Hewlett-Packard's road to redemption just got a little steeper. The struggling computer maker reported that it would take an $8.8 billion write-down due to its $10 billion 2011 acquisition of Autonomy (the deal's final closing price was $11.1 billion), saying the software company had committed "serious accounting improprieties" that inflated its value. Investors have long howled that HP paid way too much for Autonomy, and it now appears the company is worth even less than what most critics had estimated. The write-down wiped out HP's profit for the latest quarter, with the company reporting a nearly $7 billion loss. Predictably, HP's stock, already at a 10-year low, quickly fell by another 12 percent.
What happened? Prior to the acquisition, Autonomy had been considered one of the hottest software companies in the world. Founder Mike Lynch was "hailed as Britain's answer to Bill Gates," say Dominic Rushe and Charles Arthur at Britain's The Guardian. Autonomy had developed a purportedly sophisticated, high-powered search engine that could sift "through unstructured information," says Ben Worthen at The Wall Street Journal, "such as emails, instant messages, recordings of phone calls, still and video images — looking for patterns of lucrative or nefarious activity." Autonomy's clients reportedly include intelligence agencies and financial institutions.
According to HP — which is partly basing its accusations on information provided by an Autonomy whistle-blower — Autonomy wasn't selling as much software as it originally claimed. At best, that means there isn't much demand for the software. At worst, the software itself is a fraud "wrapped up in fancy Cambridge talk and the kind of accounting tricks managers have engaged in since the dawn of publicly traded stock," says Daniel Fisher at Forbes.
The acquisition was part of HP's strategy, under then-CEO Leo Apotheker, to become a software and information technology company, as opposed to a producer of laptops, personal computers, and other hardware. With the rise of Apple, the smartphone, and the tablet, traditional computer makers have found themselves squeezed. However, current CEO Meg Whitman decided not to sell HP's hardware businesses, while simultaneously developing its software side. Autonomy's implosion could seriously complicate that effort.
At the moment, Whitman says HP is considering taking legal action against multiple parties, possibly including the corporate accountants — Deloitte and KMPG — who signed off on the deal.