) decision to buy U.K-based business software maker Autonomy
Corp. seems to have compounded the challenges already being faced
by the tech giant after accusations of accounting irregularities
surfaced recently. The disclosure of certain accounting
misappropriations in Autonomy's financials has made the buyout
Earlier this week, H-P reported its fourth quarter results.
The company incurred loss per share of $3.49, which resulted from
a gruesome non-cash impairment charge of $8.8 billion.
The charge was mainly to set off the effect of the Autonomy
acquisition and certain issues related to the recent trading
value of its stock. The bulk of the charge (roughly $5.0 billion)
was to nullify the improper accounting practices relating to
Autonomy's financials prior to the acquisition.
In August 2011, the then H-P CEO Leo Apotheker announced a
major restructuring plan, focusing more on the high-growth and
high-margin businesses. The restructuring plan involved the
divestiture of H-P's lower-margin PC business, disposal of the
webOS business and the buyout of U.K-based business software
maker Autonomy Corp. Though the idea of spinning off the PC
business was dropped later on, the closure of the webOS business
did not make a difference to H-P's financial results.
Autonomy, a specialized provider of unstructured data
analytics and data management software, was purchased for a
premium price of $11.1 billion. The acquisition of Autonomy was
expected to strengthen H-P's software offerings. Management also
expected the unit to be accretive to non-GAAP earnings per share
within the first full year of completion, i.e. by the fourth
quarter of fiscal 2012.
The Curtain Raiser
After complete integration, Autonomy started contributing to
H-P's Software segment revenues from the fourth quarter of 2011.
Management felt that the market and competitive positioning of
Autonomy's cloud offerings would remain strong and undertook
initiatives to improve the performance of the unit to match
market demand. Eventually, during the second quarter of 2012, the
H-P chief replaced Mike Lynch (founder of Autonomy) with Bill
Veghte as the Software division's executive vice president.
After Mike's departure, a senior official from Autonomy's
leadership team brought the accounting missteps to management's
notice, which promptly responded to the situation with a thorough
investigation of Autonomy's financial reports before the
takeover. The PC emperor has also sought advice from the SEC's
Enforcement Division and the UK's Serious Fraud Office.
Bloomberg reports that counsel for H-P revealed the
possibility that more than $200 million of Autonomy's revenue had
been recorded improperly over a two-year period starting
Let the Show Begin!
H-P chief, Meg Whitman has expressed the opinion that this
unfair act was performed to mislead shareholders and potential
buyers. H-P also plans to file a civil suit against Autonomy's
former accounting firm, Deloitte LLC.
The accounting firm, however, is denying the allegations,
saying that there was no evidence of any misappropriation. The
firm stated that the auditors were not hired by H-P to make a due
diligence study before the purchase.
Mike Lynch is not backing down, either. He stated that the
existence of any improprieties of approximately $200 million
would not add up to such a huge charge. Instead, he has taken a
dig at the computing giant alluding to the fact that H-P was
using Autonomy as a means to cover up its own
Nationally accredited shareholder-rights law firm, Hagens
Berman Sobol Shapiro LLP has reportedly started looking into the
matter. The firm will find out H-P's stand in this case -that of
a real victim or a game changer trying to shadow its failure in
assessing Autonomy's financial position before bidding for
As per Bloomberg, the FBI has also started investigating the
Over the years H-P has made many strategic acquisitions but
some of those failed to live up to their respective purchase
considerations and add value to the tech giant. The acquisitions
of Electronic Data Systems Corp. (in 2008), Palm Inc. (in 2010)
could be worth mentioning in this respect.
But we believe that there is a silver lining, as Autonomy's
products are not going anywhere.
Though overall revenues have been slowing down, the Software
segment has remained a bright spot over the past few quarters.
Autonomy no doubt helped, though its exact contribution remains
unknown. Moreover, management remains committed to Autonomy and
intends to invest continuously to nurture its potential.
We believe that successful efforts to transform Autonomy into
a Software revenue driver would boost Meg Whitman's stand as a
CEO and would eventually bring back investor trust.
Currently, H-P has a Zacks #4 Rank, implying a short-term Sell
rating given the growing uncertainties in its core computing
market. It competes with
), which has a Zacks #5 Rank, implying a short-term Strong Sell
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