Hewlett-Packard shocked the business world when it not only reported a $6.9 billion loss for its fiscal fourth quarter yesterday but also released a non-cash impairment charge of $8.8 billion related to its acquisition of the British software company Autonomy in 2011.
HP said the majority of this impairment charge, more than $5 billion, is linked to serious accounting improprieties, misrepresentation and disclosure failures discovered by an HP internal investigation and forensic review into Autonomy’s accounting practices prior to its purchase 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.
In a statement, HP said that it 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, as well as the misrepresentation of its business mix.
The company also asserted that it appeared to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company 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 wrote in a statement.
HP has referred this matter to the U.S. Securities and Exchange Commission’s Enforcement Division and the U.K.’s Serious Fraud Office for civil and criminal investigation. In addition, it 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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The internal investigation started after a senior member of Autonomy’s leadership team came forward, following the departure of Autonomy founder and CEO Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to its purchase by HP. HP then initiated an intense internal investigation, including a forensic review by PricewaterhouseCoopers of Autonomy’s historical financial results.
Shortly following HP’s announcement, Lynch strongly rejected the company’s fraud allegations.
HP bought Autonomy in October 2011 for $11.1 billion. The deal was originally reached under previous HP CEO Léo Apotheker and closed under current CEO Meg Whitman.
Former eBay Inc. CEO and a former candidate for California governor, Whitman was named Hewlett-Packard Co. president and CEO in September 2011, replacing Apotheker (former SAP CEO) who held the position for only 11 months.