HP Charges Autonomy Management Willfully Misled Potential Buyers, Falsely Inflated Value of Autonomy

Hewlett-Packard today issued statements accusing the Autonomy management team of accounting improprieties designed to misled potential buyers by inflating the  value of Autonomy prior to its purchase by HP. HP states that it will take an $8.8 billion accounting  charge, the majority of which, some $5 billion, it says is directly related to misleading Autonomy misrepresentations and disclosure failures.

HP acquired British Autonomy, a maker of enterprise-level software, last summer under former CEO Leo Apotheker for approximately $10.2 billion. The $8.8 billion accounting charge wiped out any profits for HP’s fourth quarter, with HP today reporting a loss per share of $3.49 for its fiscal fourth quarter.

It says it’s referred the matter to both the U.S. Securities and Exchange Commission and the U.K.’s Serious Fraud Office, and will seek redress from various parties in civil courts. It also said it launched an investigation into Autonomy accounting practices after a senior member of Autonomy came forward and said there had been questionable accounting practices prior to Autonomy’s acquisition by HP.

HP issued the following statements:

“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. 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 announced a non-cash impairment charge of $8.8 billion related to Autonomy for the fourth quarter of its 2012 fiscal year. The majority of this impairment charge, more than $5 billion, it states “is linked to serious accounting improprieties, misrepresentation and disclosure failures discovered by an internal investigation by HP and forensic review into Autonomy’s accounting practices prior to its acquisition by HP.”  The balance of the impairment charge is linked to the recent trading value of HP stock and “headwinds against anticipated synergies and marketplace performance.”

HP Investigation

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

HP says it initiated an “intense internal investigation,” including a forensic review by PricewaterhouseCoopers of Autonomy’s historical financial results, under the oversight of John Schultz, executive vice president and general counsel for  HP.

As a result of that investigation, HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of Autonomy’s financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix.

Although HP’s investigation is ongoing, it cites these examples of the accounting improprieties and misrepresentations:

  • The mischaracterization 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.
    • This negative-margin, low-end hardware is estimated to have comprised 10-15 percent of Autonomy’s revenue.
  • 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.

HP charges that these were willful effort on the part of certain former Autonomy employees to inflate the underlying financial state of Autonomy in order to mislead investors and potential buyers. It says these misrepresentations and lack of disclosure “severely impacted” HP management’s ability to fairly value Autonomy at the time of the deal.

HP has referred this matter to the U.S. Securities and Exchange Commission’s Enforcement Division and the U.K.’s Serious Fraud Office for civil and criminal investigation. It says it’s also  preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders, and will “aggressively pursue this matter in the months to come.”

Ex-Autonomy CEO Denies Allegations

In a statement to the Reuters news service this morning, a spokeswoman for Autonomy management and former Autonomy CEO Mike Lynch “flatly rejected” HP’s allegations. In a brief statement released to Reuters, the spokeswoman said the former management of Autonomy denied the allegations:

“The former management team of Autonomy was shocked to see this statement today, and flatly rejects these allegations, which are false. HP’s due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and Perella Weinberg. HP’s senior management has also been closely involved with running Autonomy for the past year.”

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