Hewlett-Packard Co stunned Wall Street by alleging a massive accounting scandal at its British software unit Autonomy and taking an $8.8 billion (€6.8 billion) write down, the latest in a string of reversals that renewed questions about the competence of the storied company’s board and senior managers.
HP said it discovered “serious accounting improprieties” and “a wilful effort by Autonomy to mislead shareholders,” after a whistleblower came forward following the May ouster of former Autonomy chief executive Mike Lynch.
The news sent the company’s shares plunging 12 per cent to a 10-year low of $11.71. HP, which for decades was synonymous with technical excellence and innovation as one of the bedrock companies of Silicon Valley, now has a market value of roughly $20 billion, down from $155 billion in April of 2000.
Chief executive Meg Whitman took the helm at HP a little over a year ago when her predecessor, Leo Apotheker, was fired after less than a year on the job. Apotheker’s one big strategic move during his brief tenure was the $11 billion acquisition of Autonomy, intended to hasten HP’s transformation into a software and services company but which was criticized by many analysts as over-priced.
“Most of the board was here and voted for this deal, and we feel terribly about that,” Whitman said on a call with analysts.
The announcement came just three months after the company took a write-down of almost $11 billion on its EDS services division.
HP has for years relied on deal-making, acquiring businesses ranging from EDS to Compaq to Palm, but has largely failed to articulate a clear strategy or establish a strong position in growth businesses like computer services or mobile computing.
“To put it bluntly ... this story has been an unmitigated train wreck, and it seems every time management speaks to the Street, there is new negative incremental information forthcoming,” said ISI Group analyst Brian Marshall.
HP said it has referred the alleged accounting wrongdoing at Autonomy to the US Securities and Exchange Commission’s enforcement division and the UK’s Serious Fraud Office for civil and criminal investigation.
HP also said it would take legal action to recoup “what we can for our shareholders.”
Both agencies declined to comment.
Lynch, in an interview with Reuters, “flatly rejected” HP’s allegations and said he was “shocked” but confident he would be absolved of any misdeeds. The Irish-born executive said he had not been notified by HP about the allegation before it was made public, nor had he been contacted by any authorities.
Whitman said the investigation of Autonomy‘s finances – both external and internal – will take multiple years as it wends its way through the courts in both countries.
She defended the board’s handling of the acquisition and blamed HP’s auditors for failing to detect the problems.
“The board relied on audited financials, audited by Deloitte. Not Brand X accounting firm, but Deloitte,” she said, adding that KPMG was hired to audit Deloitte.
“Neither of them saw what we now see after someone came forward to point us in the right direction,” Whitman said.
On Tuesday, a person familiar with the situation said that the Federal Bureau of Investigation was probing the HP-Autonomy allegations in concert with the Securities and Exchange Commission, although the inquiry was at an early stage.