innovate or acquire?
Sometimes it is better to innovate than acquire
Hewlett-Packard dropped a bomb this morning in reporting its financial results for its fiscal 2012 year, stating that the British software company Autonomy, which it acquired a little more than a year ago, "outright misrepresented" its own value - leading to a colossal $8.8bn writedown for HP today. In a conference call ahead of …
Sometimes it is better to innovate than acquire
Sometimes... although IBM and Oracle seem to be doing more than fine with their acquisition strategy. I think this is another case of massive HP dysfunction. There may well have been some accounting improprieties at Autonomy, but, even if their books were accurate, HP was insane to buy them at $12 billion. We are talking about 50x forward earnings (50 years to get an ROI at current earnings, with little room for growth in their markets). Completely unjustifiable valuation even if the books were accurate. Oracle turned down Autonomy at $6 billion as "ridiculously overpriced."
I think HP, upon realizing their colossal overpayment too late, started combing through the Autonomy books to see if there was a way that they could recoup some of their massive overpayment.
I don't think that theory holds much water - the likelihood is that they will be able to recover very little so the impact of the negative publicity / embarrassment if this is exaggerated or manufactured would far outweigh any remedy they might get.
I think you are overlooking that HP's management realized that their auditors were going to tell them that they would need to write down most of the goodwill value of Autonomy at some point in the near future as Autonomy was/is tanking when it was supposed to be growing crazily.... They had two choices. Take the negative publicity as another case, e.g. Palm, EDS, on massive M&A incompetence on the HP management team's side... or take the negative publicity as being scammed by Autonomy's fraud that even KPMG and Deliotte did not catch.
fraud that even KPMG and Deliotte did not catch
Surely you jest? Let's just say I don't hold such a high opinion of the above..
Personally, I think HP bought a massive lemon and is now seeking to clear out the books. Conveniently, the people responsible have retired with nice packages and I'm sure they have been briefed already. There will be some blustering and some frantic scurrying to shove stuff under a probably already fairly bulging carpet, the auditors who flat out missed this will get another opportunity to earn fees (no such thing as money back), the press will be kept busy for a while, but in the end it will probably end up with zero after effects other than that HP has now written off a lemon, and the mention of fraud has kept the shareholders from running away.
I really don't expect much in the way of jail time here, sorry. Just a bunch of people being sacked to balance the books after this - nice justification and a faceless scapegoat of the past to blame it on.
>the likelihood is that they will be able to recover very little so the impact of the negative publicity / >embarrassment if this is exaggerated or manufactured would far outweigh any remedy they might get.
Given a choice between, "those Brits lied to us and it's all the accountants fault" and "
the former CEO, that we the board put in place, went on a mad spending spree for anyone that could spell cloud because we have no idea how to innovate anymore"
Which is goign to sound better in a report to Wall St?
They call it Toilet and Douche for a reason.
let's just say I was right and Matt Bryant was wrong. No company is worth $50M per employee. If it wasn't for Larry being such an ass everyone would agree with Oracle that it was not even worth a quarter of the half they were offered to buy it.
Curious why Oracle could get it at $6B and HP ended up buying it for $12B, did someone have pictures of someone? In today's cell phone camera world I wouldn't doubt that is the real reason.
You sir, owe me a new keyboard!!!!!
"Surely you jest? Let's just say I don't hold such a high opinion of the above..Surely you jest? Let's just say I don't hold such a high opinion of the above.."
Neither do I, but at least HP can say "we relied on the public accounting firms and they let us down"... which doesn't sound good, but it sounds a lot better than "we massively overpaid because we can't divide a price by net earnings and figure out that an ROI was virtually impossible from the outset."
fraud that even KPMG and Deliotte did not catch.
Those two did not catch anything suspicious up to the bankruptcies of Amagerbanken and Roskilde Bank either (in Denmark)! Any competent control fraud would deliberately hire incompetents so that his shenanigans are not discovered. I.O.W: There is a niche in the financial ecosystem for crap accountants.
There is a niche in the financial ecosystem for crap accountants.
Not just in the finance world. I saw a fairly spectacular rigging of a National Audit Office and the audit process to get a massive, very publicly visible project past audit where insiders knew it was, umm, "not of a value corresponding with the money spent on it" - I think that's the most politically correct way of saying it.
Although HP’s investigation is ongoing, examples of the accounting improprieties and misrepresentations include:
The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.
This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.
The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale.
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.
So who thought they could get away with that kind of circus performance?
One would believe an employee of social security was massaging the books here...
"...a willful effort ... inflate the underlying financial metrics..."
And that is exactly the sort of thing that due dilligence and companies like KPMG are supposed to pick up. HP were conned. and HP were negligent. I have no sympathy.
And, yes, two of the principle clowns have left the circus, but that leaves the whole support act to answer questions.
here is a clue, lads. A thing good that looks too good to be true, is usually too good to be true.
[Big clown icon needed]
How were HP negligent? They hired KPMG to go through the accounts, who, as you say, should have picked up on exactly this sort of thing.
I'd say it was KPMG, not HP, who were negligent.
Alternatively, isn't it possible that HP, having realized they paid *way* over the odds for Autonomy (as was widely commented at the time) are now looking for a convenient scapegoat? A foreign scapegoat at that.
Either way, HP management don't come out of this well.
Hiring KPMG is negligent! When incompetents hire consultants to do their work then *somebody* will be screwed over - and it will not be the consultants!
This crap happens ALL the time, in banking, within IT and within larger infrastructure projects: Lazy manager hires master consultant, who then in turn hires sub-consultants recursively until the money runs out and a report confirming the opinions and biases management expressed at the first interview. When the project later fails, management blames it on their consultants and generally argues that "they pursued the best advice available", "and no one could possibly have known that ... blah ... blah ... blah" ... golden parachutes and bonuses pops all round while the responsible fails upwards to cozier, more lucrative jobs!
Very possible, but the point remains, even if Autonomy's books were entirely accurate, HP massively overpaid. 50x forward earnings is insane unless we are talking about some company that is about to take over the world... no one, expect Leo, seemed to have that opinion of Autonomy.
"Alternatively, isn't it possible that HP, having realized they paid *way* over the odds for Autonomy (as was widely commented at the time) are now looking for a convenient scapegoat?"
Agree, I think that's it. HP, despite everyone telling them that they were paying multiples of Autonomy's value, seemed to think they were getting a fair price. When they figured out that they had overpaid by $8-9 billion, they told their lawyers and accountants to start working on Autonomy's books to figure out how they could call this massive mistake fraud on Autonomy's part instead of incompetence on HP's part.
Always get a second opinion.
Quote: Hiring KPMG is negligent!
KPMG was hired as an accountant to audit accounts, not as a consultant.
A normal accountant will not pick up a well designed fraud. It takes a different breed - the "forensic accountant". However, people do not hire those unless they have serious expectations to find something.
"This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue."
1) How did HP not know this if it was 10-15% of their revenues? 2) It is not that uncommon for smaller software companies to resell hardware.
"The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale."
Absolutely every software company with a channel does this at times when a PO is in progress. Obviously the VARs are not going to hold the entire value of the licenses indefinitely unless they want hugely expensive Autonomy licenses on their books. Reaching....
> Always get a second opinion.
What? You mean like they're profligate as well as incompetent?
Sounds like it's time to start taking a serious look at all the other acquisitions HP have made in recent years.
Im assuming Arthur Daley brokered the deal.
Much more precises and succinct than my efforts, but my thoughts exactly.
... if ever employed by a company being taken over by HP, run away.
Very wise. I have several friends who work or used to work at Autonomy, and the sort of comments I hear about HP are "seagull management", "couldn't organise a piss-up in a brewery" and "no idea what they bought". I've had similar experiences with two different large US corporations. Big US management and small to medium UK software houses don't play together well.
There is a big difference between US and UK companies, and it's really down to culture and how that is not understood by each side. I've seen this a couple of times and it's not pretty.
I suspect that in the Autonomy case there may have been a chance that it would work for HP if they had been left alone for a while and then "integrated" into HP but to have made the changes they did so soon after the purchase it pretty much guaranteed that the people that made it function would walk as soon as they could.
Financial dealings and valuations are often a matter of opinion, in the same way as economists disagree so do accountants because there are no real rules in accounting. Maybe this was dodgy, maybe it was a difference of culture. If I see any fraud squad raids turning up outside Autonomy I'll let you all know.
Icon is for HP, everyone in engineering thought they meant what is now Agilent when they said they were going to concentrate on their core business, but that turned out to be ink manufacture.
There's big money in ink manufacture.....
HP's 364 cartridges have 7ml of ink in them.
Now go look at the price.
Selling massively overpriced cheap stuff to stupid customers is very fashionable. HP sells expensive ink and Apple sells expensive flash memory, both of them for about 10x the going rate. Reap what you sow - next stop for a mugging, Cupertino.
>... if ever employed by a company being taken over by ANYONE, run away.
Unless it's purely a parent company level "Marathon is now Snickers" thing you are screwed.
After all, the new owners must be better/smarter/etc than you because they were the ones that took YOU over.
So unless you are a senior CXO at the victim with some golden handcuffs you are automatically at the bottom of the pile in the new organisation.
sell ink to the US Treasury and you're printing money
Deloitte prepared the bundle for KPMG to do due diligence on? My, there's going to be some fun to be had in those offices :/
You wonder what else they miss!
The legally-mandated professions (audit, law, etc) - can't wait til we can automate them away :)
Something about sending them off into space on the B Ark wasn't there?
I think that Finance could be the Killer application for Quantum Computing. It must be useful to resolve the entangled states of Bankrupt/Profitable faster and more effectively than presently. Classic accounting seems to be useless - or overcooking the books?
Classic new CEO move though. Write down absolutely as much as you can get away with blaming on the last guy, then all your future percentage growth numbers look fabulous as they're coming from a much reduced base.
Oh, and make sure your bonuses are paid on those percentage numbers.
Autonomy just paid for Meg's vineyard and a jet for the kids.
That might be an interesting theory had the share price not already dipped 40% under Meg's reign, and that was prior to the 11% it is trading down today alone. She's got to go a long way before she can demonstrate share holder value!
It will be interesting to see the fallout from this for Deloitte's and KPMG. Someone above criticised the use of consultants but that is how these large M&A's are done. Companies don't allow a potential acquirer full access hence the requirement for a 3rd party. The consultants prepare the information for the acquirer to make the decision and in this case HP made a decision based on the information they were presented with. Whether that was a correct decision even based on the fictional information is another matter but the reality is that HP were not presented with an accurate position.
I agree. There are probably two motivations going on:
a) Try to pin the blame on an overpriced acquisition somewhere else and claw some money back.
The auditors' standard defense in all these cases has been "Not our fault. Disclaimers provided along with our fat invoice".
Yes, deals like this are made through auditors. That's reality and won't change. Yes, auditors are sometimes nowhere as clever as their hourly rates would lead you to believe. Maybe this case will again show the need for a better way. Mind you, if you held the auditors' balls in a vise in case of errors, those companies would exit the audit field wholesale and go back to safer activities like writing up spreadsheets to flog CDOs.
Still, shame on KPMG if they messed up that much.
b) Blame ongoing problems on bad old Apotheker. Which is fair enough, as a lot of people questioned a $10B acquisition for a not-widely-known company.
Except that Meg "let's buy Skype" Whitman is hardly one to talk and has yet to prove that HP's board didn't, again, mess up by hiring her.
It's not the auditors job to say you are an idiot for paying $12Bn for this company.
It's the auditors job to say that their sales/costs/profits are what they claimed.
In practice there is bound to be some detail of non-transferable license revenue counted under the non-reccuring monthly account instead of the semi-deprciated (I'm making this shit up) pre-tax forecast .... to allow them to claim that they were misled.
Agree, audits are kind of ridiculous in their very nature. As though some 25 year olds from KPMG or Deliotte are going to go into a complex operation in an industry they likely know nothing about and in a few weeks come out with a complete and accurate audit. It is more marketing for investors than it is any serious assurance. As Lehman, Tyco, Worldcom, Nextel, Enron, AIG, M-L, etc, etc demonstrate, if the company wants to get away with something, they will get away with it at least at the time.
No one relies on what the auditors tell them. If they did, there would be no need for massive M&A deal teams to comb through the books again.
That might be an interesting theory had the share price not already dipped 40% under Meg's reign,
You can play the markit in many ways: I bet the LEAP PUT options on HP have done just Grreat under Meg Whitman.
Some executive bonus packages have a conversion option built into them: When the share price tanks enough the option to buy shares at some time in the, presumably, golden future converts to a multiple of shares @ current price in the, less golden, future.
Indeed it is the consultants who prepare the 'books' on these deals, and it is also true that the acquired will wish to present as rosy a picture as possible to the acquirer so as to maximise shareholder value - like a householder standing in front of a crack when a potential buyer is having a viewing.
Thing is, the potential house buyer should have the intelligence to ask the seller to stand a little to the left so as to check to see if cracks are evident and if they get the bums rush, they should have the backbone and intelligence to walk away.
What this demonstrates is that someone, somewhere, at HP was either too stupid to be making decisions of such magnitude that they should not been allowed to or they were so blinkered at the prospect of an acquisition that they were not checking closely enough for cracks.
In both cases, consultants/Autonomess - 1, HP - 0
You can't just swap the pound sign for the dollar sign and think that's equal value. Even though you and the rest of the industry think this is a fact.
It makes a change from HP kidding everyone about building quality products - Photosmart "Ink system failure" anyone?
Couldn't happen to a nicer bunch
Posted Friday 19th August 2011 13:23 GMT
".... I hope they didn't cook the books like a certain now-Microsoft-owned company in order to look more valuable than they are."
Hmm.. An AC. So insider info ? :D