Sunday, December 02, 2012
Another Look at the Hewlett Packard, Autonomy Debacle
The word "debacle" has probably been used more times in the press in the last couple of weeks by the press in describing the Autonomy Hewlett Packard situation than in the whole previous quarter.
Hewlett Packard takes an $8 billion write down. Their stock hits a 10-year low. Hewlett Packard refers the “issue” to the Serious Fraud Office in the UK and the US Securities and Exchange Commission’s Enforcement Division for civil and criminal investigation. Prior Autonomy management says that they have done nothing wrong and that Hewlett Packard is blaming Autonomy to cover up any Hewlett Packard mismanagement over the last year. Oracle states that they told people that the acquisition was overvalued. This is ugly.
It appears as if Hewlett Packard’s “smartest guys in the room” either erred or failed to do enough due diligence. KPMG is saying it was not engaged to perform any formal audit work by Hewlett Packard but “merely provided it with “a limited set of non-audit related services” in relation to the deal.” Deloitte is keeping quiet.
Lawsuit? Robbins Geller Rudman & Dowd LLP filed a class action suit against Hewlett-Packard last week. KPMG and Deloitte are both named, also.
With respect to accounting/revenue recognition – part of this is concerned with which accounting system people were talking about. Hewlett Packard looks at GAAP Accounting. Autonomy was using Europe’s accounting standards, which allows for more liberal recognition of revenue. GAAP is a foreign word (or a spelling error) to many writing about this. Revenue recognition isn't something most writers have gone beyond the most basic understanding of.
Among accounting gimmicks used at Autonomy, according to Whitman: the company had been booking the sale of computers as software revenue claiming the cost of making the machines as a marketing expense (very red flag!); revenue from long-term contracts was booked up front, instead of over time (not GAAP accounting).
The above is a great argument for focusing on cash flow as opposed to revenue in a valuation model. It is harder to play games with cash flow.
What will happen now? The SEC and the UK Serious Fraud Office will perform their investigations. Hewlett Packard will have “terse” discussions outside the press with the “smartest guys in the room” though there will continue to be public statements, as well. Then there's that lawsuit.
Autonomy execs will keep proclaiming their innocence. They also want to see Hewlett Packard’s notes in calculating the write down.
The anonymous whistle blower who mentioned “improprieties” will probably try to stay anonymous for awhile, while still hiring a food taster and holding a mirror under his car to examine brake linings.
For Meg Whitman, the magnifying glass has gotten larger, and the leash around her neck has probably been ratcheted up a bit by Hewlett-Packard’s board. Of course, these same board members approved the Autonomy acquisition.