HP says that it overpaid for Autonomy after management lied about its finances

HP was misled into substantially overvaluing Autonomy when it acquired the software firm last year, the company revealed while disclosing its quarterly earnings today.

As a result, it announced a non-cash impairment charge of $8.8 billion, of which it says that “more than $5 billion is linked to serious accounting improprieties, misrepresentation and disclosure failures discovered by an internal investigation by HP and forensic review into Autonomy’s accounting practices prior to its acquisition by HP.”

According to HP, the investigation was triggered by a whistleblower. While he or she isn’t named, HP noted that this “senior member of Autonomy’s leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP.”

As you may know, Lynch had joined HP following the acquisition, where he was leading Autonomy as a separate business unit and reporting to CEO Meg Whitman. He then left the company in May 2012 following a “very disappointing license revenue quarter” for Autonomy. By that time, most of Autonomy’s pre-acquisition senior management team had already left HP.

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Here’s HP’s official comment on the matter, which suggests that it has been purposely deceived:

“HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP. These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal. We remain 100 percent committed to Autonomy and its industry-leading technology.”

As you can imagine, this will likely result in further investigation and lawsuits, including civil ones:

“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,” it stated. “In addition, HP is preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders. The company intends to aggressively pursue this matter in the months to come.”

In this context, HP’s decision to reaffirm its appreciation for Autonomy’s software offering is also a message to tranquilize its shareholders and control the damage; while the acquisition was overvalued, it isn’t publicly questioning the deal’s full rationale.

If you are wondering why the impairment charge isn’t of $5 billion, the company also explains that “the balance of the impairment charge is linked to the recent trading value of HP stock and headwinds against anticipated synergies and marketplace performance.”

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