Hewlett Packard and Autonomy – The Soap Opera Goes On, Plus a Lawsuit

One of these days, the stories will come together about Hewlett Packard and Autonomy.  In the mean time -  They paid too much.  They took an $8 billion write down on the acquisition.  They accused the Autonomy  of poor bookkeeping.  Hewlett Packard’s financial advisors on the acquisition  stated  that they did not need to do a total deep dive before putting their blessing on the acquisition.  The prior CEO of Autonomy, Leo Apotheker, states that the books were correct at the time of the acquisition and that revenue was accrued for properly. 

Now Hewlett Packard and CEO Meg Whitman are denying that the company has tried to sell Autonomy and SAP is saying that they were approached.  In addition, for Hewlett Packard, April showers brought…  May lawsuits, as they are now facing a $1 billion shareholder lawsuit over the acquisition.  The California suite filed at California's San Francisco district court, which accuses those who oversaw the deal of conducting "cursory due diligence on a polluted and vastly overvalued asset".  $1 billion buys a whole lot of HP tablets.  http://www.guardian.co.uk/business/2013/may/07/shareholders-sue-hp-autonomy-deal

 

The stock has been recovering somewhat in price from its 52 week low of just under $11.35 to a 52 week high of $24 in late March.  When Meg Whitman took over the reins of Hewlett  Packard as CEO, the stock was trading at around $23.  For their first fiscal quarter of this year, net revenue was down  $28 B, lower than in fiscal Q1  2012.  Earnings were positive at $1.2 B, versus a loss of just under $7 B the previous quarter.  The stock is essentially unchanged, though, from a year ago while the Dow and NASDAQ are up about 25%.  Hewlett Packard has outperformed beleaguered Dell (another interesting story) but not by much. 

  

Whitman may make it through the end of 2013.  If so, Oracle’s Hurd, formerly of Hewlett Packard, will have to find a different partner for “Dancing with the Stars”.  The earnings conference call for the latest quarter is scheduled for May 22 after the markets close.    

http://www.techweekeurope.co.uk/news/hp-autonomy-sap-denial-116304

http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-EventDetails&EventId=4881977

HP-Autonomy acquisition under US Government Investigation - the Adventure Continues

The investigation over the $11.1 billion 2011 Autonomy (founded by Mike Lynch)  acquisition by Hewlett Packard   is growing into an even  larger  legal soap opera. The  US Federal Bureau of Investigation (FBI), the Securities and Exchange Commission (SEC), and the Serious Fraud Office are  all now involved.  Accounting firm  Deloitte, one of the advisors in the deal, is going to be quite busy responding to inquiries. KPMG may have to get involved, as well. Meg Whitman and the rest of the Hewlett Packard board will be having chats, as well. 

There are a number of ways to value an acquisition.  One of the most rigorous methods is using discounted cash flow analysis. Doing revenue multiple based on similar companies is another way.  However, revenues are fuzzy.  You can sign a 10-year contract, and depending on the deal, recognize the revenue at one time, or spread the revenue over a 10-year period.  Ditto with the costs associated with the sale.  There are hard dollars associated with determining profitability, as well as soft dollars.   

Much  of the value of an acquisition rests on the discounted cash flows from future revenues based on projections.  If the projection drops, the value of the acquisition drops. And if the drop is material, it has to be reflected on the acquiring company’s (HP’s) books. Hence, the $8.8 billion write-down.

In a December 28 article ZD Net article,    “HP-Autonomy acquisition under US govt investigation”, ZD quoted from a blog posted by founder and former Autonomy CEO Mike Lynch. 

Lynch said HP had failed again to provide detailed calculation on its US$5 billion write-down of Autonomy or publish an explanation of the allegations it made against his former management team. 

"Furthermore, it is now less clear how much of the $5 billion write-down is in fact being attributed to the alleged accounting issues, and how much to other changes in business performance and earnings projections.  This appears to be a material change in HP's allegations," he said. 

Lynch again dismissed any claims of impropriety and pledged to cooperate with the DOJ investigation.  "We continue to reject these allegations in the strongest possible terms.  Autonomy's financial accounts were properly maintained id in accordance with applicable regulations, fully audited by Deloitte, and available to HP during the due diligence process."

It has already been written how Autonomy was sloppy in where they assigned revenues and costs between the hardware and software in some of their deals.  This is going to cost them  if it is determined in the investigation  that they ignored US generally accepted accounting principles  (GAAP).  The IRS does not like to be shortchanged. 

However,   Hewlett Packard (CEO Meg Whitman and the HP Board) would have to approve of  this adjusted valuation.  If it was largely based on  adjusting the  forecast  of future revenues downward, and this was then used this in calculating the $8.8 billion  write-down of the deal, HP should be willing to share this information.

The firm, Robbins Geller Rudman & Dowd LLP filed a class action suit against Hewlett-Packard last week in November. They’re probably enjoying this.

http://kensek.blogspot.com/2012/12/another-look-at-hewlett-packard.html

 

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.

http://allthingsd.com/20121121/oracles-ellison-vindicated-in-autonomy-pr-flap-by-hps-8-8-billion-writedown/

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.

Is Facebook Really Worth $96 Billion in an IPO?

Facebook will be taking their IPO (Initial Public Offering) show on the road next week.  They’ll be visiting investment firms and banks to talk up the IPO and the figures developed by their “smartest guys in the room”.  Of course, these companies will be having their own smartest guys in the room listening to the pitch, looking at the numbers and trying to see if it makes sense.  Also, markets aren’t always rational.  Despite what the numbers say, when too many people are chasing too few shares and irrationality takes over, or when an IPO is priced  incorrectly, there could be a sizeable positive pop.

Moreover, blips in Q1 results are making some people nervous.  Q1 revenue was up 45% versus last year to $1.06 billion while net profit decreased 32% to $205 million.  Revenue growth in Q1 was up only slightly over Q4 2011. These are  not good things.  Other activities that have raised some concerns:

• Facebook agreed to pay $1 billion for Instagram, a company that makes it easy to share photos
• Facebook paid $550 million for patents filed by AOL and owned by Microsoft
• Facebook in March was hit with a lawsuit in March filed by Yahoo that alleged that Facebook   infringed on 10 Yahoo patents.  There are now 16 on the list. 

The figures Facebook filed with the US Securities Exchange Commission is to have an initial stock price   of $28 to $35 per share.  This would equate to a valuation of $70 billion to $88 billion. 

Sam Hamadeh of PrivCo thinks the IPO price will be between $38 and $40 per share.  "Facebook will mostly be given the benefit of the doubt ... but they still have a lot to prove," Hamadeh said.  "Especially after big IPO investors have been badly burned buying into the IPOs of Zillow, Groupon, and Zynga, all of which are trading well below their IPO prices.  They don't want to get burned again."

GreenCrest Capital’s Max Wolf believes that the financial numbers suggest a value of $60 billion.  This is 37%   less than the $96 billion Facebook is thinking of. 

Should Facebook go public at $28 share, initial investors like hi  tech investment fund FirstHand Capital would suffer an immediate paper loss.  They had purchased shares at $31 to $32 dollars and can’t sell their shares for six months after the IPO. 

BIA Kelsey’s Jed Williams stated that revenue would have to grow 41% annually over the next five years to justify Facebook’s   numbers.  This would suggest revenue almost 460% larger at the end of year five.

Morningstar believes that Facebook’s revenue would have to increase from 2011’s $3.7 billion with profit margins of 27% to $40 billion over the next six to seven years to justify the $96 billion valuation at time of initial public offering. 

According to Bloomberg - “Facebook is betting its growth prospects will persuade investors to pay 99 times earnings for its initial public offering, a higher multiple than 99 percent of companies in the Standard & Poor’s 500 Index.”

At the low end of the IPO range, Anup Srivastava, an assistant professor of accounting information and management, Kellogg School of Management has a base case scenario of $25 billion.  “This is based on the firm’s revenues reaching approximately $21 billion in ten years’ time from approximately $4 billion today, and the firm maintaining a high return on assets of approximately 20 percent.”

Different smartest guys in the room.  Different assumptions and models.  Different numbers.  And people are still trying to figure out how to value advertising revenue on mobile devices. The roadshow begins Monday.  Less than two weeks and then the IPO fun begins. I

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/05/03/BU3L1OD101.DTL#ixzz1twf3ZXjg

 

http://kensek.blogspot.com/2012/02/is-facebook-really-worth-100-billion-in.html

Symantec Sued for Scareware Tactics - January 2012

Sometimes marketing tactics can be a bit too aggressive for people. Washington state resident James Gross sued Symantec earlier in January. In the lawsuit against Symantec, he is claiming that Symantec offers customers a free, non-diagnostic scan that fraudulently detects critical issues on people's computers. The scan offers to fix many of these issues free. However, it then prompts the consumer to pay system tune-ups to clean out the rest of the errors. Products in question – PC Tools Registry Mechanic, PC Tools Performance, Toolkit, and Norton Utilities. www.pctools.com is owned by Symantec.

According to the complaint, “Symantec intentionally designed its Scareware to invariably report, in an extremely ominous manner, that harmful errors, privacy risks, and other computer problems exist on the user's PC, regardless of the real condition of the consumer's computer."

In its response, Symantec stated, "Symantec does not believe the lawsuit has merit and will vigorously defend the case. The Norton and PC Tools solutions at issue are designed to improve the system performance of our customers’ devices in terms of speed, maintain the health of their machines, and protect our customers’ information.…. Several independent third parties have tested and reviewed these products very favorably, verifying the effectiveness of their functionality."

Included in the Forbes article is the full case - Case5:12-cv-00154-HRL Document1 filed 01/10/12 (filed in US District Court, San Jose (CA) Division.

I went to www.download.com (CNET) and did a search on “free registry cleaner” for Windows devices. There were 721 products that showed on the list. The first three pages of products had 5 star ratings from the site (sorted by editor rating). One of the two adverts on the bottom of the web page was from www.pctools.com. “Free Registry Scan. Registry Cleaner Software. Try Now!”

Take these offers with a grain of salt. In addition, don’t click on any pop-up offers telling you that they can speed up your PC or that you have been infected by malware.

http://www.forbes.com/sites/andygreenberg/2012/01/11/lawsuit-claims-symantec-scareware-warns-of-fake-threats-to-sell-upgrades/

Juniper Networks Slaps Patent Suite on Palo Alto Networks - December 19

Juniper Networks is suing Palo Alto Networks cofounders Nir Zuk and Yuming Mao for patent infringement. PAN’s cofounders left Juniper in 2005 to start PAN. Zuk and Mao are accused of willful infringement of six patents Juniper Networks acquired when they purchased NetScreen in 2004. If you can’t win in the marketplace, see if there’s some way to gain a win in the courtroom. Whether this will delay an IPO (initial public offering)by Palo Alto Networks is hard to tell.

http://www.crn.com/news/networking/232300802/juniper-slaps-patent-suit-on-palo-alto.htm

To borrow heavily from William Congreve, "Hell hath no fury like a company scorned from the Gartner leaders quadrant or feeling violated about patent infringement."


Palo Alto Networks and Check Point Technologies are the only two companies in the Leaders quadrant in the December 14, 2011 Gartner Magic Quadrant for Enterprise Network Firewalls. Juniper Networks is one of four in the Challengers quadrant.


Hewlett-Packard is in a somewhat embarrassing portion of the Niche Players quadrant. Hewlett Packard CEO Meg Whitman may need to have a serious talk with the security group at Hewlett Packard about this. The lower left hand corner is not “coveted”.


There’s a misconception, perhaps foisted upon prospects by vendors, that the only companies to consider purchasing solutions from are in the Leaders quadrant of a Gartner Magic Quadrant. A good document from Gartner to read is “Magic Quadrants and MarketScopes: How Gartner Evaluates Vendors within a Market”. It’s written by Gartner analyst Charles Smulders, ID: G00154752


A few sentences from the document - “To evaluate vendors in the Leaders quadrant only and ignore those in other quadrants is risky and thus discouraged.” Use a Magic Quadrant to narrow your list of choices, but don't base your decision only on the model. Talk to the Gartner analyst who created the research for more details."

http://channelnomics.com/2011/12/19/juniper-lodges-lawsuit-palo-alto/


Read the above sentences to any vendor who flashes a Garner Magic Quadrant from his slide deck during a presentation!

Oracle Settlement of False Claim Lawsuit Could Top $200 Million

“In what will shape up to be the largest False Claims Act settlement ever collected by the General Services Administration, software maker Oracle Corp. and Oracle America will pay $199.5 million plus interest to the agency, according to a Justice Department Oct. 6 news release”. This is from an October 7 news story. http://www.govexec.com/dailyfed/1298/120798t1.htm

You can bundle the software with hardware. You can bundle the software with consulting fees. You can bundle it with support fees. But in the end, when it comes to GSA pricing, the federal government gets favored nation’s status. Well, the myth of the $600 government hammer notwithstanding. That came down to cost allocation and is another story. http://www.govexec.com/dailyfed/1298/120798t1.htm

In software pricing and licensing agreements, there’s list price. There’s street price. There’s a negotiated price. And then there’s the GSA Price List. It appears as if the courts decided that Oracle had licensed software to someone else for lower than GSA pricing.

From a competitive standpoint, if you want to know the lowest a competitor can go, check out the GSA price list. The government alleged that some customers had received higher discounts than they had received. That wasn’t a good thing.

The payday for a former Oracle employee because of the Federal False Claims act will be $40 as his portion of the settlement. That’s even larger than what Hewlett Packard paid Hurd to go away.

In an interesting comment, a company spokeswoman told the Federal Times in an email that "strong controls" would have insured government customers received fair prices. Colloquially, this could almost be translated to “someone in government should have paid more attention.”

To be fair to businesses, sometimes the press can be unclear on the concept of software licensing and pricing. It’s common for software companies to have a tiered licensing structure. With tiered licensing, prices decrease at greater tier levels. Assume that a company wants to purchase some internet security software. Let’s say that between 150 and 199 units, the price is $25 each. At 200 units, the unit price decreases to $20. Doing the math, it turns out that for anything greater than 160 units, they should purchase 200 licenses. Why? Because they’ll essentially get 40 licenses for free.

Years ago, the press vilified a company in CA for selling the state government more licenses for than they needed. But, it could have actually made economic sense for them to do that.

The above is probably “too much information”. But, it’s a useful example.

If you want to learn more about GSA pricing, go to https://www.gsaadvantage.gov/advantage/main/start_page.do

So, Oracle pays the fine for not providing the Federal Government favored nation’s status. The whistle blower receives $40 million. Now he can buy an island and have his own nation.