HP accuses Autonomy of fraudulently overvaluing itself

Hewlett-Packard has accused the former management of UK information management provider Autonomy of deliberately misrepresenting the company’s value in advance of its $11.7 billion acquisition last year.

“HP is extremely disappointed to find that 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 by HP," the company said in a statement.

"These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal.

"We remain 100 percent committed to Autonomy and its industry-leading technology.”

HP says it investigated Autonomy’s valuation "after a senior member of Autonomy’s leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP. This individual provided numerous details about which HP previously had no knowledge or visibility".

The company hired PwC to conduct a forensic review, which it says discovered accounting irregularities including:

"The mischaracterisation of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations [and] the use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale."

"This appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers.

"These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal."

In a conference call today, CEO Meg Whitman said that HP has request that the UK’s Serious Fraud Office launch an investigation into Autonomy, and that the company will be seeking redress in the civil courts.

Before the acquisition went ahead, Autonomy’s accounts were deemed "true and fair" by the acquired company’s auditor Deloitte. This was double-checked by HP’s auditor by KPMG.

On a press conference this afternoon, Whitman was asked why the company failed to detect the impropriety after the acquisition. "When you are lied to, it is hard to find [such impropriety]", she replied.

The company also revealed that the misreporting of low margin hardware sales as software license sales accounted for as much as 10% to 15% of Autonomy’s reported revenue during the two years before the acquisition.

As a result of the discoveries, HP has written down the value of its software business by $8.8 billion. This follows the $8 billion write-down of the value of HP’s IT services division in August. In these two announcements, HP has lopped off nearly $17 billion from the value of its intangible assets.

In its financial results published today, HP reported a 7% drop in revenue to $30 billion for the three months ending October 31. Sales at HP’s newly merged printer and personal systems division dropped 11% to $14.9 billion; IT services fell 6% to $8.7 billion; and Enterprise Servers, Storage and Networking fell 9% to $5.1 billion.

Beside its corporate finance arm, only HP’s software division grew, by 14% to $1.1 billion.

At the time of writing, HP’s share price had dropped 7.5% following the announcement.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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