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A couple of years ago, Hewlett Packard paid an astounding $11 billion for a British software company called Autonomy that most people thought was only worth a few billion, at most.Last quarter, after laying the blame for this colossal mistake on fired CEO Leo Apotheker, HP wrote off $9 billion of the purchase price and said it had been defrauded.
Autonomy’s former management team immediately rejected this allegation, saying HP was just looking for someone to blame for its own mismanagement.
Well, now, with luck, we’ll finally learn who’s right.
The Department of Justice has opened an investigation into the Autonomy deal, HP reported in the 10K it just filed.
As a result of the findings of an ongoing investigation, HP has provided information to the U.K. Serious Fraud Office, the U.S. Department of Justice and the SEC related to the accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP’s acquisition of Autonomy. On November 21, 2012, representatives of the U.S. Department of Justice advised HP that they had opened an investigation relating to Autonomy. HP is cooperating with the three investigating agencies.
The investigation will likely take a while. But eventually, hopefully, we’ll find out whether the vastly over-inflated price that HP paid for Autonomy was the result of fraud, as HP now claims, or HP’s own idiocy, as Autonomy’s former management says.
UPDATE: The former CEO of Autonomy, Mike Lynch, has issued a lengthy statement on the matter:
“It is extremely disappointing that HP has again failed to provide a detailed calculation of its $5 billion write-down of Autonomy, or publish any explanation of the serious allegations it has made against the former management team, in its annual report filing today.
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.
Simply put, these allegations are false, and in the absence of further detail we cannot understand what HP believes to be the basis for them.
We also do not understand why HP is raising these issues now given that Autonomy reported into the HP Finance team from the day the acquisition completed in October 2011, there was an extensive due diligence process and Autonomy was audited as a public company for many years.
We would particularly make the following points:
* HP’s CFO Cathie Lesjak and her team, plus a number of outside advisors, had access to all Autonomy accounts and documents from October 2011 onwards, and raised no issues.
* Beginning in November 2011, HP and KPMG reviewed Autonomy’s closing balance sheet in detail, and Ernst & Young reviewed Deloitte’s audit work papers.
* Beginning in October 2011, HP studied in detail Autonomy’s tax structure and transfer pricing as well as its revenue recognition practices (led by Paul Curtis, HP’s worldwide head of revenue recognition).
* An independent, third-party valuation of Autonomy’s assets was carried out in January 2012.
* Quarterly business reviews were held with Autonomy management, Meg Whitman and Cathie Lesjak to discuss Autonomy’s financial performance.
* HP has continued to sell and account for hardware alongside Autonomy software in the same way that Autonomy did for the year since the acquisition completed.
* Regarding differences between IFRS and US GAAP accounting standards, which appear to have a role in some of the allegations HP has made, Autonomy’s accounting policies were made clear in Autonomy’s 2010 annual report.
We also note the statement in HP’s annual report that it received confirmation from the U.S, Department of Justice on 21 November 2012 (the day after HP’s first public statement), that the Department had opened an investigation. We can confirm that we have as yet had no contact from any regulatory authority. We will co-operate with any investigation and look forward to the opportunity to explain our position.
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.
We remain deeply concerned about how this process has been conducted, and believe it is in everyone’s interest for it to be resolved as soon as possible.”