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Hewlett-Packard Company’s (HPQ - Analyst Report) decision to buy U.K-based business software maker Autonomy Corp. seems to have compounded the challenges already being faced by the tech giant after accusations of accounting irregularities surfaced recently. The disclosure of certain accounting misappropriations in Autonomy’s financials has made the buyout more costly.

Earlier this week, H-P reported its fourth quarter results. The company incurred loss per share of $3.49, which resulted from a gruesome non-cash impairment charge of $8.8 billion.

The charge was mainly to set off the effect of the Autonomy acquisition and certain issues related to the recent trading value of its stock. 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.

Looking Back

In August 2011, the then H-P CEO Leo Apotheker announced a major restructuring plan, focusing more on the high-growth and high-margin businesses. The restructuring plan involved the divestiture of H-P’s lower-margin PC business, disposal of the webOS business and the buyout of U.K-based business software maker Autonomy Corp. Though the idea of spinning off the PC business was dropped later on, the closure of the webOS business did not make a difference to H-P’s financial results.

Autonomy, a specialized provider of unstructured data analytics and data management software, was purchased for a premium price of $11.1 billion. The acquisition of Autonomy was expected to strengthen H-P’s software offerings. Management also expected the unit to be accretive to non-GAAP earnings per share within the first full year of completion, i.e. by the fourth quarter of fiscal 2012.

The Curtain Raiser

After complete integration, Autonomy started contributing to H-P’s Software segment revenues from the fourth quarter of 2011. Management felt that the market and competitive positioning of Autonomy’s cloud offerings would remain strong and undertook initiatives to improve the performance of the unit to match market demand. Eventually, during the second quarter of 2012, the H-P chief replaced Mike Lynch (founder of Autonomy) with Bill Veghte as the Software division’s executive vice president.

After Mike’s departure, a senior official from Autonomy’s leadership team brought the accounting missteps to management’s notice, which promptly responded to the situation with a thorough investigation of Autonomy’s financial reports before the takeover. The PC emperor has also sought advice from the SEC's Enforcement Division and the UK's Serious Fraud Office.

Bloomberg reports that counsel for H-P revealed the possibility that more than $200 million of Autonomy’s revenue had been recorded improperly over a two-year period starting 2009.

Let the Show Begin!

H-P chief, Meg Whitman has expressed the opinion that this unfair act was performed to mislead shareholders and potential buyers. H-P also plans to file a civil suit against Autonomy’s former accounting firm, Deloitte LLC.

The accounting firm, however, is denying the allegations, saying that there was no evidence of any misappropriation. The firm stated that the auditors were not hired by H-P to make a due diligence study before the purchase.

Mike Lynch is not backing down, either. He stated that the existence of any improprieties of approximately $200 million would not add up to such a huge charge. Instead, he has taken a dig at the computing giant alluding to the fact that H-P was using Autonomy as a means to cover up its own inconsistencies.

Nationally accredited shareholder-rights law firm, Hagens Berman Sobol Shapiro LLP has reportedly started looking into the matter. The firm will find out H-P’s stand in this case –that of a real victim or a game changer trying to shadow its failure in assessing Autonomy’s financial position before bidding for it.

As per Bloomberg, the FBI has also started investigating the matter.

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), Palm Inc. (in 2010) could be worth mentioning in this respect.

But we believe that there is a silver lining, as Autonomy’s products are not going anywhere.

Though overall revenues have been slowing down, the Software segment has remained a bright spot over the past few quarters. Autonomy no doubt helped, though its exact contribution remains unknown. Moreover, management remains committed to Autonomy and intends to invest continuously to nurture its potential.

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.

Currently, H-P has a Zacks #4 Rank, implying a short-term Sell rating given the growing uncertainties in its core computing market. It competes with Dell Inc. , which has a Zacks #5 Rank, implying a short-term Strong Sell rating.

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