The market has now had a day to chew over the Hewlett-Packard news:
- The discovery of an alleged accounting fraud that triggered a huge writedown of $9 billion of the $11 billion Autonomy acquisition.
- And another horrible quarter.
As we mentioned yesterday, of the two pieces of news, the horrible quarter was far worse. Almost all of HP’s businesses are shrinking, the company is overloaded with debt, and all there is in terms of hopes of a turnaround are vague plans for tablets and other new products in the back half of next year.
These problems are far more challenging and intractable than a writeoff and minor revenue restatement from the alleged accounting fraud, which is already old news.
But the news of the alleged accounting fraud dominated most of the HP conversation yesterday.
So, before we leave that topic for good, let’s give it another minute of consideration.
The general response to the news is that, by announcing the scandal, HP deftly deflected criticism of both its ongoing operating business and its terrible decision to pay $11 billion for Autonomy in the first place.
That terrible decision, it’s worth noting, cannot be blamed on the newly-alleged fraud.
For one thing, only $5 billion of the $9 billion HP wrote off yesterday was attributed to the fraud. The other $4 billion, therefore, can presumably be attributed to, well, a boneheaded decision.
Furthermore, as Jonathan Weil of Bloomberg observes, attributing $5 billion of the writedown to the fraud just doesn’t make sense.
HP has identified $200 million of Autonomy revenue that it says was inappropriately (fraudulently) booked in 2009 and 2010. That’s about 15% of the total revenue Autonomy booked in those years. HP also says that another 10%–15% of Autonomy’s revenue was “mischaracterized” as software revenue when it should have been characterised as hardware revenue. This latter issue, however, did not affect Autonomy’s overall profitability or revenue, the latter of which, in any case, was booked as a single line of revenue.
(We certainly hope HP knew that Autonomy sold hardware in addition to software. Assuming it did know this, did it imagine that Autonomy was just giving the hardware away for free? And if all HP means is that Autonomy’s internal numbers caused HP to think that Autonomy’s software revenue was bigger than it thought, did HP really not consider Autonomy’s overall profitability when deciding what to pay?)
In other words, even if you assume that 30% of Autonomy’s revenue was completely ficticious, it’s still hard to see how you can attribute $5 billion (45%) of the $11 billion purchase price to the fraud.
In any event, HP is probably now carrying Autonomy on its books for a value close to what it is actually worth: ~$2 billion.
Too bad for HP shareholders that the company’s former CEO, current CFO, and board, elected to incinerate another $9 billion of cash in the bargain.
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