DealBook: Questions Remain Over Hewlett's Big Charge on Autonomy Acquisition

The $5 billion fight over accusations of improper accounting brought by Hewlett-Packard shows no sign of abating.

In November, H.P. took a charge of $8.8 billion as it wrote down its acquisition of Autonomy, a British software company that it acquired in 2011. H.P. said that “more than $5 billion” of the charge was related to accounting and disclosure abuses at Autonomy. H.P. added that a senior executive at Autonomy pointed to the questionable practices after Mike Lynch, Autonomy’s founder and former chief executive, left H.P.

Mr. Lynch denied the charges. In November, he said the accounting moves H.P. highlighted were legitimate under international accounting rules, and he demanded that the company be more specific in how it arrived at the $5 billion number.

H.P. on Thursday released its annual report for its 2012 fiscal year, noting that the United States Justice Department “had opened an investigation relating to Autonomy.”

The report discusses the methodology it employed when making the $8.8 billion charge, but it did not break out exactly how the purported accounting improprieties were behind $5 billion of that charge.

Mr. Lynch seized on that. In a statement on Friday, he said H.P.’s report had “failed to provide any detailed information on the alleged accounting impropriety, or how this could possibly have resulted in such a substantial write-down.”

This accounting rabbit hole has real world consequences.

Hewlett-Packard, led by the company’s chief executive, Meg Whitman, has proceeded with a feisty certainty since the outset of this spat. If the $5 billion figure is not ultimately substantiated, shareholders may doubt H.P. management’s judgment. Also, annual reports are supposed to be exactly the place that investors can go to get their questions answered.

The fact that the $5 billion part of H.P.’s case is not repeated there should give shareholders pause. The report avoids words and phrases that would help a reader understand just how much of an effect the supposed improprieties had. The report says lower financial projections for Autonomy contributed to the write-down. In one part, it said those financial projections “incorporate” H.P.’s analysis of what it believed to be improper accounting. In another section, the report says the changed financial projections were “driven” by the purported abuses.

That sort of language led Mr. Lynch to say in his statement on Friday that “H.P. is backtracking.”

H.P., however, says it is doing nothing of the sort. In a statement released after Mr. Lynch’s on Friday, the company said, “As we have said previously, the majority of this impairment charge, more than $5 billion, is linked to serious accounting improprieties, disclosure failures and outright misrepresentations.”

The statement also appeared to respond to the criticism that more details about the $5 billion should have appeared in the annual report. H.P. said the report “is meant to provide the necessary overview of H.P.’s financial condition, including our audited financial statements, which is what our filing does.” The company added, “We continue to believe that the authorities and the courts are the appropriate venues in which to address the wrongdoing discovered at Autonomy.”

Sifting through the Autonomy weeds could obscure the bigger question: was everything above board at Autonomy? H.P. may have overstated the impact of what it calls improprieties in the charge. But Autonomy may still have had unreliable numbers that overstated its value at the time of its acquisition.

Mr. Lynch says the poor performance of Autonomy once it was part of H.P. was a result of H.P.’s mismanagement. But it could also have been because the new owners were not benefiting from the accounting that they have since questioned.

In some ways, the most intriguing detail in this mystery is the supposed whistle-blower who brought the accounting issues to management’s attention. This person may have been able to show how what he or she believed to be chicanery was hidden from the accounting firms that checked Autonomy’s books.

H.P. has enough performance problems that its executives will probably see the Autonomy issue as a distraction and shareholders may get little extra detail. By the sounds of it, that probably will not satisfy Mr. Lynch.

“It is time for Meg Whitman to stop making allegations and to start offering explanations,” is how he signed off his Friday statement.

Common Sense: H.P.’s Autonomy Blunder Might Be One for the Record Books

The deal was considered so bad, and such an object lesson for a generation of deal makers and corporate executives, that it seemed likely never to be repeated, rivaled or surpassed.

Until now.

Hewlett-Packard’s acquisition last year of the British software maker Autonomy for $11.1 billion “may be worse than Time Warner,” Toni Sacconaghi, the respected technology analyst at Sanford C. Bernstein, told me, a view that was echoed this week by several H.P. analysts, rivals and disgruntled investors.

Last week, H.P. stunned investors still reeling from more than a year of management upheavals, corporate blunders and disappointing earnings when it said it was writing down $8.8 billion of its acquisition of Autonomy, in effect admitting that it had overpaid by an astonishing 79 percent.

And it attributed more than $5 billion of the write-off to what it called 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,” adding, “These misrepresentations and lack of disclosure severely impacted H.P. management’s ability to fairly value Autonomy at the time of the deal.”

In an unusually aggressive public relations counterattack, Autonomy’s founder, Michael Lynch, a Cambridge-educated Ph.D., has denied the charges and accused Hewlett-Packard of mismanaging the acquisition. H.P. asked Mr. Lynch to step aside last May after Autonomy’s results fell far short of expectations.

But others say the issue of fraud, while it may offer a face-saving excuse for at least some of H.P.’s huge write-down, shouldn’t obscure the fact that the deal was wildly overpriced from the outset, that at least some people at Hewlett-Packard recognized that, and that H.P.’s chairman, Ray Lane, and the board that approved the deal should be held accountable.

A Hewlett-Packard spokesman said in a statement: “H.P.’s board of directors, like H.P. management and deal team, had no reason to believe that Autonomy’s audited financial statements were inaccurate and that its financial performance was materially overstated. It goes without saying that they are disappointed that much of the information they relied upon appears to have been manipulated or inaccurate.”

It’s true that H.P. directors and management can’t be blamed for a fraud that eluded teams of bankers and accountants, if that’s what it turns out to be. But the huge write-down and the disappointing results at Autonomy, combined with other missteps, have contributed to the widespread perception that H.P., once one of the country’s most admired companies, has lost its way.

Hewlett-Packard announced the acquisition of Autonomy, which focuses on so-called intelligent search and data analysis, on Aug. 18, 2011, along with its decision to abandon its tablet computer and consider getting out of the personal computer business. H.P. didn’t stress the price — $11.1 billion, or an eye-popping multiple of 12.6 times Autonomy’s 2010 revenue — but focused on Autonomy’s potential to transform H.P. from a low-margin producer of printers, PCs and other hardware into a high-margin, cutting-edge software company. “Together with Autonomy we plan to reinvent how both structured and unstructured data is processed, analyzed, optimized, automated and protected,” Léo Apotheker, H.P.’s chief executive at the time, proclaimed.

Autonomy had already been shopped by investment bankers by the time H.P. took the bait. But others who examined the data couldn’t come anywhere near the price that Autonomy was seeking. An executive at a rival software maker, Oracle, a company with many successful software acquisitions under its belt, told me: “We looked at Autonomy. After doing the math, we couldn’t make it work. We couldn’t figure out where the numbers came from. And taking the numbers at face value, even at $6 billion it was overvalued.” He didn’t want to be named because he was criticizing a competitor.