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HP takes US$8.8 billion hit; cries foul on Autonomy deal

The vendor takes earnings hit as it claims it was seriously misled by Autonomy prior to the mega-acquisition

Partners hoping that Hewlett-Packard Co. (NYSE: HPQ) may have gotten the worst of the bad news behind it woke up to a shock today, with news the vendor is taking an US$8.8 billion charge related to its US$10.2 billion acquisition of UK software company Autonomy in August 2011 and allegations by HP that the vendor was misled about the value of the company.

Needless to say, HP missed its fourth quarter results, reporting a net loss of US$6.9 billion. The vendor said most of the non-cash US$8.8 billion impairment charge, more than US$5 billion, is linked to “serious accounting improprieties, misrepresentation and disclosure failures” discovered following an HP investigation and forensic review of Autonomy’s accounting practices before HP bought the company.

In a statement, HP said it launched the investigation after a senior member of Autonomy’s leadership team came forward with information following Autonomy founder Mike Lynch’s departure from HP. PricewaterhouseCoopers was engaged to conduct a forensic review.

“HP 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,” said HP in a statement. “This appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers. These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal.”

According to a report by Reuters Autonomy founder Lynch has “flatly rejected” the HP charges. Former HP CEO Leo Apotheker, who oversaw the Autonomy deal, told the Wall Street Journal he’s “both stunned and disappointed” to learn of the alleged improprieties.

HP said it has referred the matter to securities regulators in the U.S. and U.K. and is also preparing civil action “against various parties” to recoup shareholder losses, promising to “aggressively” pursue the matter.

It’s a latest in a long line of blows for HP and its partners. CEO Meg Whitman warned the company’s turnaround would be slow in October, following a major write-down related to its EDS Corp. acquisition. Major layoffs over the past year have accompanied the restructuring. All told HP will book a loss of US$12.7 billion on the year. And then there was the turbulent leadership of former CEO Leo Apotheker, from the aborted musing about selling the personal systems group to the Autonomy acquisition itself.