Hewlett-Packard Co. is more than just intimating it was deceived into overpaying for U.K.-based Big Data vendor Autonomy — it’s outright accusing former Autonomy executives of cooking the books and, in part, using the channel to embellish revenue performance to get a higher valuation.
Yesterday, HP announced its fourth quarter and full-year 2012 revenues, in which overall results slipped 5 percent as nearly every major operating unit declined. Surprising the market was the $8.8 billion write off related to the 2011 Autonomy acquisition due to “accounting irregularities.”
In a statement, HP characterized the irregularities as a deliberate attempt by certain members of the Autonomy management team to inflate financial performance to gain a better valuation. Under the stewardship of former CEO Leo Apotheker, HP paid $11.7 billion for Autonomy with the intent of using the firm as the linchpin for its future Big Data and software expansion.
“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. These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal,” HP said in a statement.
Apotheker and Mike Lynch, former CEO and founder of Autonomy who left HP earlier this year, deny the allegations. In an interview with the Wall Street Journal, Apotheker called the pre-acquisition due diligence of Autonomy “meticulous.”
“I’m both stunned and disappointed to learn of Autonomy’s alleged accounting improprieties. The developments are a shock to the many who believed in the company, myself included. But I also share the sentiment of HP’s current leadership and continue to believe in Autonomy’s market potential, as its core software expertise remains sound,” Apotheker said.
Lynch, in an interview with AllThingsD, blames HP for arbitrarily changing the Autonomy sales and pricing model and creating conditions that led to its failure.
“Basically, we reject completely the assertion of HP. It’s completely wrong. The reality of the situation is that when HP bought Autonomy it had hundreds of people involved in due diligence, which was described at the time as ‘meticulous.’ And KPMG, Barclays and Perello were all involved there. And they’ve actually run it for a year. To somehow admit a $9 billion elephant in the room just beggars belief, frankly,” Lynch said.
HP commissioned PricewaterhouseCooper to conduct a forensic investigation of Autonomy’s books.
Apotheker was ousted from his CEO post in September 2011 for mishandling HP’s tablet launch and the Autonomy acquisition. Lynch, who left HP in May after the division missed sales targets, says no one from HP has attempted to contact him, and he was ambushed by the charges, learning about the allegation through an HP press release.
What HP is essentially charging Autonomy with is “stuffing the channel,” the practice of placing orders with channel partners to pump up sales numbers. Resellers take product into inventory, and the vendor counts it as a sale for accounting purposes. After the books close, channel partners are either left holding unsold inventory or the vendor takes the product back.
In the past, channel partners were often complicit with channel-stuffing activities. They were rewarded by being allowed to keep their sales incentives, such as rebates and commissions. Channel stuffing still happens, but is less common because just-in-time logistical systems and changes in accounting practices make it harder to pull off. The transition to services also diminishes the ability of vendors to pressure partners into activating faux accounts.
HP, under the leadership of Apotheker’s successor Meg Whitman, says the channel stuffing and the mischaracterization of other product sales was deliberate. The matter has been referred to the U.S. Securities and Exchange Commission and the U.K.’s Serious Fraud office for civil and criminal and investigations.
The Autonomy acquisition’s failure comes as no surprise to industry observers. When HP announced the deal in the summer 2011, Apotheker and his management team were roundly criticized for offering too much for the U.K. cloud and software company. Autonomy was a much-reviewed acquisition target, and many thought it would fetch a good price, but it had little more than $1.1 billion in revenue, and some saw softness in its future prospects.
Lynch, in the AllThingsD interview, blames HP for disrupting the Autonomy operation. He says HP arbitrarily raised prices 30 percent on Autonomy products, which turned away many current and prospective customers. Additionally, he says HP sales teams were incented to sell competing products and received no incentive for selling Autonomy. The combination was a steady decline in Autonomy performance.
The HP write-off of Autonomy’s value is the second major adjustment in financial statements this year. In the third quarter, HP wrote off $8 billion related to professional services powerhouse EDS, which it bought in 2008 for $13.9 billion. Over the last five years, HP spent more than $30 billion in acquisitions, of which it’s written off nearly $17 billion.
While some say the HP action on Autonomy is another sign of the company getting its house in order after the near-meltdown last year, others say the write-off is indicative of more problems lurking within the recesses. In September, Whitman said the HP recovery would take years to complete and the result would likely be a low-growth, mature organization.
HP says it plans to aggressively pursue the investigation of Autonomy irregularities in the coming months. If channel stuffing is part of the problem, HP and Autonomy partners will likely get dragged into the fray.
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