HP says acquired company lied about finances

Associated Press Modified: November 20, 2012 at 10:30 am •  Published: November 20, 2012
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NEW YORK (AP) — Hewlett-Packard Co. said a British company it bought for $9.7 billion last year lied about its finances, resulting in a massive write-down of the value of the business.

CEO Meg Whitman avoided calling it a fraud, but said Tuesday that there were "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation PLC."

HP is taking a charge $8.8 billion charge to align the accounting value of Autonomy with its real value. More than $5 billion of the writedown is due to the false accounting, HP said.

The revelation is another blow for HP, which is struggling to reinvent itself as PC and printer sales shrink. Its shares hit a 10-year low in morning trading.

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. The deal was greenlighted by Whitman's predecessor, Leo Apotheker, but closed in Oct. 2011, three weeks into Whitman's tenure.

Among the tricks used at Autonomy, Whitman said: The company had been booking the sale of computers as software revenue claiming the cost of making the machines as a marketing expense. Revenue from long-term contracts was booked up front, instead of over time.

As a result, Autonomy appeared to be more profitable than it was, and seemed to be growing its core software business faster than was actually the case. The moves were apparently designed to groom the company for an acquisition, Whitman said.

Once HP bought the company, Autonomy's reported results quickly declined. Autonomy CEO Mike Lynch continued to run the company as part of HP, but Whitman forced him out on May 23 because it was not living up to expectations.

"Little did I know that there was more than met the eye," Whitman said.

Once Lynch was gone, a senior Autonomy executive volunteered information about the accounting shenanigans, prompting an internal investigation, she said.

The case has been referred to the U.S. Securities and Exchange Commission and the UK's Serious Fraud Office, she said. The company will also try to recoup some of the cash it paid for Autonomy through lawsuits.

On a conference call with Whitman following the earnings report, analyst Ben Reitzes of Barclays Capital asked who will be held responsible internally for the disastrous acquisition.

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