* Alleges 'serious accounting improprieties'
* Takes charge for Autonomy software purchase
* Refers matter to SEC, UK Serious Fraud Office
* Former Autonomy CEO calls allegations 'false'
By Poornima Gupta and Nicola Leske
Nov 20 Hewlett-Packard stunned Wall Street by
alleging a massive accounting scandal at its British software
unit Autonomy that will cost the company the majority of $8.8
billion in charges.
It was the latest in a string of reversals that have renewed
questions about the basic competence of the storied company's
board and senior managers.
HP said on Tuesday it discovered "serious accounting
improprieties" and "a willful effort by Autonomy to mislead
shareholders," after a whistleblower came forward following the
ouster of Autonomy's then-chief executive, Mike Lynch, in May.
The charge follows a nearly $11 billion writedown last
quarter for the company's EDS services division.
The technology company has been roiled in the past few years
by a revolving door of CEOs, overall management turnover and
challenges in its core personal computer and printer businesses.
HP's stock slid to a 10-year low, dropping 12 percent to
$11.71 in regular trading on Tuesday. Shares are down nearly 50
percent year to date.
Lynch "flatly rejected" HP's allegations and said he was
"shocked" but confident he would be absolved of any
He had not been notified by HP about the allegation before
it was made public, nor had he been contacted by any
authorities, Lynch said in an interview with Reuters.
HP took $8.8 billion in charges in the quarter, with $5
billion tied to the problems at Autonomy. The rest of the charge
related to the "recent trading value of HP stock and headwinds
against anticipated synergies and marketplace performance," HP
HP said it has referred the matter to the U.S. Securities
and Exchange Commission's enforcement division and the UK's
Serious Fraud Office for civil and criminal investigation. It
said it would take legal action to recoup "what we can for our
Both agencies declined to comment.
HP Chief Executive Meg Whitman, who voted for the deal while
she was on HP's board, said the investigation of Autonomy's
finances - both external and internal - will take multiple years
as it makes it way through the courts in both countries.
"Most of the board was here and voted for this deal, and we
feel terribly about that," said Whitman on a call with analysts.
"The board relied on audited financials, audited by Deloitte.
Not Brand X accounting firm, but Deloitte," she said, adding
that KPMG was hired to audit Deloitte.
"Neither of them saw what we now see after someone came
forward to point us in the right direction," Whitman said.
INFLATED SALES, REVENUE
HP alleged that Autonomy's former management inflated
revenue and gross margins to mislead potential buyers. It said
Autonomy executives mischaracterized revenue from low-end
hardware sales as software sales and booked some licensing deals
with partners as revenue, even though no customer bought
HP said Autonomy claimed its gross margins were in the 40
percent to 45 percent range while realistically they were in the
28 percent to 30 percent range.
Moreover, Autonomy always represented itself as a software
firm but 10 percent to 15 percent of its revenue came from
money-losing sales of low-end hardware, HP said.
The company also claimed that Autonomy was booking licensing
revenue upfront before deals closed.
HP has embarked on an internal investigation, including a
forensic review by PricewaterhouseCoopers of Autonomy's
historical financial results, under HP General Counsel John
Schultz after the whistleblower came forward in May.
Schultz said since the accounting troubles occurred prior to
the acquisition of Autonomy, it took a long time before HP was
in a position to make the news public.
"Not surprisingly, Autonomy did not have sitting on a shelf
somewhere a set of well-maintained books that would walk you
through what was actually happening from a financial perspective
inside the company," he said. "Indeed critical documents were
missing from the obvious places, and it required that we look in
every nook and cranny."
Whitman said her predecessor, Leo Apotheker and the former
chief strategy officer, Shane Robison, were the key people
behind the Autonomy acquisition.
Apotheker bought Autonomy to diversify HP's business and
beef up its portfolio to provide one-stop shopping for
corporations. The $11 billion acquisition of Autonomy - heavily
criticized by investors as too costly - was a key part of the
plan to transform HP.
Apotheker was ousted as CEO in September 2011 after just 11
months on the job and Robison left soon after.
In a statement, Apotheker said he was "stunned and
disappointed" by the revelations and offered to make himself
available to HP and the authorities to get to the bottom of the
Whitman on Tuesday stood by Autonomy's technology and
products despite the allegations, saying it will be the growth
engine for HP. The former California gubernatorial candidate has
been trying to move beyond some of HP's past controversies,
which includes the ouster of the past two CEOs, a haphazard
product strategy and a plan to sell its PC unit that was later
HP has been running Autonomy since the acquisition closed in
October 2011, but it didn't find the accounting problems on its
own. The company investigated only after a senior Autonomy
executive came forward to detail the financial metrics
Advisers working on behalf of Autonomy included Qatalyst
Partners, the investment bank run by technology investment
banker Frank Quattrone; UBS; Goldman Sachs; Citigroup; JPMorgan
Chase, and Bank of America. Perella Weinberg Partners and
Barclays Capital advised for HP.
Law firms for Autonomy were Slaughter & May and Morgan
Lewis. The firms for HP included Gibson, Dunn & Crutcher;
Freshfields Bruckhaus Deringer; Drinker Biddle & Reath; and
Skadden, Arps, Slate, Meagher & Flom.
Robert Enderle, a tech analyst at the Enderle Group, said he
has never seen such a potential misrepresentation of financials.
"You have to rely on what the firm gives you during due
diligence and I've never seen a misstatement at this level,"
If the charges are true, it could result in a massive
punitive damages award for HP, Enderle said.
Other analysts hoped it was the end of the bad news for HP.
"This kind of feels like the last of the bad news,"
Forrester analyst Frank Gillett said.
The Autonomy allegations and announcement of the charge
coincided with the reporting of a fiscal fourth-quarter loss for
HP said net revenue fell 6.7 percent to $29.96 billion for
the quarter, ended Oct. 31, from $32.12 billion a year earlier.
Analysts, on average, expected $30.43 billion, according to
Thomson Reuters I/B/E/S.
Revenue from all of its main business units declined, with
the personal computer division recording the steepest drop, at
14 percent while revenue from printing fell 5 percent.
HP reported a quarterly net loss of $6.85 billion, or $3.49
a share, versus a profit of $239 million, or 12 cents, a year
The sprawling company, which employs more than 300,000
people globally, is undergoing a restructuring aimed at focusing
on enterprise services in the mold of International Business
"To put it bluntly ... this story has been an unmitigated
train wreck, and it seems every time management speaks to the
Street, there is new negative incremental information
forthcoming," said ISI Group analyst Brian Marshall.