Computer maker Hewlett-Packard Co. (NYSE: HPQ) reported fourth-quarter earnings yesterday (Tuesday), surprising the market with an $8.8 billion charge against its acquisition of British software company Autonomy.
HP alleges that $5 billion of the charge is related to fraud and misrepresentation by Autonomy management prior to the acquisition, a charge that former Autonomy CEO Mike Lynch vehemently denies.
This is the second multi-billion dollar charge to earnings resulting from an acquisition in as many quarters. In the third quarter, Hewlett-Packard took a nearly $11 billion charge on its acquisition of Electronic Data Systems (EDS), which failed to perform up to expectations.
Hewlett-Packard acquired Autonomy in the summer of 2011 as part of former CEO Leo Apotheker's strategy to move HP away from its reliance on computer hardware and increase revenue from the sale of high value-added software. Apotheker was forced out of Hewlett-Packard only three weeks after Autonomy was acquired and HP's new CEO, Meg Whitman, has put less emphasis on the software side of the business as she tackles the much bigger problem of restructuring the company's product lineup and its global strategy.
During Tuesday's conference call, Whitman talked about Autonomy, saying, "The majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations that occurred prior to HP's acquisition of Autonomy and the associated impact on the expected financial performance of the business over the long term."
"These improprieties were discovered through an internal investigation after a senior member of Autonomy's leadership team came forward following the departure of Mike Lynch on May 23. Based on this information, HP initiated an intense internal investigation into the allegations, including a third-party forensic review of Autonomy's historical financial results."
Whitman concluded, "HP has contacted the SEC's enforcement division and the U.K.'s Serious Fraud Office. We have requested that both agencies open criminal and civil investigations into this matter. In addition, HP intends to seek redress against various parties in the appropriate civil courts to recoup what we can for our shareholders."
Autonomy Speaks Out
Autonomy's former CEO, Mike Lynch, has a different take on HP's charges against him.
In a statement to the Financial Times, Lynch said "The former management team of Autonomy was shocked to see this statement today, and flatly rejects these allegations, which are false."
"It took 10 years to build Autonomy's industry-leading technology and it is sad to see how it has been mismanaged since its acquisition by HP," he added.
Lynch told The New York Times that HP "did due diligence that involved 300 people."
Hewlett-Packard's advisors on the Autonomy deal included Barclays, Perella Weinberg and KPMG. Also, Autonomy had engaged Deloitte to audit its accounts which Deloitte had signed off on every quarter for years.
Hewlett-Packard Investors Jump Ship (NYSE: HPQ)
The news of the charge shocked investors who sold HPQ stock down to ten-year lows. Hewlett-Packard closed down almost 12% to finish the day at $11.71.
HP's share price has been declining since it traded above $50 back in April 2010. Faced with declining consumer and corporate demand for PCs and printers, the company has struggled to find a winning strategy. Some people report that there is considerable disagreement among the Board over the company's strategic direction.
HPQ has also been the target of short sellers, notably Jim Chanos, who feel that the company has become a "value trap," a stock that looks cheap, but never gets any better.
But with Hewlett-Packard already having a bad year in terms of write-offs, it makes sense that management will take this charge now to get it out of the way. And, if HP's management can make the fraud charges stick, today's write-off could be reversed at some point in the future.
During Tuesday's conference call, Whitman said, "Fiscal 2013 is going to be a fix-and-rebuild year for the company as critical changes to our organizational structure take hold."
Whitman continued, "…we expect to see real growth in each of our businesses in 2014 as they ramp through 2013. This is because the new products and services we're working on will kick in. Our investment in R&D and IT will begin to pay off…We expect that growth will accelerate as we enter FY '15 and beyond."
All that may be true if there are no more big hits to Hewlett-Packard's balance sheet.
The other thing to consider is HP's dividend. Currently, the company pays an annual dividend of $0.52 which, on the basis of yesterday's closing price of $11.71, yields 4.4%. If Whitman's assessment is correct and the company does begin to turn around in 2013, then investors might get paid to wait if-and this is a big if-HP (NYSE: HPQ) doesn't cut its dividend.
Related Articles and News:
- Money Morning:
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- The New York Times:
Autonomy's Ex-Chief: H.P.'s Claims "Completely and Utterly Wrong'
HP alleges Autonomy wrongdoing, takes $5 billion charge
How Jim Chanos Spotted the HP Scandal
- The Associated Press:
HP claims fraud prompted $5B overpayment for co.
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