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HP Stock Hits 10-Year Low on $8.8 Billion Charge From Alleged Autonomy Wrongdoing

Tuesday, 20 Nov 2012 02:07 PM

 

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Hewlett-Packard Co. accused Autonomy Corp., the British software maker it bought last year, of falsifying finances and took a related $8.8 billion writedown, adding to challenges facing Chief Executive Officer Meg Whitman. The shares plunged to a 10-year low.

“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,” Hewlett-Packard said Tuesday in a statement.

Autonomy denied the allegations.

The charge is another blow for Hewlett-Packard, which is already suffering from management turmoil and slowdowns in its personal-computer, printer and technology-services businesses. Former Chief Executive Officer Leo Apotheker, 59, agreed to buy Autonomy to diversify away from hardware and expand in software for corporations. Apotheker left in 2011 after less than a year on the job following repeated strategy shifts and forecast cuts.

“The idea was to re-purpose HP as a software-based business of which Autonomy would have been the core, and now HP keeps driving, not knowing where to turn, and here we have the finger of blame,” said George O’Connor, an analyst at Panmure Gordon & Co. “It seems very late in the day that HP would find accounting irregularities.”

The shares of Palo Alto, California-based Hewlett-Packard fell 11 percent to $11.88 at 12:01 p.m. in New York, declining to the lowest price since 2002.

Through Monday, the stock had dropped 48 percent this year.

Deloitte Audit

More than $5 billion of the total charge is due to accounting practices, which were disclosed by a senior executive at Autonomy after founder Mike Lynch, 47, departed in May, Hewlett-Packard said. The company said it has referred the matter to U.S. and U.K. securities regulators and will also pursue civil litigation.

“The board relied on audited financials — audited by Deloitte — not Brand X accounting firm but Deloitte,” Whitman said today on a conference call with investors. “The CEO at the time and the head of strategy who led this deal are both gone — Leo Apotheker and Shane Robison.”

Autonomy’s former top managament team said allegations by Hewlett-Packard are “false,” according to Vanessa Colomar, a spokeswoman for Lynch.

Jamie Harley, a spokesman for Deloitte, Judith Burns, a spokeswoman for the U.S. Securities and Exchange Commission, Jina Roe, a spokewoman for the U.K. Serious Fraud Office, and Chris Hamilton, a spokesman for the U.K. Financial Services Authority, all declined to comment. Robison didn’t return a calls seeking comment.

Apotheker ‘Stunned’

Apotheker said he’s “stunned and disappointed” by the alleged improprieties and that he did thorough due diligence on the acquisition. He agreed to buy Autonomy, the second-largest U.K. software maker, for $10.3 billion to expand in cloud-computing and add software that searches a broad range of data, including e-mails, music, videos and posts on social networks such as Facebook Inc.

Autonomy misrepresented its gross profit margin and also falsely created or miscategorized more than $200 million in revenue over a two-year period starting in 2009, John Schultz, Hewlett-Packard’s general counsel, said in an interview. Autonomy was reselling Dell Inc. computers and counting those sales as software revenue, he said. Some sales were also fabricated through resellers.

‘Active Concealment’

“You have active concealment,” Schultz said. Deloitte “obviously didn’t catch these issues at the time. It was difficult, if not impossible for HP to catch them.”

This isn’t Whitman’s first writedown related to a deal done by one of her predecessors. In August, Hewlett-Packard wrote down by $8 billion the value of the enterprise-services unit forged by ex-CEO Mark Hurd’s $13.2 billion purchase of Electronic Data Systems Corp. in 2008.

While accounting issues were responsible for the majority of the charge from Autonomy, Hewlett-Packard said a portion was also caused by the recent trading value of its shares. The company forecast fiscal first-quarter profit that missed analysts’ estimates amid a continuing slump in personal computer sales.

Earnings excluding some items will be 68 cents to 71 cents a share for the period, which ends in January, Hewlett-Packard said in a separate statement. Analysts on average had estimated profit of 85 cents a share, according to data compiled by Bloomberg.

‘Self-Inflicted’

Whitman, 56, is paring product lines and cutting staff to make the supplier of PCs, printers and data center gear more competitive. The company, once a hotbed of invention and the world’s biggest PC maker, has suffered from declining sales and has been late to develop mobile and cloud computing products.

“They have a lot of deep-rooted problems,” said Eric Maronak, chief investment officer at Victory Capital Management Inc. in New York, which owns Hewlett-Packard shares. “A lot of it is self inflicted.”

The net loss in the fiscal fourth quarter was $6.85 billion, or $3.49 a share, compared with net income of $239 million, or 12 cents, a year earlier. Results included the charge related to Autonomy.

Profit excluding some items was $1.16 a share, topping analysts’s average $1.14 estimate.

Fourth-quarter sales fell to $30 billion. Analysts had projected revenue of $30.4 billion.

Smartphones, Tablets

Hewlett-Packard, which gets more than a quarter of sales from PCs, is suffering as consumers and business users increasingly favor smartphones and tablets.

“The environment remains challenging for HP and other technology companies in the space,” said Abhey Lamba, an analyst at Mizuho Securities USA Inc. “HP is unlikely to post revenue growth for a couple of years due to market dynamics in the PC and printing businesses.”

The total PC market will contract by 1.2 percent to 348.7 million units this year, according to IHS iSuppli. That’s the first annual decline since 2001, the market researcher said.

Whitman said at the company’s annual investor meeting last month that a turnaround won’t happen anytime soon. At the time, she forecast earnings for the current fiscal year to $3.40 to $3.60 a share, lower than analysts had expected.

Cost Cutting

She is cutting 29,000 jobs by the end of fiscal 2014 to save as much as $3.5 billion a year. Whitman is also streamlining Hewlett-Packard’s unwieldy line of printers, overhauling technology services to improve profit, and re- entering the tablet computer market in January with the company’s ElitePad. The company is also focusing on products that help run corporate data centers, which yield higher profits than PCs.

The earnings report came less than a week after Dell reported fiscal third-quarter revenue fell 11 percent and PC sales dropped 19 percent, amid competition from Apple Inc.’s iPad and other tablet computers.

“HP is faced with many of the same secular and cyclical headwinds as Dell,” albeit with a lower percentage of sales from PCs, Jayson Noland, an analyst at Robert W. Baird & Co., wrote in a research report.

© Copyright 2014 Bloomberg News. All rights reserved.

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