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Recent operational failures at Hewlett-Packard Co. are providing investors with valuable lessons.
On Nov. 20, H-P said it wrote off $8.8 billion of accounting goodwill for the $11 billion it paid to acquire Autonomy Corp. in October 2011. Amazingly, this came on the heels of an $8 billion August write-down of its $13.3 billion purchase of EDS in 2008.
H-P bought Autonomy, a U.K.-based software company, to expand its offerings in cloud computing and data search. H-P has since charged that Autonomy misrepresented its gross profit margin and miscategorized $200 million in revenue before the acquisition. H-P is now under new management, led by Meg Whitman, who also was an H-P board member at the time of the Autonomy acquisition.
The fraud allegations have spawned heated finger-pointing among participants in the barely year-old acquisition. Former Autonomy CEO Mike Lynch has vehemently denied the fraud and fired off a letter challenging H-P’s board to respond to a series of questions. Leo Apotheker, H-P’s CEO at the time of the acquisition, issued a statement saying the due diligence on Autonomy was “meticulous.”
With a whole multitude of parties being pulled into the fracas—including the H-P board, former CEOs, the investment bankers, accountants and lawyers that advised H-P on the deal—and with the motives of current H-P management also in question, one observer was moved to call the situation a “circular firing squad.”
To top it off, a review of H-P’s proxy statements over the past decade shows a nauseating level of pay and severance packages doled out throughout the wealth destruction.
In just the past two years, H-P’s long-term debt doubled from $15 billion to $30 billion to fund the acquisitions and a series of poorly timed stock buybacks. During 2010, the company repurchased $11 billion of H-P stock at prices above $40 per share. Last year, another $10 billion was spent in buybacks at an average price near $30. Today, H-P’s stock trades for about $12.50 per share.
Still, the problems at H-P were not necessarily news to a few savvy investors. Last summer, renowned short-seller Jim Chanos called the company the “ultimate value trap,” citing accounting concerns.
Oracle passed on acquiring Autonomy when it was being shopped around, saying a $6 billion value on the company was “extremely overpriced.”
And the fact that Frank Quattrone was the adviser shopping Autonomy should have been enough to have kept H-P’s checkbook in its pocket. Quattrone was a key banker instrumental in separating IPO investors from their money during the tech bubble.
Sadly, the once-iconic H-P, a component of the Dow Jones industrial average, has been reduced to a turnstile of overpaid management presiding over a series of poor capital-allocation decisions that have taken shareholders to the woodshed.
The H-P saga portrays the huge importance the capital-allocation function plays in deciding ultimate shareholder wealth. In this case, management decisions destroyed shareholder value and have diminished a once-proud company.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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