You just couldn’t make this up. HP, formerly one of the New York Stock Exchange’s darlings and until recent times often mentioned in the same breath as IBM, could be set to call in the cops over the acquisition of Autonomy 18 months ago. According to CEO Meg Whitman, someone had been cooking the books before the deal was inked.

With the amount of money and size of the companies we are talking about at the enterprise end of the information management space, no one is ever really surprised when some of the more unsavory business practices come to light.

Autonomy’s Financial Matters

However, even in these terms what is alleged to have happened with Autonomy is really quite startling. In order to be absolutely clear about this, we are going to cite here a statement issued by HP and attributed to CEO Meg Whitman, as it is unclear as yet whether any kind of criminal or civil proceeding will be filed.

Nevertheless, Whitman seems convinced that something is wrong so let’s take a look:

"HP is extremely disappointed to find that 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 by HP. These efforts appear to have been a wilful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal. We remain 100 percent committed to Autonomy and its industry-leading technology.”

This is bad enough; but from an IT point of view it really throws the success of Autonomy and the IDOL product up in the air. Again from the statement:

Although HP’s investigation is ongoing, examples of the accounting improprieties and misrepresentations include:

The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.

This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.

The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale.”

The result, HP says, is that the misrepresentation of Autonomy's figures means that at the time of the deal its financial performance, its revenues, its core growth rate and gross margins were all seriously out of kilter with the reality.

Autonomy’ Books

Of course the impact of such an announcement was really going to hurt and already the pain has started. In early morning trading, share price jumped off a cliff to land 13% lower at US$ 11.55 and appeared to be still sliding as this piece was being written.

Not a big surprise really considering the severity of the allegations that Whitman has outlined in the statement. The big question here, though, is where is corporate governance?

Where was the board of HP when this deal was being hammered together? Who examined the books? Who approved the figures? What about former HP CEO Leo Apotheker, or Autonomy’s former CEO Mike Lynch, where were they? What is their involvement in this?

And this is not the first time that these questions have been asked. Anyone that follows the information management industry, or who is familiar with the technologies both Autonomy and HP produce have been struggling for the past18 months to understand the US$ 11 billion price tag.

This is not a case of bolting the door once the horse has left. It’s a case of ignoring the alarms once it looked like the door might be open in the first place. And if outsiders could see it, there must have been people working in Autonomy that could see it too.

But it seems there was, and the facts only came to the attention of Meg Whitman when an employee raised concerns about certain accounting practices at Autonomy.

Again, for legal reasons, let’s cite HP’s statement:

HP launched its internal investigation into these issues after a senior member of Autonomy’s leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP. This individual provided numerous details about which HP previously had no knowledge or visibility.”

As of today, it is still unclear what action is going to be taken. HP says it has reported what it knows to the US Securities and Exchange Commission’s Enforcement Division and the UK’s Serious Fraud Office for civil and criminal investigation. With this, there is little more to be said until they come back with findings, as everything else is speculation.

Learning Opportunities

HP Share Prices

The incident couldn’t have come at a worse time for HP. In the last quarter -- that is Q3 -- it reported losses of US$ 8.9 billion following a write-down on Electronic Data Systems, a technology consulting service it bought for US$ 13 billion in 2008. It also had to pay for an estimated 30,000 redundancies.

This time around, despite some encouraging signs of a wind-change in the fortunes of the company, it has had to take a US$ 8.8 billion write-down related to Autonomy, which means for this quarter it will post losses of US$ 6.9 billion.

To make losses like this during one quarter is bad, to do it two in a row is… well bad too. However serious it actually is won’t become apparent yet as investors mull their options here.

While the stock value is now at its lowest since 2002, and today’s drop is pretty dramatic, share prices bounce all the time and no one should read too much into this.

HP Q4 Results

That is they shouldn’t read too much into it, unless, the decline continues and starts to look terminal and while we don’t want to put money on it here, it’s unlikely that this is going to happen. But it’s going to have to work. Some of the other figures in today’s results include:

  • Services revenues dropped 6% on the year, including technology services, which dropped by 4% and business service revenues down 7%
  • Personal systems overall were down 14% with commercial revenue down 13% and consumer revenue down 16%
  • Hardware units were down 20% on the year with commercial hardware down 15% on the year.
  • Enterprise Servers, Storage and Networking revenue down 9% year over year

That’s all pretty bad you’d have to agree. But it’s only in keeping with what’s been happening elsewhere and reflects a sluggish global economy that, while no longer in the financial trauma ward, is still not far away from it.

On the other hand, software revenue grew 14% year over year including revenues from Autonomy driven by 9% license growth, 9% support service growth and 48% growth in services. Financial services revenues also grew by 1%.

In sum, while the situation looks bad, particularly with this Autonomy investigation in the works, HP can still come up with the goods.

Software sales are considered to be the principal gauge of a company’s heath generally speaking. If HP can increase revenues 14% here, then it’s still got a lot to shout about.

Image Courtesy of Marcio Eugenio (Shutterstock)