Hewlett-Packard Co. (HPQ) executives accused they were misled by the British software maker, Autonomy when former CEO Léo Apotheker made $11.7 billion in combined cash and assumed debt acquisition in 2011. The core allegation is that management team at Autonomy, the British software firm cooked their books in such a way that it made the Autonomy seem more valuable than it was.
Catherine A. Lesjak, Hewlett’s chief financial officer, said that without the help from such aggressive accounting, Autonomy most likely had operating margins of 28 to 30 percent, rather than 40 to 45 percent.
“We were shocked and very surprised because no one had actually been in touch with us,” Mike Lynch, the former chief executive of Autonomy said.
On a conference call on Tuesday, John F. Schultz, H.P.’s general counsel, said Autonomy kept opaque books. “Critical documents were missing from the obvious places and it required that we look in every nook and cranny,” he said.
Hewlett’s chief executive, Meg Whitman, said that Autonomy would still play an important role at her company.
“This will be a growth engine for H.P.,” she said, then added, “Perhaps not as big a growth engine as we originally anticipated.”
Here are some bullet points of what’s been going on:
- Now CEO Meg Whitman, Chairman Ray Lane and other directors pushed the deal in 2011.
- Allegations came just 3 months after Hewlett-Packard announced an $8 billion writedown related to Autonomy acquisition.
- Of HP’s $8.8 billion writedown , $5 billion is related to the alleged fraud at Autonomy.
- It took about HP about fifteen months to go public with allegations of accounting improprieties.
- Hewlett-Packard says Autonomy was selling some low-margin hardware at a loss but booking those sales as high-margin software sales.
- Autonomy was allegedly hiding this by reporting some portion of the cost of those products as a marketing expense, rather than as a cost of goods sold.
- Hewlett-Packard Co. (HPQ) has plunged 75% since it ousted CEO Mark Hurd in August 2010.
- HP has a market value one-tenth the size of International Business Machines Corp. and one-sixth Oracle Corp. (ORCL).
- HP is also accusing Autonomy of not properly reporting deals to license its software to resellers and partners.
- Hewlett-Packard is also accusing Autonomy of not booking its software-as-a-service sales correctly. Revenue on software-as-a-service deals should only be recognized when the customer pays, according to accounting standards—typically on a monthly subscription basis.
- The hardware sales were unprofitable, and accounted for 10 to 15 percent of Autonomy’s revenue before the purchase.
- Autonomy also booked revenue too early and when a proper sale hadn’t taken place.
- In July 2009, Kynikos Associates, the firm founded by the investor James S. Chanos, wrote a detailed report that criticized Autonomy’s accounting in ways that now appear prescient.
- Kynikos said that Autonomy’s deferred revenue appeared lackluster. It added that the company might have masked the underperformance with acquisitions.
Do you think HP allegations on former management team at Autonomy is right?
Is it the tech business that makes it easier for senior executives to indulge in questionable accounting practice?
Management’s credibility is in doubt – Why Hewlett — and its auditors — could not spot what it now says it has uncovered?