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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.

 

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Wed, 11/21/2012 - 10:39 | 3001789 GetZeeGold
GetZeeGold's picture

 

 

When GAAP is outlawed things will start making more sense.

Wed, 11/21/2012 - 10:45 | 3001794 idea_hamster
idea_hamster's picture

How do you commit accounting fraud for more than the assets on your balance sheet?

Easy:  defraud your liability side as well -- which is unlimited.

Why did Enron implode so spectacularly?  Not because its assets were zero, but because its liabilies were entire factors of magnitude greater than anyone realized.

They had $3.5 B in assets?  Fine -- all they need is $1.5 B in hidden debt exposure.  These guys have to think outside the box a bit.

Wed, 11/21/2012 - 11:42 | 3001998 Richard Chesler
Richard Chesler's picture

It's a big club, and not friends of Obama are not in it.

Wed, 11/21/2012 - 14:32 | 3002705 Joe Sixpack
Joe Sixpack's picture

The Hidden Liability = Meg Whitman's failure to take California, thus no leverage for extortion?

Wed, 11/21/2012 - 14:54 | 3002817 AldousHuxley
AldousHuxley's picture

meg whitman is republican version of hillary.

 

ebay was fluke.

Wed, 11/21/2012 - 10:41 | 3001796 kliguy38
kliguy38's picture

Yeh sure.....of course it will make sense and it will be replaced with GARP and then GOPP and then GGOP blah blah blah......the sheep will keep falling for the same game....and WHY?? Because they WANT to.

Wed, 11/21/2012 - 10:48 | 3001820 Flakmeister
Flakmeister's picture

And replaced by what?

Wed, 11/21/2012 - 10:59 | 3001859 Zero Govt
Zero Govt's picture

replaced by CoCo the Clown

Wed, 11/21/2012 - 11:01 | 3001863 ParkAveFlasher
ParkAveFlasher's picture

Replaced by IFRS, which has the singular distinction of defining nothing in any intelligible language.

Wed, 11/21/2012 - 11:20 | 3001914 Zero Govt
Zero Govt's picture

CoCo the Clown is an act, like the entire accountancy profession. The more script (rules) they add the more chaotic and completely incompetent the act becomes

it's like the Law/Judiciary, Regulation and Govt itself, it's a sack full of shit (rules)

Wed, 11/21/2012 - 11:51 | 3002033 formadesika3
formadesika3's picture

The Auditing model at present is flawed. It involves a basic conflict of interest. This is what brought Arthur Anderson down. Auditing firms should work for an insurer. That insurer would sell a policy to publicly-traded companies for a clean bill of health. This would eliminate the pressure auditing firms are subject to by company management.

Wed, 11/21/2012 - 12:09 | 3002117 ParkAveFlasher
ParkAveFlasher's picture

Just what the world needs, more insurance. /s

Fiat currency is the ultimate insurance policy.  All roads lead to evaporation of value in the largest reservoirs, considered TBTF, which are then refilled with printed paper.  And like insurance policies, you have to have it by law, yet you know that you are paying for nothing.

It's physics.  Once the object of labor, the value of time well spent, is lost, it can not be replaced because you can not go back in time.  The payout of insurance is a mortgage on the future, in all cases. 

Wed, 11/21/2012 - 12:23 | 3002159 formadesika3
formadesika3's picture

Reread my post. I didn't say the world needs more insurance. In some cases, it needs less. Health insurance for example was a very bad idea and is the underlying cause for the crisis in the US healthcare system. I was simply expressing a fix for what's wrong with the auditing model.

It wouldn't have to be mandatory. Buyer beware. Prudent individuals would demand it before buying stock in a publicly-traded company.

Wed, 11/21/2012 - 12:36 | 3002224 ParkAveFlasher
ParkAveFlasher's picture

You are advocating what is essentially corporate health insurance. 

You would attach auditing firms to insurance firms, which is analogous to attaching medical diagnostic firms to insurance firms.  You are deemed healthy, you get insurance easily.  You are not deemed healthy, you do not get insurance easily. 

You would empower insurance firms with the clarity of audit.

Rules that mandate insurance did not start out as rules that mandate insurance.  They were born as optional and voluntary.  However, once accidents happen, once litigation enters the game, and once litigation burdens the law providers with liability, the law providers respond by offsetting their liabilities, and mandates are born.  Invariably

Insurance is a wager that things will fail, or not.  Most things don't fail, however when they do, the failures disproportionately weigh upon the system.  Thus insurance. 

Wed, 11/21/2012 - 12:50 | 3002278 formadesika3
formadesika3's picture

Your criticism is that this type of insurance might/could/possibly turn into a mandate. I'm not sure that would be an inevitable outcome in this case but to the extent that everything seems to devolve into more governmnet involvement in the private sector, point taken.

Wed, 11/21/2012 - 12:59 | 3002300 ParkAveFlasher
ParkAveFlasher's picture

I'm glad you can see it or least react politely. 

I would go on to say that the entire concept of insurance is misconception.  Once value is lost, it is lost, and you can assign a nominal value to the loss and pay out to victims, however, you are simply extracting from yourself and non-victims on a past, present, and forward basis.  Insurance is an individual betting on failure of something, however the ante of that bet is reduced by the number of policy holders, and if insurance is ubiquitous or mandated, the meaning of that bet is nearly dissolved because your payment is low compared to the max risk. 

This is subject, in a fiat currency, to pricing controls and fixes, in that if the costs to replace or fix your lost value are made artificially high, than you would never think twice about paying your comparatively low insurance rates.  It is a numbers game, it is a pyramid like any other.

Thus in a world where more things fail that don't, there should be no insurance.

I would put the burden of audit on the shareholders.  Let the buyer beware.

Wed, 11/21/2012 - 12:50 | 3002279 ParkAveFlasher
ParkAveFlasher's picture

"This would eliminate the pressure auditing firms are subject to by company management."

No, it would simply revector pressure, not eliminate it. 

If a company is a dog, it is a dog, it should go bankrupt, and the share issuers, by name, will be known to the share holders who may seek recompense. 

If you seek to create pools (insurers) that refill reservoirs (busted firms) on an emergency basis, you still need to fill those pools. 

You would disassemble one pyramid scheme, and replace it with another.

Wed, 11/21/2012 - 12:57 | 3002293 formadesika3
formadesika3's picture

A soundly-run insurance company is not a pyramid scheme.

A large well-capitalized insurance company is much better positioned to resist corporate pressure than auditing firms can ever be.

Wed, 11/21/2012 - 13:01 | 3002305 ParkAveFlasher
ParkAveFlasher's picture

A soundly-run insurance company takes in more than it pays out.  Or, what?

Wed, 11/21/2012 - 13:16 | 3002374 formadesika3
formadesika3's picture

Actually, I'm trying but fail to see your point. (I've never been a part of the insurance biz, btw.) You say the whole idea of insurance is a misconception but if people voluntarily buy it, then by definition, it must provide value, if you believe in the subjective theory of value at any rate.

Wed, 11/21/2012 - 13:47 | 3002490 ParkAveFlasher
ParkAveFlasher's picture

I don't. 

Wed, 11/21/2012 - 13:27 | 3002410 formadesika3
formadesika3's picture

A soundly-run insurance company takes in more than it pays out.  Or, what?

It fails, of course. But that's true of any company. The value of insurance is to arbitrage risk. People and organizations should have the right to self-insure of course. No argument there.

Wed, 11/21/2012 - 14:05 | 3002572 ParkAveFlasher
ParkAveFlasher's picture

Success is self-insuring.

Wed, 11/21/2012 - 12:51 | 3002282 Buckaroo Banzai
Buckaroo Banzai's picture

You can't conflate human health with corporate health.

Human health, outside of physical trauma, is very poorly understood, and is impossible to underwrite on a person-by-person basis. Corporate health is much easier to understand in general, and while some businesses are more complicated than others, it isn't hard to classify the differences for underwriting purposes.

That is what makes corporate health an insurable risk, and human health an uninsurable risk.

 

Wed, 11/21/2012 - 13:12 | 3002358 ParkAveFlasher
ParkAveFlasher's picture

I'm trying not to drive at "corporations are people". It is irrelevant to my point.

I would say that one can INDEED assess the health of either, if one has the expertise and the tools and the access, however that assessment has no direct bearing on the actions of both people and corporations. 

Saying that one is not obese, with good heart health, and a cheerful demeanor according to standard psych surveys, speaks nothing to their propensity to drive too fast or walk very close to the train platform edge or never look down the dark alleys while walking home. 

Likewise, saying that a company has healthy growth in established markets, good cash flow, and solid profitability speaks nothing to the propensity for its directors to peddle favors, tempt regulators, or yes, cook books, either directly (lying) or indirectly (moving or revaluing inventory, revisions after actionable data is actioned upon, etc.).

A healthy man goes home one day and sticks his finger in the socket.

A healthy company goes to market one day with a fifth row of icons. 

Insurance is a stubborn illusion, but it is a pyramid.

Wed, 11/21/2012 - 11:15 | 3001906 MachoMan
MachoMan's picture

It's dart throwing at present...  we'll upgrade to PLAID blindfolded dart throwing...  followed by dizzy bat.

Wed, 11/21/2012 - 11:12 | 3001894 Stoploss
Stoploss's picture

Here's to hoping every body doesn't figure out ( at the same time )

everything thing is, and has been, a lie.

 

Wed, 11/21/2012 - 12:11 | 3002126 kralizec
kralizec's picture

GAAP is being phased out, we are all moving towards IFRS - International Financial Reporting Standards.

Really all it means is we will all be using the same playbook, it still comes down to gaming the system with new terms and assumptions, and it is likely compliance & enforcement will be spotty and there will be lots of opinions offered on the concept of value.

Other than that it should be a kick-ass transition!

http://www.ifrs.org/Pages/default.aspx

Wed, 11/21/2012 - 12:18 | 3002154 Raymond K Hessel
Raymond K Hessel's picture

ASC 820 won't go away because of IFRS.  They also have to MMKT. IFRS is probably why we adopted FAS 157 / ASC 820.

Wed, 11/21/2012 - 15:26 | 3002885 californiagirl
californiagirl's picture

IFRS leave a lot more room for subjective "manipulation" as they are less stringent than U.S. GAAP. Falsifying revenue recognition and gross margins contributes to false reveue/income projections and an overvaluation of Goodwill. The accounting rules are not creating the fraud.

One of the underlying principals of GAAP is that the accounting is supposed to reflect the economic reality of the underlying transaction. However, unethical management often purposefully manipulates legal and other documents to misrepresent the economic reality and makes other verbal agreements that are difficult for the accountants to discover, particularly when high level collusion is involved. I could write a very thick book on the tricks and fraud I discovered during my years of auditing.

Ignorant accountants that are inadequately trained in GAAP, or don't have the balls to rock the boat or risk losing an angry clients, are also to blame.

Software revenue recognition is one of the most heavily abused areas in accounting. Because accountants are not software and computer eexperts, they can be more easily misled. They need to make extra efforts to understand a comprehensive arrangement with a customer/client and the product than have been promised, significantly beyond reading the paperwork.

HP will need to disclose more about the fraud when they file their financials.

Wed, 11/21/2012 - 10:42 | 3001797 LawsofPhysics
LawsofPhysics's picture

Anyone suprised?  Fraud is the status quo, there is no accountability at the top anywhere.    Once again, it appears that only collapse will bring back real consequences for bad behavior AT ALL LEVELS of society.

< sigh > Same as it ever was.

Wed, 11/21/2012 - 10:43 | 3001798 Mitch Comestein
Mitch Comestein's picture

What they are writting down is the goodwill on HP's books and the goodwill & intangibles that were on Autonomy's books.  They obviously found out that whatever Autonomy had technology-wise, for which they were buying, was a scam or worthless.  Therefore, all the intangibles and goodwill is worthless.  In GAAP accounting, the goodwill/intangible has to produce a cashflow or expected to produce it.  If that cashflow is later determined to be zero, then the intangible/goodwill needs to be written off.  They have to do a test every year. 

Wed, 11/21/2012 - 10:45 | 3001810 LawsofPhysics
LawsofPhysics's picture

so, "mark to fantasy" accounting strikes again.  Color me shocked.

Wed, 11/21/2012 - 11:05 | 3001872 Zero Govt
Zero Govt's picture

HP Execs didn't bag/buy a 'winner' then?!!

..you should see what Bernanke is buying, shit isn't the word!!!

Wed, 11/21/2012 - 11:08 | 3001883 LawsofPhysics
LawsofPhysics's picture

What Bernanke is doing is criminal, end the damn Fed.

Wed, 11/21/2012 - 11:11 | 3001892 Zero Govt
Zero Govt's picture

Govt is criminal (theft). Period. End it...

Stop Paying Tax ...take your chips off their menu.

 

Wed, 11/21/2012 - 11:21 | 3001933 LawsofPhysics
LawsofPhysics's picture

I have been long black markets since 2001.  Nice (tax free) returns.

Wed, 11/21/2012 - 11:17 | 3001917 Winston Churchill
Winston Churchill's picture

They (HP) ran the company for 12 months prior to closing on the

purchase.

Run Muppets,run.

Smells like a fish market.

Wed, 11/21/2012 - 10:44 | 3001803 LawsofPhysics
LawsofPhysics's picture

Related to the article and all the "mark to fantasy" bullshit going on.  Say it with me now; "Show me the collateral and assets behind that balance sheet bitchez!"

 

Wed, 11/21/2012 - 10:45 | 3001807 Dr. Engali
Dr. Engali's picture

Shock of shocks...a poorly managed dying company is lying, before you know it they will be trying to tell us that Goldman isn't doing God's work.

Wed, 11/21/2012 - 11:09 | 3001885 Zero Govt
Zero Govt's picture

Blankfein is doing Gods work, Bernanke is buying the shit results

Lucifer must be laughing his socks off

Wed, 11/21/2012 - 10:45 | 3001808 Rustysilver
Rustysilver's picture

So another company lied. Tyler reports it as news: it's not.

Wed, 11/21/2012 - 11:25 | 3001949 Sudden Debt
Sudden Debt's picture

your boss just called me. He's going to double your salary and give you a extra fat bonus cheque for christmass... promise...

unless the economy is going to have another crisis of course... but everything is looking good... promise...

 

 

Wed, 11/21/2012 - 11:25 | 3001950 prains
prains's picture

then explain what it's not then cornhole

Wed, 11/21/2012 - 10:45 | 3001809 EscapeKey
EscapeKey's picture

The mind boggles thinking about the "goodwill" associated with the Fed's MBS purchases off of primary dealers.

Wed, 11/21/2012 - 10:48 | 3001821 LawsofPhysics
LawsofPhysics's picture

Bingo.  Criminal for everyone else (especially the individual person/corporation) except a banking cartel.  End the damn Fed.

Wed, 11/21/2012 - 10:55 | 3001846 ParkAveFlasher
ParkAveFlasher's picture

I always loved that "goodwill" in the corporate balance sheets.  It's as if Santa Claus arrives quarterly.

Wed, 11/21/2012 - 11:56 | 3002060 azzhatter
azzhatter's picture

GE Capital

Wed, 11/21/2012 - 10:47 | 3001815 orca
orca's picture

Good rebuttal http://tinyurl.com/cjvyzjp
Whichever way you slice it, HPQ is a shithole of a share.

Wed, 11/21/2012 - 10:47 | 3001816 AynRandFan
AynRandFan's picture

Oracle wasn't fooled but HP was.  

Stupid is as stupid does.

Wed, 11/21/2012 - 10:48 | 3001823 unununium
unununium's picture

The "impropriety" was believing target company's BS projections for the future.

Wed, 11/21/2012 - 10:48 | 3001826 TeamDepends
TeamDepends's picture

Red means run, son

Numbers add up to nothing

Neil Young

Wed, 11/21/2012 - 10:50 | 3001828 Flakmeister
Flakmeister's picture

Why can't we have more of this "creative destruction" in the financial sector, starting with, say, Goldman Sachs??

Wed, 11/21/2012 - 10:50 | 3001830 ebworthen
ebworthen's picture

More parasitism at the expense of the little people.

Executives responsible jumped ship six months after "the deal".

Shareholders left holding the empty bags; I'm shocked, shocked I tell you.

Wed, 11/21/2012 - 10:51 | 3001833 Rainman
Rainman's picture

From Weil's old news department, the morons at Bank of Lynch paid $ 4.2 Billion for Countrywide's goodwill....even though they knew it's real value was sub zero.

 

http://www.bloomberg.com/news/2010-11-04/bank-of-america-edges-closer-to-tipping-point-commentary-by-jonathan-weil.html

Wed, 11/21/2012 - 11:21 | 3001934 Winston Churchill
Winston Churchill's picture

Goodwill is just an accounting entry to cover paying too much for an asset.

Run, wherever you see it on a balance sheet.

Wed, 11/21/2012 - 11:57 | 3002064 azzhatter
azzhatter's picture

GE Capital

Wed, 11/21/2012 - 12:42 | 3002256 ParkAveFlasher
ParkAveFlasher's picture

Say, I just got a note on linkedin that GE Capital is hiring.  Imagine that.

Wed, 11/21/2012 - 10:52 | 3001835 Seize Mars
Seize Mars's picture

quote

"HP’s leaders just want investors to think the debacle is other people’s fault. What a shock."

Nice try, HP scumbag fuckers. They are going to get sued by former principals of Autonomy - and guess what - it will be in British court. British courts love defamation / libel / slanderous fuckin bullshit from some scumbag liar American CEO bitch like the Good Lord loves holy water.

Wed, 11/21/2012 - 10:54 | 3001845 larz
larz's picture

THIS is why management makes the big bucks.

Wed, 11/21/2012 - 11:03 | 3001871 Boilermaker
Boilermaker's picture

This is why I only make 'industry average'.

Wed, 11/21/2012 - 11:27 | 3001957 ParkAveFlasher
ParkAveFlasher's picture

"Industry average salary" is code for "captive-residency-district-sheeple quantitative flux required to achieve xyz targeted tax returns".

If you feel a sudden itch on the back of your neck, don't scratch it - the collar might just explode.

If you can imagine it in these terms, someone is working towards it. 

Wed, 11/21/2012 - 11:10 | 3001888 blunderdog
blunderdog's picture

If they don't pay a lot, they won't attract the best of the best.  Can't expect people to do this stuff at reasonable salaries--it's hard work!

Wed, 11/21/2012 - 10:55 | 3001847 Boilermaker
Boilermaker's picture

The numbers make perfect sense.

Fee for a bogus certification of financials and due diligence:  $12,000,000

Penalty for providing a bogus certification:  $1,000,000

Signed,

KPMG & Deloitte

Wed, 11/21/2012 - 10:54 | 3001848 TahoeBilly2012
TahoeBilly2012's picture

@Mars How coffee have you had?

Wed, 11/21/2012 - 12:39 | 3002243 Seize Mars
Seize Mars's picture

Enough to know a bunch of California bullshit when I see it.

:o)

Wed, 11/21/2012 - 10:57 | 3001855 GreatUncle
GreatUncle's picture

Interesting but only from this perspective.

So one corporation has been accrueing a loss over the last few years decides to buy a company and then shove the loss against this.

Ha ha, nothing to do with the "contracted demand" for many IT products that HP provide since 2008 then ay? ay?

Since 2008 and the trend since then I expected many blue chip profits to fall because the mentality is to preserve dividends would require concealing hidden losses through accounting etc.

Now if HP was a GM company however then there could be government handout for a start and then a new IT form of "cash for clunkers" stimulus.

Wed, 11/21/2012 - 10:58 | 3001858 Forbes
Forbes's picture

Hindsight is 20/20. HP overpaid for an acquisition, likely valuing (discounting) certain cashflows into perpetuity when those cashflows had very short-term shelf life due to rapidly changing technology/software/competitive environment, i.e. the costs to stay current and competitve in the marketplace were higher than anyone understood (or should've understood). A management mistake in valuing/executing the acquisition. Was it intentional, i.e. a fraud? Well, negligence in hindsight can look like fraud.

Wed, 11/21/2012 - 11:02 | 3001864 Seasmoke
Seasmoke's picture

what a bunch of crybabies.....they could have bought Countrywide....now that would be a reason to place blame

Wed, 11/21/2012 - 11:02 | 3001866 ArrestBobRubin
ArrestBobRubin's picture

In the world the hideous bankster trash so thoughtfully created for us to inhabit, which numbers DO make sense?

The "numbers" and the "news": twin creations of fantasy to support the agenda of the Real Terrorists

Wed, 11/21/2012 - 11:02 | 3001868 kweksma
kweksma's picture

HP payed 12.000.000.000 dollars for a company they thought would bring a revolution in searching unstructured data.

Then someone walked up to Meg and showed here www.google.com.

You know what she said?

 

"Shit"

Wed, 11/21/2012 - 11:04 | 3001874 Seasmoke
Seasmoke's picture

has there ever been a BIG merger that has ever worked out for all involved.......so why do they continue to do them ???????????? 

Wed, 11/21/2012 - 11:13 | 3001900 fuu
fuu's picture

Diworsification.

Wed, 11/21/2012 - 13:00 | 3002304 Buckaroo Banzai
Buckaroo Banzai's picture

Because that's how the investment bankers and corporate executives get paid, silly.

What-- you think anybody actually gives a shit about shareholders???

HA HA HA HA HA HA HA

Wed, 11/21/2012 - 11:09 | 3001878 formadesika3
formadesika3's picture

 

cya. fire everybody.


 

Wed, 11/21/2012 - 11:07 | 3001879 Jim in MN
Jim in MN's picture

"What's all this I keep hearing about liquified Twinkies?  Why when I was a little girl all we drank was Kool-Aid, and not that awful sugar free stuff either.  Then that nice man in South America had to ruin it with his shooting spree and mass killing and.....what's that?  What? 

Oh.

Never mind."

 

--Rosanne Zerohedgidana

Wed, 11/21/2012 - 11:11 | 3001884 Monedas
Monedas's picture

Meg, this is worse than your $100 m fling for the Senate ! You are no Maggie Thatcher .... plus, the liberal media has you in their cross hairs !

Wed, 11/21/2012 - 11:09 | 3001887 Shevva
Shevva's picture

I ssssoooooooo want to comment, come on sack me already so I can comment.

Wed, 11/21/2012 - 11:13 | 3001890 orangedrinkandchips
orangedrinkandchips's picture

Fucking worthless cunt! (EDIT: Now I am not saying she is fucking cunt because she bought the company...she didnt...however...THIS is a good spot to pivot and say...HEY....LEO FUCKED UP AND BOUGHT THIS OUTRAGEOUS COMPANY AND WE WERE WRONG. FLAT OUT WRONG AND AS THE NEW CEO...I AM SORRY. NOW I WILL FIX IT STARTING WITH WRITING DOWN THE INSANITY......

 

But....having her blame the auditors!! Shit negro please!

It's the auditors fault! always is!

Gimme a break Nell, I sure deserve it!

 

Im sorry, I use to audit for a living and yes auditors are good but not going to find the shit they hide like infidelity!

 

NO...YOU OVER PAID FOR THE STUPID COMPANY.....PERIOD. NOT BRAND X PRINTER/HARDWARE COMPANY...NO...HP!

 

hilarious!

 

IM OBESE BUT IT'S NOT MY FAULT...IT'S NABISCO, LAYS, COKE, PEPSI....PANERA!

 

DENY, DENY, DENY

Wed, 11/21/2012 - 11:18 | 3001911 LouisDega
LouisDega's picture

 Its not cool to be a jive turkey so close to Thanksgiving

Wed, 11/21/2012 - 11:21 | 3001921 haskelslocal
haskelslocal's picture

What was Automomy "supposed" to have had that suggested a 150% premium?

Perhaps nothing except buddy boy payouts for the M&A team.

Thanks ZH for another nutshell breakdown. 

Wed, 11/21/2012 - 11:19 | 3001923 williambanzai7
williambanzai7's picture

Has anyone checked out what IDOL, Autonomy's so called next generation information platform which purportedly uses adaptive pattern techniques centered on Bayesian inference?

It is a bunch of smoke and mirrors. 

They thought they were buying smoke and mirrors and bought a dog instead.

Forget about the auditors, they are idiots as usual.

The malpractice was management.

Wed, 11/21/2012 - 11:34 | 3001977 marginview
marginview's picture

It’s ironic that Bayes theorem is used to update the probability of an outcome given new data. When that new data started to come in, the minute the contract was signed, HP’s probability of another takeover disaster just kept getting higher and higher.

Wed, 11/21/2012 - 11:24 | 3001937 MILESCFA
MILESCFA's picture

When I covered HP as a research analyst, there were times when "INK" provided GREATER THAN 100% of profits (ergo, all other divisions combined LOST money). From what I can tell, INK is finally topping. The real OTHER problem is that through a combination of tax laws and bonus structures, dividends are frowned upon and the mantra is "growth at all cost". Well, it cost HP $5b! The market will truly bottom for all stocks when dividend yields return to levels that provide the bulk of the "long-term 7% return", and even 4-5% on HPQ may seem reasonable under a ZIRP, it's the mkt's yield that counts - the bottom will see even higher yields (8%+)... see:  http://www.vectorgrader.com/indicators/dividend-yield

Wed, 11/21/2012 - 11:24 | 3001945 Joe Davola
Joe Davola's picture

The one upside to Obama's victory is Meg The Clueless won't be treasury secretary.  Unfortunately, we'll end up with someone as contemptible as Timmah.

Wed, 11/21/2012 - 11:25 | 3001951 marginview
marginview's picture

Yet another example of the uselessness of the extremely expensive (both in fees and cost of training the autotrons who carry it out) auditing process.

Though Deloitte's incompetency is multifaceted  -> they received 40 million in consultancy fees for a software system that had to be completely scrapped.

http://www.independent.ie/national-news/three-ministers-160m-and-one-dud-system-234630.html

Wed, 11/21/2012 - 11:26 | 3001954 glenlloyd
glenlloyd's picture

Hasn't that been Obama's mantra for quite a while now?

We didn't do that, somebody else did!

Whitman's killing HP....lol

Wed, 11/21/2012 - 11:26 | 3001958 the not so migh...
the not so mighty maximiza's picture

Quick, get Carla Fiornicator back, lets blow up HP the way its supposed to be done.

 

Wed, 11/21/2012 - 11:31 | 3001972 orangedrinkandchips
orangedrinkandchips's picture

Seriously, if Meg wanted to do it right, she would take the blame for overpaying and getting duped in the first place. She didnt get duped but she walked into the deal.....SO......CUT LOSSES LIKE YOURE DOING AND ACCEP THE BLAME.

 

DOUBLE EDGE SWORD....they boost the numbers and HP doesnt look at shit and just writes a check.

 

two tears in a bucket.....

Wed, 11/21/2012 - 11:46 | 3002012 bankonzhongguo
bankonzhongguo's picture

I am pretty sure my kids would run a lemonade stand better.

HP.  What a joke.

Wed, 11/21/2012 - 12:10 | 3002119 overmedicatedun...
overmedicatedundersexed's picture

it seems making anything computer related better have an apple on it..I miss the orange but that was long ago.

Wed, 11/21/2012 - 11:48 | 3002024 SoundMoney45
SoundMoney45's picture

Hopefully the HP board will sell what remains of HP to Oracle before their next mis-step.

Wed, 11/21/2012 - 12:02 | 3002082 azzhatter
azzhatter's picture

I loved Whitman's comments yesterday that Autonomy's margins were not the 45% we were led to believe they were. Just admit it, you blew the due dilligence and you got an ass raping and move on. Toilet and Douche probably sent in their usual 24 year olds to do the audit based on everything Autonomy told(sold?) them. Move along Meg, Leo put one in you sideways

Wed, 11/21/2012 - 12:46 | 3002265 ThisIsBob
ThisIsBob's picture

Couldn't happen to a nicer person.  But then I don't know her and she doesn't know me.

Wed, 11/21/2012 - 12:02 | 3002083 NEOSERF
NEOSERF's picture

Perhaps someone should audit Apothekers Swiss bank account...preferably not Deloitte.

Wed, 11/21/2012 - 12:11 | 3002129 Raymond K Hessel
Raymond K Hessel's picture

The choice between goodwill and intangible assets is based on management's strategy on how it wants to book impairments over time.  

Other intangible assets have to be amortized over time but goodwill is checked every year.  Both are intangible assets but goodwill is the plug when you're done valuing brands, patents, customer lists, etc.

The more assets you assign to intangible assets, the smaller goodwill gets.  

Intangible assets, like other assets, depreciate over time.  Goodwill is checked for impairment and written down every year.

If you like to smooth your profits over time, you intimate to your valuation guys that you want to see a lot work done on the intangible assets.

If you like to have more control over your expenses, say if you don't know who will win the election so you don't know where taxes & regs will be in 2013, you intimate, never outright tell them, to your valuation guys that you want to see more allocated to goodwill.

The split between intangible assets and goodwill is about managing earnings and tax strategy.  This write down is clearly a decision based on where HP thinks taxes will be in 2013 more than anything else.

Wed, 11/21/2012 - 12:17 | 3002149 Offthebeach
Offthebeach's picture

Anyone seen Angelo Mozilo around lately?

Wed, 11/21/2012 - 12:22 | 3002169 j0nx
j0nx's picture

Check out the account balances on ALL of those who stood to gain by this deal on all sides and your answer lies there. Will anything be done to them? Doubtful. Would anything be done to you and I if we did something similar? You bet your ass. These things continue to happen because the people allow them to continue happening. There is your answer and your ZEN conclusion for the day.

Wed, 11/21/2012 - 13:23 | 3002394 hidingfromhelis
hidingfromhelis's picture

It hurts to admit, but I've overpaid for Goodwill too.  Yes, there have been times where I paid $4.99 for a pair of pants only to see the green tag items at 50% off the following week.  Can you imagine the horror?  Wish I'd had a firm like Deloitte & Touche looking out for my best interests, because I know they'd never tell me what they thought I wanted to hear.

Wed, 11/21/2012 - 13:35 | 3002442 Jack Sheet
Jack Sheet's picture

This has all been done before.

http://en.wikipedia.org/wiki/Olympus_scandal

Wed, 11/21/2012 - 13:37 | 3002446 MoneyandPolitics
MoneyandPolitics's picture

Actually, the impairment and explanations make perfect sense. Weil, along with the vast majority of the investing public, need an M&A accounting tutorial particularly regarding the subject of goodwill.  

When you buy a software company, or any type of services company for that matter, you’re largely purchasing the knowledge and knowhow of the enterprise. This means that there are few physical assets (buildings, machines, etc.) and likely minimal working capital assets involved.

To value the target, a buyer comes up with a DCF model utilizing expectations of future revenues and margins and growth for the target. In the case of Autonomy, HP’s model suggested the company was worth $11 billion. HP then values the assets and liabilities on Autonomy’s balance sheet to come up with a net asset value. This net asset value is normally increased with identifiable intangible assets, such as customer lists, trade names and other soft assets.

The difference between the DCF valuation ($11 billion) and the adjusted net assets (net balance sheet assets + identifiable intangible assets) is goodwill.

As someone who published on the accounting chicanery of Autonomy I can tell you exactly what happened and why the goodwill was impaired. First, the margin assumption in the DCF model was incorrect because Autonomy was overcapitalizing development relative to amortization, thereby reflecting an unsustainably high operating margin. Second, the company appeared to be accelerating the recognition of revenues, as evidenced by outsized growth in accounts receivable and a decline in deferred revenue (this was partially obscured by Autonomy’s own acquisition activity).

After HP adjusted the DCF model for lower margins and lower revenue growth the original $11 billion enterprise valuation was no longer supportable, thereby necessitating the impairment of goodwill (and the other soft assets created as part of the acquisition accounting process).

Why HP missed this in its due diligence is really the question. I don’t have access to the internal books yet I figured it out using Autonomy’s own public filings.   

Wed, 11/21/2012 - 21:20 | 3003724 ArsoN
ArsoN's picture

solid post.  thanks.  

Wed, 11/21/2012 - 13:55 | 3002515 ArsoN
ArsoN's picture

their laptops suck too

Wed, 11/21/2012 - 18:02 | 3003378 dark pools of soros
dark pools of soros's picture

Unions are killing this company!! Without unions they are having a hard time blaming someone besides them!

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