Hewlett-Packard Claims Fraud at Autonomy, Takes Write-Down
What happens with the accounting firm HP hired to make this deal? Don't they bear some responsibility?
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UPDATE: Hewlett-Packard Claims Fraud at Autonomy, Takes Write-Down
--Hewlett-Packard accuses Autonomy of fraud
--Says it has asked SEC and U.K. to open investigations
--Writes down $8.8 billion of purchase price
By Ian Sherr and Ben Worthen
SAN FRANCISCO--Hewlett-Packard Co. (HPQ) leveled serious accusations Tuesday against a software company it bought last year, saying it would take an $8.8 billion write-down, dropping the value of Autonomy Corp., after it claimed the company's leadership misrepresented its performance as the deal was being negotiated.
H-P, of Palo Alto, Calif., said it was writing down a vast majority of Autonomy, a software company it acquired last year for more than $10 billion, due to "serious accounting improprieties, disclosure failures and outright misrepresentations" at Autonomy that occurred prior to H-P's acquisition of the firm. The non-cash write-down amounted to $8.8 billion, H-P said, which included recent drops in H-P's stock price.
The comments shine a harsh new light on the deal, which angered investors and contributed to the technology giant's decision to oust former Chief Executive Leo Apotheker last September.
In a blunt press release, H-P claimed Autonomy mischaracterized revenue from negative-margin, low-end hardware sales, which represented as much as 15% of the company's revenue. H-P said Autonomy also presented licensing transactions with value-added resellers as revenue, even though no end 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," H-P said in a statement. "These misrepresentations and lack of disclosure severely impacted H-P management's ability to fairly value Autonomy at the time of the deal."
Meg Whitman, H-P's current chief executive, said the company has informed the Securities and Exchange Commission as well as the United Kingdom's fraud office.
"We have requested both agencies open criminal and civil investigations into this matter," she said. "H-P intends to seek regress against various parties in the appropriate civil courts to recoup what we can for our shareholders."
Mr. Apotheker and Autonomy's founder, Mike Lynch, didn't immediately respond to requests for comment.
The comments on the deal overshadowed H-P's earnings, which the company said included a swing to a loss following the write-down. For the fourth quarter, ended Oct. 31, H-P reported a loss of $6.9 million, or $3.49 a share, versus a year- ago profit of $239 million, or 12 cents a share. The year-earlier period included $885 million of charges tied to H-P's decision to wind down its webOS device business following the acquisition of Palm Inc.
Excluding one-time impacts, per-share earnings edged down to $1.16 from $1.17. Analysts polled by Thomson Reuters had projected $1.14 a share.
Revenue sank 6.5%, or 4%, adjusting for currency impacts, to $30 billion. Analysts had expected $30.43 billion. The latest quarter marked H-P's fifth-consecutive quarter of falling sales.
The company's operating margin swung to negative 21.7% from positive 2.5% a year ago. Total costs and expenses surged 16%.
H-P said revenue from its personal-systems unit was down 14%, as commercial revenue decreased 13% and consumer revenue declined 16%.
Revenue from the company's services segment fell about 6%, while revenue in its enterprise, servers, storage and networking segment dropped about 9%. Sales in the printing business fell about 5%. A relative bright spot was software revenue, which grew 14%.
Shares of H-P, which backed its earnings view for the year, dropped 9.3% to $12.06 in recent premarket trading, as revenue fell short of expectations. The stock has fallen 52% over the past year.
H-P is in the midst of a multiyear turnaround as the personal-computer market faces growing pressure from mobile devices, intense price competition and economic uncertainty in emerging markets. Last week, rival Dell Inc. (DELL) reported its fiscal third-quarter earnings nearly halved as it recorded weaker personal-computer sales to consumers and corporate customers.
H-P has also faced falling interest in printers among consumers, who have shifted from relying on paper to using their mobile devices instead. Servers have seen their prices fall along with desktop and laptop computers, taking margins along with them.
In March, the company unveiled a sweeping reorganization plan that would fold its once-dominant printing business into its PC-making personal-systems group and centralize many other functions. It later disclosed plans to lay off 27,000 workers. Though the company has insisted its computer, software, services and printer businesses can be reinvigorated, it has said it expects revenue for the current fiscal year to fall in each of its largest businesses.
--Carolyn Hensen, Nathalie Tadena and Saabira Chaudhuri contributed to this article.
Write to Ian Sherr at ian.sherr@dowjones.com and Ben Worthen at ben.worthen@wsj.com
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