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  • Writer's pictureJeff Matthews

The Question We’d Like to Have Heard Today

When your company reports a loss per share of $6.41, or roughly half your own stock price, thanks in good measure to the write-off of most of the book value of a $10 billion acquisition [actually $11.1 billion by the time it closed thanks to currency moves] you made barely one year ago, you should probably let more than nine analysts ask questions on the earnings call…especially when you’re going to blame almost everybody but your own employees for the horrible, terrible, no-good, very bad acquisition.

But HP management, keeping up a pattern of playing the Wall Street fiddle about as well as a public company management can play it, did just that, mainly by yammering for a very long period of time from the “script” before opening the call to questions.

Here’s how CEO Meg Whitman (not the architect of the Autonomy acquisition, but now serving as the undertaker) spun the deal before the Q&A:

“Autonomy remains a work in progress as we move this business from start up to grown up. There is a big market opportunity for this business but operational improvements are needed to take full advantage of these opportunities. While we expect these efforts will improve the future of our Autonomy business, we announced today an $8.8 billion non-cash impairment charge related to Autonomy. Let me spend a moment giving you some detail about the situation.

“The majority of this impairment charge is linked to serious accounting improprieties, disclosure failures, and out right misrepresentations that occurred prior to HP’s acquisition of Autonomy [emphasis added] and the associated impact on the expected financial performance of the business over the long term. The balance of the impairment charge is linked to the recent trading value of HP stock. These improprieties were discovered through an internal investigation after a senior member of Autonomy’s leadership team came forward following the departure of Mike Lynch on May 23.

“Based on this information, HP initiated an intense internal investigation into the allegations, including a third party forensic review of Autonomy’s historical financial results. HP has contacted the SEC’s Enforcement Division and the UK’s Serious Fraud Office. We have requested that both agencies open criminal and civil investigations into this matter. In addition, HP intends to seek regress against various parties in the appropriate civil courts to recoup what we can for our shareholders.

“I want to stress that we remain 100% committed to Autonomy and its industry leading technology. We will continue to fully support our new and existing customers and we believe Autonomy’s technology will play a significant role in our growth strategy over the long term. To that end, we recently announced Robert Youngjohns as Senior Vice President and General Manager our Autonomy IM business unit. Robert is a seasoned software executive who was most recently President of Microsoft North America.”

The second way HP assured itself of a Q&A session lacking fireworks was that those nine analysts who were allowed to ask questions are all polite sell-siders, as opposed to actual, angry HP shareholders. And polite sell-siders are not going to ask the really juicy questions you’d want to hear asked. Still, the first analyst, Ben Reitzes, of Barclays, gave it a reasonable shot out of the gate:

Ben Reitzes

“Yes, thanks a lot. Meg, with regard to the Autonomy situation, we understand what you’re doing in terms of going after the folks that you feel misled you but what about internally? Whose responsible internally for the acquisition, how are you analyzing yourself internally, the Board, I think everybody at the Board was there when the Autonomy decision was made except for Mr. Whitworth, so what’s the, what are you doing internally to make sure that you have the right processes and who are you holding accountable internally if anyone to make sure this doesn’t happen again and that maybe even there’s some folks internally that need to be held responsible and we could see repercussions of this in the near future. How are you looking at it internally?”

Meg Whitman

“Yes, well first of all, the CEO at the time and the Head of Strategy who lead this deal are both gone…[emphasis added] With regard to the Board you’re right. Most of the Board was here and voted for this deal and we feel terribly about that. What I will say is the Board relied on audited financials, audited by Deloitte, not Brand X accounting firm but Deloitte and by the way, during our very extensive due diligence process, we hired KPMG to audit Deloitte, and neither of them saw what we now see after someone came forward to point us in the right direction. That said, obviously, we have not done any big acquisitions and we will review the acquisition process.

“What I will say is due diligence and M&A now reports to our Chief Financial Officer. At the time when I came to the Company I was surprised to find that due diligence and M&A reported to strategy as opposed to the Chief Financial Officer. I’ve never seen that before in my career and that’s a decision I made right away before I knew any of this, so I understand your point of view and we have made a few changes in that regard but in the end, you have to rely on audited financials [emphasis added] and we did and we will now carry on and as you know we’ve reported this to the SEC as well as the serious fraud office and we will take it from here.”

Ben Reitzes

“And in terms of internal personnel though, based on what you see right now the organization can remain stable based on this occurrence?”

Meg Whitman

“Yes, it can. I mean really the two people that should have been held responsible are gone and that’s the way I see it right now so I feel good about sort of the stability it of leadership.”

Longtime readers can see where we’re going with this.

According to HP’s CEO, there were only “two people” in all of HP who “should have been held responsible” for the Autonomy acquisition, which saw the evaporation in about a year of nearly all the value ascribed to what $11 billion worth of HP’s cash had been used to buy, and both those “two people” are happily gone.

But if my friend, fellow blogger and ace hedge fund manager John Hempton could have told me the Autonomy books were well and truly “dodgy” way before today’s news, based strictly on a reading of the same “audited financials” that HP’s CEO said today “you have to rely on”…then where on earth was HP’s entire senior management team, which presumably contains a few people who know as much about how the audited financials of a software company should look as a guy in Australia reading 10Ks and 10Qs, when this deal was getting done? Out of the office making a Peets coffee run?

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2012) Available now at

© 2012 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.

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