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business newsMore Questions Than Answers in Hewlett-Packard's Acquisition of Autonomy
This $10 billion purchase, all in cash on balance sheet, could be a huge mistake for the wayward technology firm.
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Anger and frustration are the two emotions pulsing through my veins as I think about Hewlett-Packard (HPQ).
HP, once the symbol of innovation, is being dismantled by its high-pedigreed board and the CEO of the hour (hopefully his tenure will be measured in hours, not years). I vividly remember the early 2000's when Carly Fiorina, then CEO, engineered the company's merger with Compaq. She argued that the move was a must for HP’s future to be bright. Walter Hewlett, the son of one of the founders, was publicly opposed to it. I remember the drama of the proxy fight; the TV interviews, the arguments from both sides, and the finale -- Walter Hewlett lost and the merger went through. But it was not actually the finale, because nine years and two CEOs later the company has announced that the PC business -- the one it so desperately wanted just a decade ago -- is too difficult and the company will look for ways to get rid of it. Almost in the same breath Hewlett-Packard announced that it will kill its WebOS devices segment, a business it acquired in April 2010 for $1 billion.
Management, possibly missing the irony in those two announcements, went ahead and announced another acquisition, which this time will surely transform the company. HP announced it will buy Autonomy, a UK software company, for $10 billion. I understand $10 billion doesn’t sound like a lot of money in today’s post-trillion dollar bailout world, but it is plenty for this company, especially considering what that money is buying. There are many ways to illustrate how expensive and meaningless to HP’s future this acquisition is: $10 billion is about a fifth of HP’s market capitalization, while Autonomous will contribute 0.7% to its revenues, and 2.7% to its earnings. Also, HP paid 10x revenues and about 25 times earnings. 
Leo Apotheker, HP’s CEO, bragged about Autonomy:
Autonomy has grown its revenues at a compound annual growth rate of approximately 55% and adjusted operating profit at a rate of approximately 83% over the last 5 years.
Keith Backman, a sell-side analyst from BMO Capital, asked a very pertinent question about Autonomy:
...metrics that you threw out for Autonomy, particularly on top-line growth, included a lot of acquisitions for Autonomy. What’s the organic growth rate that Autonomy has achieved lately?
Leo did not have an answer, whereupon HP’s stock started to drop. Hewlett-Packard had reported a decent quarter; expectations were already low (its stock was at about 6x 2011 estimates, which remain intact), and Dell (DELL) had already lowered guidance a day before, so no one was surprised when revenue guidance for 2011 was lowered by a few percentage points. Management said that since it will pay for Autonomy from cash on the balance sheet, it will not be buying much of its stock in the near future. Then they mentioned that this acquisition will be accretive. Yes, accretive! Nothing to worry about, this transaction is accretive only for those short on common sense and economic literacy.
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