HP woes deepen with bad deal writedown

Hewlett-Packard's woes deepened Tuesday as the US tech giant reported a massive loss, blaming deliberate financial misstatements from a British software firm it bought last year. HP called for a probe by US and British authorities of software maker Autonomy, saying "accounting improprieties" before the acquisition led to an "overvalued" acquisition price, which forced HP to take a huge writedown in value. HP's share price tumbled 11.95 percent to close at $11.71, as the new woes weighed on the US computer giant already struggling with a changing technology landscape. The bombshell came when HP said it was taking a writedown of $8.8 billion, largely because of the reduced value of the software company acquired just over a year ago. While writedowns under accounting rules are not unusual for slumping firms, HP said this was a case of deliberately misleading statements by Autonomy that went unnoticed until now. "HP has referred this matter to the US Securities and Exchange Commission's Enforcement Division and the UK's Serious Fraud Office for civil and criminal investigation," HP said, as it announced a big hit to earnings. The California firm said it was also "preparing to seek redress against various parties in the appropriate civil courts" over the losses. HP announced the news as it reported a $6.9 billion quarterly loss. The company was pushed into the red by the writedown, of which $5.5 billion was linked to Autonomy and the rest to the slumping value of HP's own share price. The announcement triggered stunned reactions from people involved in the Autonomy deal, and skeptical comments from analysts about HP's future. HP chief executive Meg Whitman, who took over after the acquisition, said "the two people that should have been held responsible are gone" but noted that board members and others were not alerted by financial reviews from well-respected auditors. "The board relied on audited financials, audited by Deloitte, not brand X accounting firm but Deloitte," she said. "We hired KPMG to audit Deloitte, and neither of them saw what we now see." An HP statement said "some former members of Autonomy's management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company." "These efforts appear to have been a willful effort to mislead investors and potential buyers." HP said it launched an internal investigation "after a senior member of Autonomy's leadership team came forward," prompting a fresh review by PricewaterhouseCoopers. As a result, HP said it "now believes that Autonomy was substantially overvalued at the time of its acquisition." Former HP chief Leo Apotheker, who spearheaded the Autonomy deal in 2011 before being forced out, said he was "stunned and disappointed" by the allegations, and claimed there was a "meticulous and thorough" review before the deal closed. Mike Lynch, founder of Autonomy, told The Wall Street Journal the allegations were "completely and utterly wrong." The news added to woes at HP, which remains one of the world's biggest PC makers but has been struggling to keep pace with a shift to mobile computing and tablets. The US computer giant closed its the fiscal year with a $12.65 billion loss. Revenues fell seven percent to a worse-than-expected $30 billion in the quarter and were down five percent to $120.4 billion for the year. "We expected bad but got worse," said analyst Peter Misek at Jefferies. Misek said that even putting aside the Autonomy problems, HP forecasts are "too optimistic." Chris Whitmore at Deutsche Bank issued a "sell" recommendation for HP, saying the latest write-down "could raise concerns around HP's internal controls... and potential for other negative surprises under the prior CEO's tenure." Brian White at Topeka Capital Markets said HP would need "heroic improvements" to turn itself around and noted that the stock is down 80 percent from 2010 highs. "HP remains a 'show me' stock and investors' patience is already running very thin," he said. "In our view, the solution is simple, make bigger and bolder decisions to right the ship, starting with divesting the PC business and cleaning up the board of directors."