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HP Plunges on $8.8 Billion Charge From Autonomy Writedown

By Aaron Ricadela and Amy Thomson
November 20, 2012 5:03 PM EST 53 Comments
Hewlett-Packard Forecast Misses Estimates; $8.8 Billion Charge
Hewlett-Packard Forecast Misses Estimates; $8.8 Billion Charge

Nov. 20 (Bloomberg) -- Hewlett-Packard Co (HPQ). (HPQ) accused Autonomy Corp., the software maker it bought last year, of a broad range of financial falsehoods resulting in an $8.8 billion writedown, adding to challenges facing Chief Executive Officer Meg Whitman in the midst of a multiyear turnaround. Shares plunged.

More than $5 billion of the charge relates to accounting missteps, including improperly categorized hardware, Hewlett- Packard said. The rest is linked to Hewlett-Packard’s share value and projections that the deal won’t meet expectations, said the company, which also forecast fiscal first-quarter profit that missed analysts’ estimates.

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“Some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition,” Hewlett-Packard said in a statement. Autonomy managers denied the allegations.

The charge is another setback for Hewlett-Packard, which is already buffeted by management turmoil and slowdowns in its personal-computer, printer and technology-services businesses. The allegations, which didn’t emerge until half a year after the deal closed, call into question the company’s dealmaking diligence and validate concerns that it overpaid for Autonomy.

“This is going to test investors’ patience, and the stock is going to continue to struggle,” Brian White, an analyst at Topeka Capital Markets Inc., said in an interview with Carol Massar on Bloomberg Radio. “This just adds fuel to the fire in that investors have been very concerned about the company’s fundamental performance, and now you’ve got improprieties in a company that you acquired that everyone was upset you acquired anyway.”

‘Late’ Findings

Former CEO Leo Apotheker, 59, agreed to buy Autonomy to diversify away from hardware and expand in software for corporations. Apotheker left in 2011 after less than a year on the job following repeated strategy shifts and forecast cuts. Whitman, 56, and Chairman Ray Lane were on the board when it signed off on the deal, and the company may have taken too long to uncover the financial missteps, said George O’Connor, an analyst at Panmure Gordon & Co.

“It seems very late in the day that HP would find accounting irregularities,” he said.

The shares of Palo Alto, California-based Hewlett-Packard fell 12 percent to $11.71 at the close, dropping to the lowest since October 2002. The stock has dropped 55 percent this year.

Deloitte, KPMG

Hewlett-Packard began investigating Autonomy’s finances after a senior executive at Autonomy came forward following the May departure of founder Mike Lynch, 47, Hewlett-Packard said. The company said it has referred the matter to U.S. and U.K. securities regulators and will also pursue civil litigation.

“The board relied on audited financials -- audited by Deloitte -- not Brand X accounting firm but Deloitte,” Whitman said today on a conference call with investors. “The CEO at the time and the head of strategy who led this deal are both gone -- Leo Apotheker and Shane Robison.”

Hewlett-Packard also hired KPMG to audit Deloitte, Whitman said.

Autonomy’s former top management team said allegations by Hewlett-Packard are “false,” according to Vanessa Colomar, a spokeswoman for Lynch.

Lynch, in an interview with the Wall Street Journal, said Hewlett-Packard has mismanaged the Autonomy deal and that the company is “trying to cover it up with this big writeoff.”

‘Stunned, Dispappointed’

Jamie Harley, a spokesman for Deloitte, said the firm will “cooperate with the relevant authorities with any investigations into these allegations.”

Judith Burns, a spokeswoman for the U.S. Securities and Exchange Commission; Jina Roe, a spokeswoman for the U.K. Serious Fraud Office; and Chris Hamilton, a spokesman for the U.K. Financial Services Authority, declined to comment. Robison didn’t return a call seeking comment. Deborah Primiano, a spokeswoman for KPMG, didn’t immediately respond to a request for comment.

Apotheker said he’s “stunned and disappointed” by the alleged improprieties and that he did thorough due diligence on the acquisition. He agreed to buy Autonomy, the second-largest U.K. software maker, for $10.3 billion to expand in cloud- computing and add software that searches a broad range of data, including e-mails, music, videos and posts on social networks such as Facebook Inc.

Profit Misrepresented

Autonomy misrepresented its gross profit margin and also falsely created or miscategorized more than $200 million in revenue over a two-year period starting in 2009, John Schultz, Hewlett-Packard’s general counsel, said in an interview. Autonomy was reselling Dell Inc. (DELL) computers and counting those sales as software revenue, he said. Some sales were also fabricated through resellers.

“You have active concealment,” Schultz said. Deloitte “obviously didn’t catch these issues at the time. It was difficult, if not impossible for HP to catch them.”

This isn’t Whitman’s first writedown related to a deal done by one of her predecessors. In August, Hewlett-Packard wrote down by $8 billion the value of the enterprise-services unit forged by ex-CEO Mark Hurd’s $13.2 billion purchase of Electronic Data Systems Corp. in 2008.

While accounting issues were responsible for the majority of the charge from Autonomy, Hewlett-Packard said a portion was also caused by the recent trading value of its shares.

‘Deep Problems’

Profit excluding some items will be 68 cents to 71 cents a share for the period, which ends in January, Hewlett-Packard said in a separate statement. Analysts on average had estimated profit of 85 cents a share, according to data compiled by Bloomberg.

Whitman is paring product lines and cutting staff to make the supplier of PCs, printers and data center gear more competitive. The company, once a hotbed of invention and the world’s biggest PC maker, has suffered from declining sales and has been late to develop mobile and cloud computing products.

“They have a lot of deep-rooted problems,” said Eric Maronak, chief investment officer at Victory Capital Management Inc. in New York, which owns Hewlett-Packard shares. “A lot of it is self-inflicted.”

The net loss in the fiscal fourth quarter was $6.85 billion, or $3.49 a share, compared with net income of $239 million, or 12 cents, a year earlier. Results included the charge related to Autonomy.

‘Challenging Environment’

Profit excluding some items was $1.16 a share, topping analysts’ average $1.14 estimate. Fourth-quarter sales fell to $30 billion. Analysts had projected revenue of $30.4 billion.

Hewlett-Packard, which gets more than a quarter of sales from PCs, is suffering as consumers and business users increasingly favor smartphones and tablets.

“The environment remains challenging for HP and other technology companies in the space,” said Abhey Lamba, an analyst at Mizuho Securities USA Inc. “HP is unlikely to post revenue growth for a couple of years due to market dynamics in the PC and printing businesses.”

The total PC market will contract by 1.2 percent to 348.7 million units this year, according to IHS iSuppli. That’s the first annual decline since 2001, the market researcher said.

Whitman said at the company’s annual investor meeting last month that a turnaround won’t happen anytime soon. At the time, she forecast earnings for the current fiscal year of $3.40 to $3.60 a share, lower than analysts had expected.

‘Shakier’ Future

She is cutting 29,000 jobs by the end of fiscal 2014 to save as much as $3.5 billion a year. Whitman is also streamlining Hewlett-Packard’s unwieldy line of printers, overhauling technology services to improve profit, and re- entering the tablet computer market in January with the company’s ElitePad. The company is also focusing on products that help run corporate data centers, which yield higher profits than PCs.

“Everyone expected discouraging news and HP delivered even worse news,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. “Their big acquisition to grow their cloud computing and big data business -- their future -- is a bust. Their existing business is deteriorating and their future business looks shakier than ever.”

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Amy Thomson in London at athomson6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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