person familiar with the matter. An SEC spokesperson couldn't immediately be reached.
Hewlett-Packard has claimed that the leadership at Autonomy, the software firm it acquired last year, misrepresented its performance as the deal was being negotiated. WSJ's Ben Rooney profiles the company and its founder, Mike Lynch. Photo: Bloomberg
The U.K.'s Serious Fraud Office declined to comment on H-P's announcement.
A Silicon Valley icon, H-P became the world's largest technology maker by revenue from selling personal computers, printers and other products and services for businesses. But it's been hurt by a several factors, including CEO and executive turnover, slowing demand for some products and mounting debt.
A History of Hewlett-Packard
The Autonomy allegations and write-down added a new element.
Even before H-P announced its acquisition of the software maker in August 2011, rumors swirled that Autonomy's growth was due partly to fuzzy accounting. A dossier questioning some of Autonomy's growth was widely circulated around the time that the acquisition by H-P was announced.
Mike Lynch, Autonomy's CEO at the time, denied any such irregularities in an interview then. Mr. Lynch left H-P in May.
In an interview Tuesday, Mr. Lynch said the allegations are "completely and utterly wrong and we reject them completely." He added that he wasn't made aware of the allegations until H-P's press release was issued Tuesday.
H-P's internal team was aware of the allegations at the time of Mr. Lynch's departure, people familiar with the matter have said. There was broad concern when H-P announced its intent to acquire Autonomy in August 2011 that it was overpaying—rival Oracle Corp. even ran a publicity campaign stating that it had a chance to buy Autonomy but passed because it was too expensive.
At the time, one of the people familiar with the matter said H-P was looking for a way to unwind the deal before it closed but couldn't find any material accounting issues. On Tuesday, Ms. Whitman said the company relied on Deloitte's audit of Autonomy and had hired KPMG for an additional review.
Neither firm found any irregularities, she said. H-P's internal investigation was launched after a senior Autonomy executive came forward in May, following Mr. Lynch's resignation from H-P.
Spokespeople for Deloitte UK and KPMG declined further comment beyond noting the allegations, citing client confidentiality.
Ms. Whitman, who was on H-P's board when the Autonomy deal was announced, blamed the mistake on her predecessor, Leo Apotheker, and the company's former strategy chief, Shane Robison.
"The two people who should have been held responsible are gone," she said, noting that the mergers and acquisition function now report to H-P's finance chief.
In a statement, Mr. Apotheker said he was "both stunned and disappointed" to learn of H-P's allegations. He said "the due diligence process was meticulous and thorough, and included two of the world's largest and most respected auditing firms working on behalf of HP." He added that he will assist H-P and the authorities "to get to the bottom of this."
Mr. Robison didn't immediately respond to requests for comment.
H-P general counsel John Schultz said in an interview that he was aware that there were rumors about accounting issues at Autonomy before the deal closed, but that H-P was shown "significant documentation from former Autonomy executives refuting the allegations." In hindsight, "It's fair to say those refutations were questionable," he said.
H-P's decision to buy Autonomy in August last year was part of Mr. Apotheker's dramatic plan to revamp H-P by splitting off or selling its personal-computer business. Mr. Apotheker was ousted a few weeks after the announcement, and his successor, current CEO Ms. Whitman, eventually chose to keep the PC division.
When H-P bought it, Autonomy was Britain's biggest software company, and second-largest in Europe after Germany's SAP AG. It has customers that include intelligence agencies, big corporations, banks and law firms.
Autonomy's software searches through unstructured information—such as emails, instant messages, recordings of phone calls, still and video images—looking for patterns of lucrative or nefarious activity. Intelligence agencies use it in analyzing intercepted communications; the dealings of Jérôme Kerviel, rogue trader at Société Générale SA, were also tracked using Autonomy's technology.
Even without the Autonomy charge, H-P's business suffered.
Overall for the fiscal fourth quarter ended Oct. 31, H-P said it swung to a $6.9 billion loss while revenue fell 7% from a year earlier. It was the technology giant's fifth straight quarter of big declines, a trend Ms. Whitman said is likely to continue.
H-P last month said it expected revenue in the current fiscal year to fall in each of its biggest businesses. It said it expected per-share profits for the year of $2.10 to 2.30, or between $3.40 and $3.60 excluding one-time charges. The company reiterated that guidance Tuesday, while projecting current-quarter earnings between 34 cents and 37 cents per share, or between 68 cents and 71 cents excluding one-time charges.
The forecast assumes that the second half of the new fiscal year will be better than the first, which contributed to Tuesday's sell off. "I think that's pretty optimistic," said Rob Cihra, an analyst at Evercore Partners . "Management's credibility isn't that high so when they guide for a recovery in the second half, investors take that with a big bag of salt."
He said investors expected an Autonomy write-down, just not for the cited reasons. "Things just keep getting worse, not better," he said.
H-P's revenue for the quarter was $30 billion compared with $32.1 billion a year earlier.
Revenue in its PC business fell 14% from a year ago to $8.7 billion. Sales to consumers were hit particularly hard during the quarter, decreasing 16%, though sales to businesses also fell 13%.
The overall market for PCs has slipped lately, as people instead buy tablets and smartphones. Research company IDC said that overall PC shipments declined more than 8% in the third quarter of 2012, the largest such shortfall in more than a decade. H-P's shipments declined 16%, IDC said.
Sales in H-P's printer group dropped 5% to $6.1 billion, while revenue from products like servers and networking gear used by businesses declined 9% to $5.1 billion. In H-P's big services business, which the company has identified as a problem area, sales fell 6% to $8.7 billion.
—Ian Sherr, Drew Fitzgerald, Paul Sonne, Rolfe Winkler and Ben Rooney contributed to this article. Write to Ian Sherr at email@example.com and Ben Worthen at firstname.lastname@example.org
Corrections & Amplifications
Hewlett-Packard lost $6.9 billion in the most recent quarter. An earlier version of this article incorrectly said H-P's quarterly loss was $6.9 million.