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Hewlett-Packard Company (HPQ - Analyst Report) recently agreed to settle a lawsuit related to the acquisition of Autonomy, a specialized provider of unstructured data analytics and data management software, which was purchased for a premium price of $11.1 billion.

According to the litigation, the attorneys on behalf of the shareholders (namely Cotchett, Pitre & McCarthy, LLP, and Robbins Geller Rudman & Dowd LLP) alleged that H-P’s board members including H-P chief, Meg Whitman was well aware of the accounting frauds and that they did not examine Autonomy’s financial statements well before signing the deal.

Per the settlement, all claims against H-P’s directors including CEO Meg Whitman, arising out of the Autonomy acquisition will be dismissed. The settlement of the civil lawsuit was filed in the United States District Court by H-P’s shareholders.

The accounting irregularities related to the acquisition of U.K-based business software maker Autonomy Corp had the 73-year old tech giant recording a huge impairment charge of $8.8 billion in its fourth quarter 2012 results. The bulk of the charge (roughly $5.0 billion) was to nullify the improper accounting practices relating to Autonomy’s financials prior to the acquisition.

The lawsuit was filed, following the announcement, in Nov 2012. H-P alleged that the disclosure of certain accounting misappropriations in Autonomy’s financials has made the buyout more costly.

However, all these allegations have been denied by Autonomy founder Mike Lynch. H-P’s much-hyped Autonomy acquisition was marred by several lawsuits by investors who claimed that they were misled by the above-mentioned irregularities.

Conclusion

Over the years, H-P has made many strategic acquisitions but some of those failed to live up to their respective purchase considerations and add value to the tech giant. The acquisitions of Electronic Data Systems Corp. (in 2008) and Palm Inc. (in 2010) are cases in point.

Although, the Autonomy acquisition has put the company into a financial mess, it furthers H-P’s strategic goal of focusing on the software business. We consider this a positive because it is likely to achieve its long-term profitability. Despite the slowdown in overall revenues, the Software segment has remained a bright spot in the past few quarters. 

Autonomy no doubt helped, though its exact contribution remains unknown. We believe that successful efforts to transform Autonomy into a Software revenue driver would boost Meg Whitman’s stand as a CEO and would eventually bring back investor trust.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from IBM (IBM - Analyst Report) and Oracle (ORCL - Analyst Report) should also not be discounted.

Currently, H-P has a Zacks Rank #3 (Hold). Investors can also look at Micron Technology (MU - Analyst Report), which has a Zacks Rank #2 (Buy).

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