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HP's Turkey Of A Deal Should Worry Its Bankers

This article is more than 10 years old.

By Sarah Cohen

It’s difficult to comprehend how one of America’s premier technology companies, Hewlett-Packard (NYSE: HPQ), once the largest PC manufacturer in the world and until recently a company deal-makers would name as a possible acquirer of anything that includes hardware or software, got tricked by Autonomy.

Yesterday, HP stated in its fourth quarter 2012 earnings release that it took a $8.8 billion goodwill charge on the $11.1 billion acquisition of UK-based software company Autonomy last year, a deal which was panned by investors as overpriced on the day of the announcement in August 2011.

That acquirers may overpay for a target and absorb enormous goodwill charges is part of the M&A firmament. Even the best acquirers absorb goodwill charges.

What makes HP’s Autonomy acquisition different is that, instead of accepting the charge without elaboration, in essence admitting that it made a poor decision, HP accused Autonomy of fraud. “The majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP's acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term,” HP stated yesterday. Autonomy founder Mike Lynch, who could not be reached for comment, denied the allegations on behalf of himself and his management team, according to a report in The Guardian.

If Autonomy committed fraud, this doesn’t say much for its long, long list of advisors. The banks advising Autonomy alone include almost all of the bulge bracket banks-- UBS, Goldman Sachs, Citi, JP Morgan and Bank of America--as well as Qatalyst, considered to be the lead on this deal. HP’s financial advisors were Barclays and Perella Weinberg.

It’s difficult to imagine how Autonomy could dupe HP as well as nearly every bulge bracket bank in the known universe.

HP issued another statement yesterday, saying Autonomy mischaracterized revenue from low-margin hardware sales as coming from licensing or value-added resellers.

When an acquirer wants to purchase a company, a standard part of the process is due diligence. The acquirer investigates the seller and makes sure its financial information is credible. Did HP decide due diligence wasn’t important? Was it short of time? Were its advisers having personal problems or otherwise distracted?

The Autonomy matter has been referred to regulators in two countries, and the Federal Bureau of Investigation has opened a case, according to the New York Times, which also said HP is considering its own legal action. It’s clear that HP is holding Autonomy accountable for this turkey, said a banker, and  Qatalyst, Barclays and Perella Weinberg should be concerned, the banker said. The three firms did not return calls for comment.

The other financial advisers have less to worry about, the banker said. In the UK, public companies usually have two brokers, who may want some piece of the action in a sale, but perform no real advisory role. Other banks may tag along after parties have already reached agreements. For instance, the bank might be a good customer of Autonomy’s, or some such, said the banker.

On this Thanksgiving, at least Oracle (NASDAQ:ORCL) has cause to count its blessings. CEO Larry Ellison said in a conference call in September 2011 that it passed on Autonomy because it was “absurdly high” priced.

Sarah Cohen is a Senior Reporter at mergermarket and the Global Telecommunications Sector Head.  She can be reached at sarah.cohen@mergermarket.com.