HP claims fraud prompted $5B overpayment for company

PETER SVENSSON

AP Tech­nol­ogy Writer

NEW YORK — Hewlett-Packard Co. said on Tues­day that it’s the vic­tim of a multi-billion dol­lar fraud at the hands of a British com­pany it bought last year that lied about its finances.

HP CEO Meg Whit­man said exec­u­tives at Auton­omy Cor­po­ra­tion PLC “will­fully” boosted the company’s fig­ures through var­i­ous account­ing tricks, which con­vinced HP to pay $9.7 bil­lion for the com­pany in Octo­ber 2011.

Autonomy’s for­mer CEO said HP’s alle­ga­tions are false.

HP is now tak­ing an $8.8 bil­lion charge to align Autonomy’s pur­chase price with what HP now says is its real value. More than $5 bil­lion of that charge is due to false account­ing, HP said.

The rev­e­la­tion is another blow for HP, which is strug­gling to rein­vent itself as PC and printer sales shrink. The company’s stock hit a 10-year low in morn­ing trading.

Among other things, Auton­omy makes search engines that help com­pa­nies find vital infor­ma­tion stored across com­puter net­works. Acquir­ing it was part of an attempt by HP to strengthen its port­fo­lio of high-value prod­ucts and ser­vices for cor­po­ra­tions and gov­ern­ment agen­cies. The deal was approved by Whitman’s pre­de­ces­sor, Leo Apotheker, but closed three weeks into Whitman’s tenure as chief exec­u­tive. Whit­man was a mem­ber of HP’s board of direc­tors when Apotheker ini­ti­ated the Auton­omy purchase.

Among the tricks used at Auton­omy, Whit­man said: The com­pany had been book­ing the sale of com­put­ers as soft­ware rev­enue and claim­ing the cost of mak­ing the machines as a mar­ket­ing expense. Rev­enue from long-term con­tracts was booked up front, instead of over time.

The alle­ga­tions are seri­ous, accord­ing to account­ing experts.

“Accord­ing to GAAP (gen­er­ally accepted account­ing prin­ci­ples), the over­state­ment of rev­enue under any tax code is ille­gal,” said Mark Williams, a finance pro­fes­sor at Boston Uni­ver­sity and a for­mer bank exam­iner for the Fed­eral Reserve.

As a result of its alleged account­ing prac­tices, Auton­omy appeared to be more prof­itable than it was and seemed to be grow­ing its core soft­ware busi­ness faster than was actu­ally the case. The moves were appar­ently designed to groom the com­pany for an acqui­si­tion, Whit­man said.

Once HP bought the com­pany, Autonomy’s reported rev­enue growth and profit mar­gin quickly declined. Auton­omy CEO Mike Lynch con­tin­ued to run the com­pany as part of HP, but Whit­man forced him out on May 23 because it was not liv­ing up to expectations.

“Lit­tle did I know that there was more than met the eye,” Whit­man said.

With Lynch gone, a senior Auton­omy exec­u­tive vol­un­teered infor­ma­tion about the alleged account­ing irreg­u­lar­i­ties, prompt­ing an inter­nal inves­ti­ga­tion, Whit­man said.

The case has been referred to the U.S. Secu­ri­ties and Exchange Com­mis­sion and the UK’s Seri­ous Fraud Office, she said. The com­pany will also try to recoup some of the cash it paid for Auton­omy through lawsuits.

In a state­ment to the Finan­cial Times, Lynch said “The for­mer man­age­ment team of Auton­omy was shocked to see this state­ment today, and flatly rejects these alle­ga­tions, which are false.”

“It took 10 years to build Autonomy’s industry-leading tech­nol­ogy and it is sad to see how it has been mis­man­aged since its acqui­si­tion by HP,” he added.

On a con­fer­ence call with Whit­man fol­low­ing the earn­ings report, ana­lyst Ben Reitzes of Bar­clays Cap­i­tal asked who will be held respon­si­ble inter­nally for the dis­as­trous acquisition.

Whit­man answered that the two exec­u­tives who should have been held respon­si­ble — Apotheker and strat­egy chief Shane Robi­son — are gone. But the deal was also approved by the board of directors.

“Most of the board was here and voted for this deal, and we feel ter­ri­bly about that,” Whit­man said. “What I will say is that the board relied on audited finan­cials. Audited by Deloitte — not ‘Brand X’ account­ing firm, but Deloitte. Dur­ing our very exten­sive due dili­gence process, we hired KPMG to audit Deloitte. And nei­ther of them saw what we now see after some­one came for­ward to point us in the right direction.”

Apotheker told The Asso­ci­ated Press on Tues­day that he was “stunned and dis­ap­pointed” to learn of the alle­ga­tions against Auton­omy, and pointed out that they had gone undis­cov­ered by HP’s audi­tors, exec­u­tives and directors.

Deloitte UK said it could not com­ment on the mat­ter because of client con­fi­den­tial­ity rules.

Whit­man said she still views Auton­omy as a “growth engine for HP soft­ware,” albeit a weaker one than ini­tially thought. HP has been attempt­ing to morph itself into a com­pany that not only makes com­puter hard­ware but one that deliv­ers soft­ware and ser­vices, too.

HP’s stock dipped $1.59, or 12 per­cent, to close at $11.71 in Tuesday’s trad­ing. Just after the market’s open, the stock hit $11.35, its low­est level since 2002.

HP’s net loss for the fis­cal fourth quar­ter, which ended Oct. 31, amounted to $6.85 bil­lion, or $3.49 per share. That com­pares with net income of $239 mil­lion, or 12 cents per share, in the same period last year.

It was the sec­ond mam­moth loss in a row for HP. In the third fis­cal quar­ter, it lost a record $8.86 bil­lion, or $4.49 per share. That was due to a charge for another acqui­si­tion — that of Elec­tronic Data Sys­tems, a tech­nol­ogy con­sult­ing ser­vice that it bought for $13 bil­lion in 2009. In that case, HP didn’t blame improper account­ing, just results that didn’t live up to expectations.

Exclud­ing the charges in the lat­est quar­ter, HP earned $1.16 per share in the lat­est quar­ter, just above the aver­age ana­lyst fore­cast of $1.14 per share, as polled by FactSet.

HP’s rev­enue was $30.0 bil­lion, down 7 per­cent from last year. That was below ana­lyst expec­ta­tions at $30.5 billion.

The Palo Alto, Calif., com­pany stuck to its pre­vi­ously given earn­ings fore­cast for the fis­cal year that just started, but it issued a fore­cast for this quar­ter that was well below ana­lyst expec­ta­tions. It expects earn­ings, exclud­ing items, to be 68 cents to 71 cents per share, while ana­lysts were look­ing for 85 cents, accord­ing to FactSet.

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