As if Hewlett-Packard Co. didn’t have enough to worry about, it’s now facing a shareholder class-action lawsuit that alleges management violated securities regulations by not disclosing the true value of Autonomy, causing its stock price to plummet.
A lawsuit filed yesterday in U.S. District Court in San Francisco by shareholder Allan Nicolow charges HP with issuing “false and misleading statements” about Autonomy’s worth when it announced the $11 billion acquisition deal in August 2011. Within six months of the deal, HP announced Autonomy sales were plummeting. Last week, HP wrote off $8.8. billion related to the acquisition, saying Autonomy management used accounting tricks to inflate its value.
While HP shareholders have the right to sue, they may be suing over the wrong issue. The wrongdoing, if any, may be in what happened after the Autonomy deal was struck.
For shareholders, such lawsuits are a necessity. Investors make purchase decisions based on disclosure statements and financial filings mandated by law. Wall Street neither makes nor expects guarantees, but there is an expectation of transparency in financial transactions that will affect stock prices.
HP’s stock has steadily declined since February 2011, when the company embarked on strategies around tablets and the WebOS operating system. The stock price went into a free fall in August 2011, when HP announced its TouchPad product launch had failed. It withdrew from the tablet market, shelved the WebOS operating system, considered spinning off its $40 billion PC business and announced the acquisition of Autonomy.
At the time the acquisition was announced, everyone — analysts, competitors, shareholders and even HP CFO Cathie Lesjak — said HP was grossly overpaying for Autonomy, which was generating approximately $1.1 billion in revenue. Then-CEO Leo Apotheker plowed ahead. The deal and the bumbled tablet/PC strategy cost Apotheker his job. Current CEO Meg Whitman proceeded with the Autonomy deal, as it was too far down the road to reverse course.
Should HP have paused to listen to all the warnings? Should HP have done more due diligence? Did HP rush into a deal it had too little experience to pull off? These are good questions, but not as good as asking what happened after the deal closed.
The first signs the Autonomy deal was in trouble came last May when HP blamed Autonomy’s sagging sales for its poor second quarter financial performance. The precise numbers weren’t available, but HP’s software sales for that quarter tallied at $970 million — less than the pre-acquisition sales for both companies combined. The sharp decline cost Autonomy founder Mike Lynch his job; he was replaced by former Microsoft executive Robert Youngjohns.
Lynch denies any accounting shenanigans designed to inflate the value of his company. Instead, he says, HP did a poor job integrating the sales organizations. HP sales teams were still being incented to sell competing products and no incentives to sell Autonomy software, he says. Further, HP imposed strict margin requirements and raised prices by as much as 30 percent, turning off existing customers.
HP and the former Autonomy management teams are likely to wage a war of words for some months to come. Allegations of financial reporting improprieties have been turned over to U.S. and U.K. authorities for review.
Yes, shareholders and partners should be concerned about what happened with Autonomy. The due diligence should have caught any “irregularities.” Moreover, HP’s shareholders and partners should look at what came after, as it’s a reflection of the current management and its ability to right the listing giant.
The Autonomy issue is equally about integration, go-to-market strategies, sales execution, channel performance and, ultimately, the creation of new opportunities that result in value.
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