Why HP Took an $8 Billion Charge for 2011 Autonomy Deal

NEWS ANALYSIS: In its quarterly and year-end financial reports, HP was forced to take a whopping $8.8 billion "intangible asset impairment" charge for the $11.1 billion Autonomy acquisition in 2011, citing serious accounting and credibility problems.

Even though Hewlett-Packard replaced Leo Apotheker in September 2011 after a mere 11 months as CEO, his influence is still impacting the company big time. It might continue to affect the company for a long time to come.

On quarterly earnings report day, Nov. 20, the iconic IT company had good news and bad news—in fact, mostly bad news.

First, the good: HP's profit margins have improved, and its software (up 14 percent) and storage businesses (up 60 percent) are growing. HP's full-year fiscal 2012 net revenue was $120.4 billion, down only 5 percent from the prior year, despite a soft macroeconomy and all the internal turmoil. Those numbers all portend well for the future, if the company can get out of the hole in which it is mired.

Now, the bad news: HP reported a fiscal year net loss of $6.8 billion, compared with a $200 million profit in the same period a year earlier. For the quarter, HP's profit slipped $2.1 billion year-over-year. Shares of common stock slid 12 percent and closed at $11.72 on Nov. 20—the stock's lowest level since July 1994, when the stock was at $10.92.

Last Three Years Have Been Problematic

The stock was selling for $53.90 in April 2010, right before then-CEO Mark Hurd was forced to resign due to a personal-conduct issue with a female contract employee. The stock's all-time high was $66.28 in January 2000.

There's more, and this one's big: HP was forced to take a whopping $8.8 billion "intangible asset impairment" charge for the $11.1 billion Autonomy acquisition in 2011 that Hurd and Apotheker had advocated, citing some serious accounting and credibility problems.

The company said in its quarterly report to the Securities and Exchange Commission that the accounting issues took place just before the acquisition and thus accounted for the majority of the charges in the quarter, which totaled more than $5 billion.

HP's explanation to the SEC of the huge charge-off included allegations of "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy that occurred prior to HP's acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long term."

Among other things, Autonomy makes search engines that help companies find vital information stored across computer networks. Acquiring it was part of an attempt by HP to strengthen its portfolio of high-value products and services for corporations and government agencies.

Among the tricks used at Autonomy, CEO Meg Whitman said on a conference call to analysts and reporters, was that it had been booking the sale of servers as software revenue and claiming the cost of making the machines as a marketing expense. Revenue from long-term contracts also was booked up front, instead of over time, Whitman said.

Writing Down 80 Percent of Autonomy Payment

So, HP basically is writing down 80 percent of the value of the transaction, which it had predicted would bring HP to the forefront of the new cloud-based IT economy against competitors such as Oracle and IBM. The bigger question: Who vetted this deal for HP?

The answer: First, the HP board of directors, which is ultimately responsible for this train wreck. Second, Deloitte, which was Autonomy's auditing firm. Third, KPMG, HP's auditors, which audited Deloitte's work. These are not insignificant names. Nonetheless, a whole pack of problems went uncovered before Apotheker and HP decided to part with $11 billion of the company's hard-earned capital to annex the U.K.-based software company.

"I'm both stunned and disappointed to learn of Autonomy's alleged accounting improprieties," Apotheker wrote in a media advisory. "The developments are a shock to the many who believed in the company, myself included."

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