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Originally published Tuesday, November 20, 2012 at 10:00 PM

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Hewlett-Packard reports massive charge; shares plummet

Hewlett-Packard revealed that it had to take a massive charge to align the accounting value of Autonomy Corp., which it bought for $10 billion last year, with its real value.

Los Angeles Times

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Hewlett-Packard reported a hefty $8.8 billion charge in its fourth quarter, largely due to serious accounting problems stemming from its 2011 purchase of a British software maker.

The Palo Alto, Calif., company released its earnings Tuesday and revealed that it had to take a massive charge to align the accounting value of Autonomy Corp., which it bought for $10 billion last year, with its real value.

The writedown, combined with a weak first-quarter outlook for struggling HP, caused shares to plunge. The company’s stock fell $1.59, or 12 percent, to $11.71.

“The majority of this impairment charge is linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy that occurred prior to HP’s acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long term,” HP said in a statement. “The balance of the impairment charge is linked to the recent trading value of HP stock.”

HP Chief Executive Meg Whitman said the company began to realize something was amiss after Autonomy founder and Chief Executive Mike Lynch left on May 23, according to The Associated Press. A senior Autonomy executive then volunteered information about the accounting improprieties, which led to an internal investigation.

Autonomy’s former top management team “flatly rejects” the allegations, according to Vanessa Colomar, a spokeswoman for Lynch. Autonomy has been mismanaged by Hewlett-Packard, she said.

Lynch said in an interview on CNBC that he wasn’t contacted by Hewlett-Packard before the company made its allegations public Tuesday.

“The big issue isn’t the fraud they’re talking about. The big issue is that HP has made acquisitions that have turned out to be a disaster,” said Lynn Turner, former chief accountant of the Securities and Exchange Commission (SEC) and a managing director at LitiNomics, an economic and forensic consulting firm.

The writedown comes after HP’s August announcement that it would take a charge of $9.2 billion, largely related to its purchase of Electronic Data Systems. When companies make an acquisition, the difference between the value of the target’s hard assets and the purchase price is known as goodwill. That gets carried on the company’s balance sheet as an asset and is reviewed periodically by public companies.

The Autonomy and EDS writedowns together total $18 billion, while Hewlett-Packard’s balance sheet as of April showed almost $45 billion in goodwill.

“Those were decisions approved by the board and they raise serious questions about the competency of the board and management team,” Turner said.

The case has been referred to the U.S. Securities and Exchange Commission and the UK’s Serious Fraud Office, The AP said, citing Whitman. HP will also try to recoup some of what it paid for Autonomy through lawsuits.

Autonomy is a software company that helps organizations understand the meaning in information, according to the firm’s website: “A pioneer in its industry, Autonomy’s unique meaning-based technology is able to make sense of and process unstructured, ‘human information,’ and draw real business value from that meaning.”

HP’s fourth-quarter revenue was $30 billion, down 7 percent from the same quarter in 2011 and down 4 percent when adjusted for the effects of currency. The company reported a loss of $6.9 billion, or $3.49 per share, compared with a profit of $200 million, or 12 cents per share, a year earlier.

Across business categories, personal systems revenue was down 14 percent year-over-year; printing revenue declined 5 percent; services revenue fell 6 percent; and enterprise servers, storage and networking dropped 9 percent.

Software revenue, however, grew 14 percent year over year, including the results of Autonomy.

For the first quarter of fiscal 2013, HP estimated earnings per share to be in the range of 34 to 37 cents.

Material from Bloomberg News is included in this report.

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