Last month, Hewlett-Packard announced that it had gotten played by one of its acquisitions. Autonomy, a British software maker it purchased for $11.7 billion in August 2011, was not worth as much as HP thought.
"[S]ome 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," the Palo Alto-based company said in a statement. "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 wrote down $8.8 billion in losses. Its stock price plummeted. And it's only getting worse: The shareholders are suing. At least one lawsuit, filed Wednesday by Stanley Morrical, accuses HP executives of intentionally misrepresenting the value of Autonomy in order to fatten their own pockets.
The "fundamental and foundational fraud," states the complaint, stems from HP hyping up a supposedly innovative information platform that would be released to the public on Dec. 1, 2011: a product called "IDOL 10" which integrated the work of Anatomy with the work of Vertica, also owned by HP. But in reality, the suit claims, the product was leagues behind what the company claimed.
"This revolutionary new technology would justify spending $11.7 billion to acquire Autonomy," the lawsuit says (emphasis theirs). "There was only ONE PROBLEM -- the integrated HP Next Generation Information Platform that HP promised DID NOT AND DOES NOT EXIST. The integrated Next Generation Information Platform that HP claimed existed did not exist in the form that was announced."
Morrical claims that "This fraud was known at the highest levels of the company," and that "In order to preserve their positions on the HP Board of Directors and to protect their compensation packages, the Individual Defendants failed to conduct due diligence prior to the Autonomy acquisition." The suit lists 19 defendants, including CEO Meg Whitman, and the board of directors.
"HP skipped from IDOL 7 to IDOL 10, claiming that Autonomy and Vertica (another HP acquisition) had merged their products together to create a product that had no competitor. HP did not tell investors, the public and shareholders that this integrated platform was unavailable on Dec. 1, 2011 and is unavailable today. Nevertheless, HP told the public that it did exist and it was available for sale as of Dec. 1, 2011."
Another lawsuit, filed in late November by Allan Nicolow, offers examples of how the executives benefited from the alleged deception: Chief Financial Officer Catherine Lesjak took home $9.9 million in stock-based compensation and bonuses, and former Controller James Murrin sold $3.5 million of HP stock.
HP's discovery that Autonomy was inflated smelled fishy to many from the start. As Forbes wrote soon after the Nov. 20 announcement:
If the allegations are true, the obvious question that comes to mind is: why didn't HP unearth this information during its acquisition?
Normally, companies rely upon a bevy of advisers -- ranging from law firms, investment banks, accounting firms, and consultants -- when completing an acquisition of this magnitude. These advisers provide strategic guidance, financing (if needed), and legal advice. They also solve problems or respond to concerns in helping to finalize a deal. Perhaps most important of all, they conduct due diligence of a target company to make sure its business practices are efficient and reliable, its valuable assets are safeguarded, and its accounts are accurate. They also seek out any potential liabilities like environmental hazards or costly lawsuits.
Whitman claimed that the company's mistake was relying too much on Autonomy's auditor, a well-known accounting firm called Deloitte. And her company doubled down on its faith in its tarnished purchase: "We remain 100 percent committed to Autonomy and its industry-leading technology," the damage-control press release read.
Today's lawsuit challenges that. "HP is still concealing the fact that the Autonomy acquisition did not provide HP the technology that HP promised to the public and that is the real reason for the write-down," it argues.