HP Goes Radio Silent Into 2013 on Autonomy Debacle

Antoine Gara - The Street  DEC 28, 2012 2:15 PM

HP's Autonomy silence may be an investor headache heading into 2013


Hewlett-Packard (NYSE:HPQ) set off fireworks in November when it said it was the victim of an accounting fraud related to its $11.1 billion acquisition of British software specialist Autonomy. Now, a late Thursday filing shows the US Department of Justice is investigating HP's Autonomy unit.

However, the company remains notably silent on the investigation and is likely to have little new to say about the Autonomy deal in 2013.

As enforcement agencies pick up what HP said started as an internal investigation on whistleblower claims of fraud, all signs point to the company maintaining silence on those allegations now that legal authorities are investigating them.

HP's silence is consistent with its previous statements when first disclosing the fraud allegations; however, it also means the investigation may prove to be a distraction in 2013 as the PC giant tries to execute on a highly uncertain software and services transformation.

Meanwhile, the investigation may be a crucial test to HP chief executive Meg Whitman's reputation after she and the company's board supported the Autonomy deal in late 2011 and pinned most of this year's writedown on the recently uncovered alleged fraud.

HP shares, which are the worst performer in the Dow Jones Industrial Average in 2012, fell nearly 2% in early Friday trading to $13.73, putting year-to-date losses at over 45%.

In November, HP recorded a $8.8 billion fourth quarter writedown of Autonomy, erasing most of the software analytics unit's value to shareholders, and casting in doubt the company's efforts to remake itself into the mold of IBM (NYSE:IBM).

HP attributed the majority of the writedown to an accounting fraud perpetrated by the company prior to its Aug. 2011 acquisition and said it has referred the charges to Britain's Serious Fraud Office, the DoJ and the Securities and Exchange Commission. HP also said that fraud charges relate to Autonomy's recognition of revenue and that the company opened an investigation when an Autonomy executive came forward with the fraud.

"HP is extremely disappointed to find that some former members of Autonomy's management team used accounting improprieties, misrepresentations, and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy's acquisition by HP. These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management's ability to fairly value Autonomy at the time of the deal," HP said. In the wake of HP's writedown and fraud accusation, some in the media noted HP may have simply overpaid for the software and data analytics specialist.

Others such as Oracle (NASDAQ:ORCL) highlighted that Autonomy had been shopped to them, but that HP's initial $11.7 billion pricetag was "way too high." Notably, Oracle said the company's head of M&A Douglas Kehring and its president Mark Hurd -- a former HP chief executive -- valued Automony at less than its $6 billion market value at the time.

Meanwhile, former Autonomy chief executive and founder Mike Lynch took to the airwaves to mount a vigorous defense of the company's accounting. In an open letter to HP's board of directors, Lynch wrote, "It was shocking that HP put non-specific but highly damaging allegations into the public domain without prior notification or contact with me, as former CEO of Autonomy. I utterly reject all allegations of impropriety."

Lynch's criticism caused HP to quickly fire back with a second statement related to November fraud allegations levied against Autonomy.

"While Dr. Lynch is eager for a debate, we believe the legal process is the correct method in which to bring out the facts and take action on behalf of our shareholders. In that setting, we look forward to hearing Dr. Lynch and other former Autonomy employees answer questions under penalty of perjury," HP said, while noting that it will defer investigation to regulators like the DoJ and file its own legal action at "the appropriate time."

After HP's December 27 10-K filing with the Securities and Exchange Commission, investors now know legal authorities will be investigating HP's claim of an accounting fraud perpetrated by Autonomy.

"On November 21, 2012, representatives of the US Department of Justice advised HP that they had opened an investigation relating to Autonomy," HP said in its filing, which added that the company has "provided information" to the UK's SFO and the SEC. "HP is cooperating with the three investigating agencies," the company adds.

While the DoJ's investigation signals investors will see a resolution to HP's multi-year debacle, that regulatory investigation may also prove to be a distraction in 2013 for HP and its CEO Whitman, as the company tries to execute on a make-or-break turnaround effort.

An email and voicemail left with HP spokesperson Michael Thatcher seeking comment wasn't immediately returned.