HP in turmoil

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In September 2011 the American technology giant Hewlett-Packard (HP) acquired British software firm Autonomy for USD 11.1 billion.

HP

HP’s news release in October 2011 stated:

“The acquisition positions HP as a leader in the large and growing enterprise information management space. Autonomy’s software offerings power more than 25,000 customer accounts worldwide and, as part of HP, will provide high-value business solutions to help customers manage the explosion of unstructured and structured information. Autonomy offers solutions that are complementary across HP’s enterprise offerings and strengthens the company’s data analytics, cloud, industry and workflow management capabilities.”

The price of over USD 11 billion was in excess of 10 times the annual sales revenue of Autonomy.

Back in August 2011, HP had announced a set of other bold moves: to sell its PC and tablets business and re-evaluate other assets. Simply put, it sounded like HP (or Leo Apotheker) wanted to move out of the hardware business and enter the software business. The markets reacted badly. In two days the prices of HP’s shares dropped by more than a quarter (25%).

HP's Palm acquisition
HP’s Palm acquisition

The “new” strategic direction of the firm was also in stark contrast with Palm’s USD 1.2 million acquisition in 2010. All the relevant projects had to be cancelled. It is worth noting that only a few months ago, Palm’s acquisition was hailed as HP’s competitive answer to Apple!

Leo Apotheker did not survive all of this. In late September 2011, before even the Autonomy deal was sealed and signed, he was replaced by Megal Whitman. This means that Apotheker did not stay a full year at the help. He was appointed in late 2010 to replace Mark Hurd who was allegedly involved in a sexual harassment incident.

HP's CEO Meg Whitman
HP’s CEO Meg Whitman

What was the reason for the Autonomy acquisition? Reuters reports:

“In the nine months since taking the helm at HP, Apotheker had tried furiously to find a way to move the lumbering company away from its low-margin computer hardware business and into the lucrative corporate software and services arena. Apotheker was looking for a big, transformative acquisition, two people familiar with the situation said, and after overtures to several companies went nowhere, he set his sights on Autonomy.

After two months of negotiations on what was known at HP as “Project Tesla,” Apotheker sat down with Lynch at a hotel in Deauville on the Normandy coast – and shook hands on what would become an $11.1 billion deal.

The Autonomy takeover was indeed a bombshell – but not in the way that Apotheker had hoped. When it was announced in August 2011, HP’s stock plummeted amid withering criticism of the price tag. Within weeks, Apotheker was out of a job. Within months, Lynch and his new masters at HP were at war.”

Leo Apotheker
Leo Apotheker

Mr Mike Lynch, the founder of Autonomy made USD 800m out of the Autonomy deal. He was ousted from HP in March 2012, following disappointing sales for the Autonomy business, and has accused HP’s bureaucratic culture for the decline in Autonomy’s revenues. This was only the prelude to the Autonomy “saga”.

In November 2012, the Wall Street Journal reported that “…(HP said that) it had been duped into overpaying for one of its largest acquisitions, contributing to an $8.8 billion write-down and a huge quarterly loss. The technology giant said that an internal investigation had revealed “serious accounting improprieties” and “outright misrepresentations” in connection with U.K. software maker Autonomy, which HP acquired for $11.1 billion in October 2011…HP General Counsel John Schultz said the internal investigation into the Autonomy deal began in May when he told Ms. Whitman he had just spoken with a senior executive in the Autonomy software business, who had alleged that executives at Autonomy had been cooking the books before the acquisition. The identity of that senior executive couldn’t be determined.”

The Economist reported on 24th November 2012:

“HP said it was writing down the value of Autonomy by $8.8 billion, ascribing more than $5 billion of that to “serious accounting improprieties, disclosure failures and outright misrepresentations” before the deal. It named no one, but blamed “some” of Autonomy’s former managers. HP says it was tipped off by a remaining member of Autonomy’s team soon after Mike Lynch, the British firm’s founder and boss, was forced out in May. Accounting sleuths have concluded that Autonomy bloated its software sales by dressing up revenue from “negative-margin, low-end” hardware and by prematurely counting sales through resellers, a practice known as “channel-stuffing”. HP has passed its findings to the Securities and Exchange Commission in America and the Serious Fraud Office in Britain. It also says it will sue.”

HP's Share Price in USD
HP’s Share Price in USD

Leo Apotheker, who was the architect of Autonomy’s aquisition, made a statement (Source: Bloomberg) on 20th November 2012:

“I’m both stunned and disappointed to learn of Autonomy’s alleged accounting improprieties. The developments are a shock to the many who believed in the company, myself included. But I also share the sentiment of HP’s current leadership and continue to believe in Autonomy’s market potential, as its core software expertise remains sound.

Looking back on the acquisition, which closed in Sept. 2011, the due diligence process was meticulous and thorough, and included two of the world’s largest and most respected auditing firms working on behalf of HP. Since Autonomy was a public company in the UK, much of the process relied on public financial reports — accounting statements approved, filed and backed by Autonomy’s leadership, board and auditors.

According to HP, the accounting issues it discovered pre-date its acquisition of Autonomy. As such, it’s apparent that Autonomy’s alleged accounting misrepresentations misled a number of people over time – not just HP’s leadership team, auditors and directors. In fact, the alleged improprieties apparently came to light only after an internal whistleblower raised the issue in the spring, well after my departure.

I will make myself available, however I can, to assist HP and the appropriate authorities get to the bottom of this.”

Autonomy's founder Mike Lynch
Autonomy’s founder Mike Lynch

The Autonomy write down is not the only one plaguing HP.

In August 2012 the firm “said it would write down the value of its technology-services business by about $8 billion, underscoring both industry changes and singular pressures plaguing the company. The charge is one of the largest by a U.S. technology company, and an acknowledgment that HP’s $13.9 billion acquisition of Electronic Data Systems Corp. four years ago didn’t work out as intended…HP’s services business, now the company’s second biggest revenue producer behind computers, absorbed EDS in 2008 to smooth out the occasional volatility in tech hardware sales and help the company compete more effectively with International Business Machines Corp.’s tech-services division.” (The Wall Street Journal). The outsourcing of IT operations, the business model practiced by EDS, has been under a lot of pressure from Indian competitors who have a significant cost advantage. The emerging business model of cloud computing is another – even more significant – game changer.

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If we just add the two deals, disregarding the time value of money, we will see that HP paid a total of USD 25 billion for EDS and Autonomy, and then wrote down USD 17 billion. This is a lot of money, even for HP.

The company has lost more than USD 90 billion in market value since 2009.

At a meeting with analysts a year after taking over, in October 2012, CEO Whitman stated that… the frequent changes at the top of the company had caused “multiple inconsistent strategic choices, and frankly some significant executional miscues.”

Whitman blamed the computer maker’s challenges on management upheaval dating back to Carly Fiorina, underinvestment in new products and exposure to a PC business eroded by the shift to smartphones and tablets.

“The two growth engines of our company are going to be the software business and the enterprise business,” Whitman said. “Our customers make long-term investments. This start-stop of the last three years — you can’t run the railroad that way.” (Business Week)

hp_baloon

In an article published  in “live mint” there is mention of a leadership challenge: “Seventy three years after Bill Hewlett and Dave Packard worked in a car garage to start the first electronics company in what was then a valley of orange groves, Hewlett-Packard is at its lowest point ever. Over the last decade, its market cap has tumbled by nearly 60%. In a way, this is where IBM found itself in 1993 or Apple in 1997. Apple was revived by Jobs and IBM brought back from the brink by Lou Gerstner. But HP’s two Jobs’ are long dead and today’s tech CEOs hardly seem to have the ability to do what Gerstner did.”

But is leadership the only issue? Definitely not.

As Jonathan Ford mentions in his FT article, the HP problems require the CEO to think more about staff and the customers rather than the vagaries of the stock market. And this brings back the major question of HP’s strategy, or the lack of it.