On HP's Debacle: "The Numbers Don't Make Sense"

Tyler Durden's picture

HP said that more than $5bn of yesterday's gargantuan write-down was due to "serious accounting improprieties" but as Bloomberg's Jonathan Weil states "the numbers don't make sense". With only $3.5bn of total assets on their balance sheet as Q2 2011, a $5bn 'fraud' would seem tough to swallow - and HP has far from forthcoming on any details. Perhaps the fault lies within (as opposed to without) as Weil notes HP recorded $6.6bn of goodwill (the plug between market price and the above-market price HP paid) - which was later revised to $6.9bn; now HP is writing down that goodwill - and blaming it on financial fraud from Autonomy. "HP didn't record the goodwill because it was lied to by Autonomy. HP recorded the goodwill because it knew Autonomy's identifiable assets were worth much less than it paid." It seems to Weil (and to us) that HP's management want the 'obvious-to-the-world write-downs required for goodwill and intangibles' post such a huge 'over-pay' to appear to be someone else's fault.

 

Via Bloomberg's Jonathan Weil:

HP didn’t record the goodwill because it was lied to by Autonomy. HP recorded the goodwill because it knew Autonomy’s identifiable assets were worth much less than it paid.

 

Here’s the problem with Hewlett- Packard Co.’s explanation today for why it took an $8.8 billion writedown related to its purchase of Autonomy Corp.: The numbers don’t make sense.

 

HP said “more than $5 billion” of the writedown “is linked to serious accounting improprieties, misrepresentation and disclosure failures discovered by an internal investigation by HP and forensic review into Autonomy’s accounting practices prior to its acquisition by HP.”

 

One reason the previous number seems odd is that Autonomy showed only $3.5 billion of total assets as of June 30, 2011. That was the date of the last balance sheet Autonomy publicly disclosed before it was bought by HP in November 2011.

 

Perhaps it’s true that Autonomy somehow committed more than $5 billion of financial-reporting improprieties with only a $3.5 billion balance sheet. I’m not sure how this is possible. But if it is, HP should explain. So far the company hasn’t.

 

HP said in its 2011 annual report that it paid $11 billion for Autonomy, a software company based in Cambridge, England. In connection with the acquisition, HP initially recorded $6.6 billion of goodwill and $4.6 billion of other intangible assets. HP later revised the goodwill to $6.9 billion and reduced other intangibles by about $300 million, according to its most recent quarterly report.

 

The goodwill figure is especially telling. Goodwill is the bookkeeping entry that a company records when it pays a premium to buy another company. More precisely, it’s the difference between the purchase price and the fair market value of the acquired company’s net assets. Goodwill can’t be sold by itself. The goodwill in this instance tells you that HP paid $6.9 billion more than it believed Autonomy’s net assets were worth.

 

Now HP is writing down some of that goodwill and blaming it on supposed financial-reporting improprieties by Autonomy. This also doesn’t make sense. HP didn’t record the goodwill because it was lied to by Autonomy. HP recorded the goodwill because it knew Autonomy’s identifiable assets were worth much less than it paid.

 

HP provided few details today to back up its allegations, which Autonomy’s former top executives are denying. HP put no hard numbers on the actual accounting errors it alleged. During a conference call with investors, HP Chief Executive Officer Meg Whitman said: “The board relied on audited financials -- audited by Deloitte -- not Brand X accounting firm but Deloitte.”

 

That doesn’t explain why HP paid $11 billion for Autonomy. As I wrote in a Ticker post on Oct. 4, it was obvious well before today’s news that HP needed to book more huge losses to write down goodwill and other intangibles. HP’s leaders just want investors to think the debacle is other people’s fault. What a shock.