HP - "value destruction through acquisition"

How Jim Chanos Spotted the HP Scandal

Although some investors believed that HP was cheap enough to be considered a "value stock" because its price-to-earnings ratio was relatively low compared to competitors, Chanos said that HP appeared to be masking the true costs of its basic R&D costs with spending through acquisitions. If those costs were expensed as operating costs rather than capitalized as acquisitions, then revenues and cash flow at HP were basically flat, Chanos said.

Chanos said that the attempt to grow through acquisitions-HP had done $37 billion in acquisitions over the last four to five years-had not paid off for HP and that its core businesses were struggling. The personal computing market, in particular, was under assault from mobile technology, with people increasingly abandoning laptops for tablets. The company was engaged in "value destruction through acquisition," Chanos said.
Comment: List of HP acquisitions. Today's HP news is the Autonomy deal. A previous failing (in my view) acquisition was the Palm deal.

Following a series of mergers and acquisitions, HP represents a combination of Apollo, DEC, Compaq, 3Com and Palm
Comment: The stock, HPQ, pays a nice dividend but if your losing money you can't pay that dividend for long. HPQ and BAC are a drag on the Dow Jones Industrial Average (both being components)


  1. How H-P was duped in Autonomy deal

    “H-P now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of Autonomy’s financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix,” the company said Tuesday as it reported fiscal fourth-quarter results.
    In a call with analysts, CEO Meg Whitman, who replaced Apotheker after he abruptly left H-P, told analysts that the company plans to seek redress against those involved in the fraud.
    She also said, “Most of the board was there and voted for this deal and we feel terribly about that.”
    H-P’s claims of fraud came to light after a senior member of Autonomy’s leadership came forward after the departure of Lynch earlier this year, and told H-P “that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by H-P,” the company said.

    Comment: One wonders about the "Due diligence" process in place at HP!

  2. Not so fast: Autonomy Founder 'Shocked' by HP Allegations of Fraud:

    Autonomy founder and former CEO Mike Lynch told CNBC Tuesday that he was "shocked" by allegations of accounting fraud and blamed Hewlett-Packard, which acquired his company last year, for "mismangement" that led an $8.8 billion charge and sent HP's stock reeling.
    "We've been pretty ambushed by this today," Lynch said in an interview from London. "I think there's been significant mismanagement of the company."

  3. I sold my HP stock in July of last year at just over 35/share after deciding to make some changes in my investment strategy. Looks like I got out at a good time. I originally bought Compaq, which was one of the companies acquired by HP, and I held it more than 10 years. I'm out of the volatile tech stocks completely now.

  4. Oracle: Shocker! Larry Ellison Sees Eye-to-Eye With HP:

    When HP acquired Autonomy, Ellison told investors on an earnings call that Oracle had looked at Autonomy’s price and thought it was “absurdly high.” Oracle later released a series of statements claiming that Autonomy had also pitched a sale to Oracle’s executives — only to be rejected because the price was too steep.

    At the time it was easy to dismiss Ellison’s statements as bluster. His tirade came in the midst of a feud with HP over the firing of former HP CEO and Ellison tennis buddy Mark Hurd over accusations of sexual harassment. Hurd landed at Oracle as president shortly thereafter, then HP countered with a lawsuit claiming he was in violation of his non-compete contract.

  5. Cramer: Get Out of HP, Best Buy Now

    Cramer said investors may be tempted to buy into these companies because they're both household names. Surely they'll be able to resurrect themselves, many may think, but in reality both stocks are total disasters.

    Tuesday, HP announced a $5.5 billion write-down for its purchase last year of the U.K.-based Autonomy. According to the company there was widespread accounting errors and misrepresentations at Autonomy, which caused HP to lose nearly $8.8 billion of its $11 billion investment.

    Cramer said the problem with HP is it's no longer an innovator but an assembler of products that are in decline. PCs are losing out to tablets while margins are shrinking in the printer business. Meanwhile, rivals are eating HP's lunch in the consulting business. Cramer said it's not too late to sell this stock, which has already lost 55% of its value this year.

  6. This is interesting (11/21/12): In HP-Autonomy debacle, many advisers but little good advice:

    When Hewlett Packard acquired Autonomy last year for $11.1 billion, some 15 different financial, legal and accounting firms were involved in the transaction -- and none raised a flag about what HP said Tuesday was a major accounting fraud.
    HP stunned Wall Street with the allegations about its British software unit and took an $8.8 billion writedown, the latest in a string of reversals for the storied company.
    HP Chief Executive Meg Whitman, who was a director at the company at the time of the deal, said the board had relied on accounting firm Deloitte for vetting Autonomy's financials and that KPMG was subsequently hired to audit Deloitte.

  7. More: HP Is “the Epitome of a Value Trap” After “Embarrassing Debacle”: Ritholtz

    "The mind boggles as to where the snafu was," says Barry Ritholtz, CEO of Fusion IQ and author of The Big Picture blog, who notes the accounting industry is once again left with another black eye — and with shareholders holding the bag. "I'm not just talking about HP," he says. "This is a mainstream part of finance and quite frankly an embarrassing debacle."
    Beyond questions over the potential failings of audit firms Deloitte UK and KPMG, HP's board and its finance team, "to me this is just another bad HP acquisition," Ritholtz says. "They were once a wonderful, storied company. Now they need to figure out who they are."
    For shareholders, this is the critical question because the Autonomy write-down and drama over the allegations served to somewhat obscure another lousy quarter for HP overall.


    "HP is the epitome of a value trap," says Ritholtz, who has no position (long or short) in the stock. "The stock has been in a relentless downtrend for a decade, has a history of making horrific acquisitions and is in a space that's pretty much been devastated by tablets in general and Apple specifically."

  8. Why Didn't H-P's CFO Know More About Autonomy?

    BLOCKBUSTER ... HP CFO (Chief Financial Officer) out of loop on Autonomy deal ... opposed it .... HP paid 11 times EARNINGS for Automony

  9. Lynch (former head of Autonomy): Q&A With Autonomy Founder Mike Lynch on H-P Allegations:

    We were audited on a quarterly basis. It was Deloitte who knew the company well. We had 10 years as a listed company; during that time Deloitte would have had their work reviewed by the various boards. Of course H-P did what its senior management called “a meticulous due diligence” involving hundreds of people that was highly intense, involving KPMG Barclays as well. They threw everything at it.

    And of course they have run the company for four quarters, they have been doing the books.

    The figures are just mad. You are talking about handing them an asset worth $12 billion and they are saying $9 billion of that they are taking off. That would be such an obvious massive thing with 300 people and all these firms doing due diligence, how could you possibly not spot it?

  10. NYTimes article on 11/26: Autonomy Founder Challenges H.P.’s Claims

    there are the questions about how Autonomy’s accountants, plus more than a dozen other highly regarded law, banking and accounting firms that received millions for working on the company’s sale, could have missed the problems.

    Deloitte, Autonomy’s regular auditor, reviewed Autonomy’s books on a quarterly basis, Mr. Lynch said, and was given invoices for every transaction over $100,000, plus those for a random batch of smaller deals.

  11. 1/21/13: Inside H-P's Missed Chance To Avoid a Disastrous Deal

    Days before Hewlett-Packard Co. dived into an $11 billion software deal it almost instantly regretted, it missed a chance to back away.

    During a call with an H-P delegation, outside auditors for British software maker Autonomy Corp. mentioned that an executive there had raised an allegation of improper accounting at the firm, according to people familiar with the call, who said the auditors added that the allegation was found to be groundless.

    The H-P executives never passed this mention on to their board or chief executive, one of the people said.

    Within days of agreeing to buy Autonomy, in the summer of 2011, H-P was looking for a way to get out of it. Before the deal even closed, H-P canned the CEO who pushed it. Then last fall, H-P wrote down the value of the software firm by $8.8 billion, blaming more than $5 billion of that on what it said was improper accounting at Autonomy designed to inflate its revenue and profit. Autonomy's founder denied any wrong accounting.


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