HPIn 1939 HP was founded in Palo Alto and it has gone from strength to strength.  Throughout all those years, it has not always gone well.  They have brought a few products on the market that have not been brilliant, have entered a few markets that were not their forte and have bought a few companies they shouldn’t have bought and some they shouldn’t have bought for the price they paid.

 Was it Overpriced?

One of those was Autonomy.  In 2011, they paid $10.3 billion.  At that stage, they were the worlds largest computer maker.  Analysts asked at the time, were HP paying too much for Autonomy.  Autonomy specialised in analysing ‘unstructured’ data – that is data that is not in neat data bases.

This week, on 20th November, HP admitted that they paid too much.  $8.8 billion too much.  Ouch. They are attributing “serious accounting improprieties, disclosure failures and outright misrepresentations” before the deal. It didn’t name anyone, but it did blame “some” of Autonomy’s former managers.  HP says it was tipped off by a remaining member of Autonomy’s team soon after Mike Lynch, the British firm’s founder and boss, was forced out in May.

People who examined the books after the sale said that Autonomy exaggerated its software sales by changing revenue from “negative-margin, low-end” hardware and by prematurely counting sales through resellers, a practice known as “channel-stuffing”.

HP has passed its findings to the Securities and Exchange Commission in America and the Serious Fraud Office in Britain. It also says it will sue.

But what about due diligence?

Mike Lynch has said that HP carried out ‘intensive’ due diligence through KPMG and bankers from Barclays and Perella Weinberg. He said that “it is sad to see how (Autonomy) has been mismanaged since its acquisition.”

How could this have happened? Advisors are paid exorbitant sums to carry out these checks.  Even after the sale, it went un-noticed for a while.  Advisors know the tricks that companies like Autonomy get up to.  Their auditors, Deloitte, signed off their accounts.  HP’s Board approved the purchase, offering a premium of more than 60%.

HPs board that was there at the time of the buyout are still there today. “We feel terribly about that,” said Meg Whitman, HP’s boss, but “the board relied on audited financials.” When someone is “concealing the truth”, it is “difficult to uncover that”, said  HP’s general counsel, John Schultz.

Ms Whitman noted that her predecessor, Léo Apotheker, and the then head of strategy, Shane Robison, “the two people that should have been held responsible” internally, had departed.

Heads did roll.  Léo Apotheker was sacked just after the buyout.  He was only a year in the job.  He says he is “stunned and disappointed” by the turn of events.  Shareholders got nervous.

Meg Whitman is trying to steady the ship, but it seems to be sinking.  The share price is falling ($50 to $12), sales are dropping in PCs, printers, services and servers.  The only light to shine is an increase in sales in software of 14%.

HP have also written down other company purchases, $8 billion on EDS which it bought in 2008 for $13.9 billion and $1.2 billion of Compaq which it bought in 2002.

How more can HP take?


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