HP says it had to write off $8.8 billion in Q4 because acquired IT company lied about its books [updated]

HP $8.8 Billion Write Off

HP (HPQ) has gotten pretty used to writing off losses in recent quarters, and the company on Tuesday announced that it would incur yet another mammoth write off of $8.8 billion linked to its 2011 acquisition of enterprise information technology firm Autonomy. What makes this latest write off particularly interesting is that HP says that the “majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy… that occurred prior to HP’s acquisition.” Put even more bluntly, HP says it will write off $8.8 billion because Autonomy lied about its finances. Earlier this year, HP also took an $8 billion charge related to its 2008 acquisition of Electronic Data Systems. HP’s press release follows below.

UPDATE: Business Insider reports that former Autonomy CEO Mike Lynch “flatly rejects” HP’s charges that his former company committed accounting fraud during his tenure.

HP Issues Statement Regarding Autonomy Impairment Charge

HP internal investigation and forensic review uncovers accounting improprieties, misrepresentations and disclosure failures in Autonomy financial statements prior to 2011 acquisition by HP

PALO ALTO, Calif., Nov. 20, 2012

HP today issued the following regarding the non-cash impairment charge relating to Autonomy that was announced during HP’s fourth-quarter earnings announcement:

“HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP. These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal. We remain 100 percent committed to Autonomy and its industry-leading technology.”

Additional background:

HP today announced a non-cash impairment charge of $8.8 billion related to Autonomy in the fourth quarter of its 2012 fiscal year. The majority of this impairment charge, more than $5 billion, is linked to serious accounting improprieties, misrepresentation and disclosure failures discovered by an internal investigation by HP and forensic review into Autonomy’s accounting practices prior to its acquisition by HP. The balance of the impairment charge is linked to the recent trading value of HP stock and headwinds against anticipated synergies and marketplace performance.

HP launched its internal investigation into these issues after a senior member of Autonomy’s leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP. This individual provided numerous details about which HP previously had no knowledge or visibility.

HP initiated an intense internal investigation, including a forensic review by PricewaterhouseCoopers of Autonomy’s historical financial results, under the oversight of John Schultz, executive vice president and general counsel, HP.

As a result of that investigation, HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of Autonomy’s financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix.

Although HP’s investigation is ongoing, examples of the accounting improprieties and misrepresentations include:

  • The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.
    • This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.
  • The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user 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. These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal.

HP has referred this matter to the US Securities and Exchange Commission’s Enforcement Division and the UK’s Serious Fraud Office for civil and criminal investigation. In addition, HP is preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders. The company intends to aggressively pursue this matter in the months to come.

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