HP writes down $8.8 billion over 'improprieties' in the Autonomy acquisition (i.e. they lied)
It was a little over two years ago that HP hired former SAP chief Leo Apotheker to be the Palo Alto tech giant's new CEO. Apotheker came from a short tenure as CEO of German enterprise software firm SAP, from which he'd been forced out after poor performance during an admittedly poor economic environment. At the time, we expressed our misgivings over the pick; Apotheker was an enterprise software guy through-and-through, having spent twenty years at SAP (which is small in comparison to HP). Sure, enterprise services were a profitable and growing portion of the HP business, but HP also still had a massive and dominating consumer hardware enterprise and had just months prior completed its acquisition of Palm to further expand that consumer hardware portfolio.
We all know what happened next: within a year HP launched and then cancelled a new generation of webOS hardware, announced a plan to split HP into separate consumer and enterprise companies, and purchased UK-based enterprise software company Autonomy for $10.2 billion. A month later, Apotheker's embattled term as HP CEO came to an unceremonious end as he was dumped in favor of former Ebay CEO Meg Whitman, who has since spent the past year struggling to clean up the mess Apotheker created.
Today, in conjunction with announcing their fiscal year 2012 results, HP declared an $8.8 billion write-down loss related to the purchase of Autonomy. Specifically, the charge is related to the revelation that "members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company" before HP's purchase. In other words, they lied about how much Autonomy was worth and how much money it could make for HP, leading to HP overpaying by billions of dollars for the company (The purchase price at the time was more than 80% higher than Autonomy's stock price; when HP bought Palm they paid a mere 23% premium over the trading price).
After writing down $3.3 billion a year ago after Apotheker's cancellation of webOS hardware and $8 billion more a few months ago related to a failure to actualize the value of their 2008 purchase of enterprise services company EDS, the last thing HP needed was another multi-billion write-down. But here we are, bringing the one-year write-down total to over $20 billion. Without the EDS and Autonomy write-downs, HP actually would have only suffered a loss of $600 million for the year, which while not great, looks downright rosy given the situation HP found itself in a year ago and the $12.7 billion paper loss now on the books.
Understandably, HP's not happy about this debacle, and make no mistake, this is a debacle. HP says that they have contacted both the US SEC Enforcement Division and the UK Serious Fraud Office for "civil and criminal investigation". And not wanting to leave it up to the feds, HP's also "preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders." In other words, "We'll see you in court."
For his part, former Autonomy CEO Mike Lynch has flatly denied the charges to multiple publications, including Business Insider and The Wall Street Journal. Former HP CEO Leo Apotheker, the man who pursued the acquisition of Autonomy, also chimed in through the Journal, saying that he's "both stunned and disappointed to learn of Autonomy’s alleged accounting improprieties" and that "the due diligence process was meticulous and thorough" with the assistance of "two of the world’s largest and most respected auditing firms" to check the numbers. How Autonomy was supposedly able to dupe these respected auditing firms and HP's own numbers guys is hard to say, and we're not going to point any fingers at who might be to blame. Suffice to say, there's plenty of failing to go around here. And HP's shareholders aren't please by this news either, sending shares of HP down nearly 12% today, hitting a new low not seen since October 1994 (yes, an eighteen-year low, though if you adjust for inflation it's actually a twenty-year low for HPQ). HP's stock price is down 58% over the past year.
Recently we've been rolling back how much we report on HP's financial situation. With the webOS Global Business Unit poised to become an independent company (albeit one that's monetarily reliant upon HP's largess), the continually depressing fiscal state of HP had been becoming less and less relevant. But if we go back one year to the start of this debacle, we have to wonder how differently things could have turned out had HP not so grossly overpaid for Autonomy.
In the conference call after the cancellation of webOS hardware development, HP CFO Cathie Lesjak said that "To make [webOS] a financial success would require significant investments over the next one to two years." HP wasn't willing to commit the billions of dollars that would have been necessary for webOS to stand a chance at long term success in the burgeoning smartphone marketplace. Just ask Apple, Google, and Samsung how much they've had to spend to achieve success, and how many billions companies like HTC, Microsoft, Nokia, and Research In Motion have spent in their falls from grace (or in Microsoft's case, a slow and stumbling climb up from eternal and existential floundering in mobile).
To put HP's financial predicament at the time in perspective, it was three months later that they announced the full $3.3. billion loss that they were taking related to the webOS experiment over the prior year. It's probable that HP likely would have continued to lose money in the short term if they'd continued to pursue a webOS market, but we doubt that even after two years they could have come close to equaling the bath they're taking over Autonomy. By committing over $10 billion to purchasing Autonomy, Leo Apotheker severely limited HP's cash flow options, creating a "this or that" scenario where HP had to make cuts, and Palm was a casualty in the bloodletting.
But, oh, what the webOS GBU could have done with $8.8 billion. We'd be on at least a third generation of HP webOS hardware by now, and from what we've been able to learn about what HP had in development, they had a lot of innovative stuff in the works. But until we get our hands on a time machine, there's no sense in crying over almost nine billion dollars in year-old spilled milk.