RFM 2013 Top 5 – Part 5 – HPQ – Eggy visage

Hewlett Packard will end up with even more egg on its face this year as I believe that it will lose the war of words with the former management of Autonomy. .

• The acquisition of Autonomy has been nothing short of a total disaster for the hapless Hewlett-Packard.
• Billed as the great white hope to begin the transition of a blundering hardware company into a software and services company, HPW blew almost all of its available cash balance to acquire Autonomy for $11.3bn in October 2010.
• Just over a year later, HPQ wrote off more than $5bn of that acquisition blaming the former management of Autonomy of serious accounting improprieties.
• HPQ has forwarded its evidence to the SEC and the SFO in the UK, both of whom are investigating but have yet to decide if there is a case to answer.
• Typically, in these situations, the accused party heads for the hills but in this case the accused is fighting back hard.
• Furthermore, HPQ has so far declined to disclose the exact details or even the exact size of the write down that is due to the “accounting improprieties”.
• HPQ claims to have been “very transparent” around these issues but quite frankly its comments do not add up.
• HPQ claims that this write down “is linked to serious accounting improprieties, disclosure failures and outright misrepresentations discovered by HP’s internal investigation into Autonomy’s practices prior to and in connection with the acquisition”.
• Erm Hello? If red flags had been raised prior to the acquisition why on earth did the company proceed?
• All of the research that I have done points to very poor due diligence by HPQ on a company that was well known to be on the darker side of the accounting standards.
• By blaming Autonomy of wilful deception, the company can shift the blame for what could end up being exceptionally poor due diligence.
• Whether or not HPQ was wilfully misled is likely to depend on the finer interpretations of accounting, which in software can be very grey.
• The SEC and SFO are likely to proceed only if they can be reasonably certain that they will achieve a conviction which I think in this case will be difficult to achieve.
• Hence, I suspect that both the SEC and SFO will decline to proceed with a prosecution leaving Hewlett Packard looking, once again, very foolish.
• The stock has rallied nicely but off a very low base.
• Frankly, I can’t get interested until there is a clear out of both the executive and non-executive teams as they continue to demonstrate that it is not fit for purpose.