Counterparties: Where synergies go to die

November 20, 2012

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HP has become the place where synergies go to die. In its earnings release today, HP said it has taken an $8.8 billion writedown, caused by what it calls “serious accounting improprieties” at Autonomy, a software company it acquired for $11 billion in August 2011. This, as David Benoit notes, is HP’s second acquisition-related $8 billion writedown of the year.

HP is furiously pointing fingers: in a statement, the company said there was a “willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics”. And CEO Meg Whitman told analysts that Deloitte had signed off on Autonomy’s accounts, with KPMG signing off on Deloitte. Still, only $5 billion of this quarter’s write down came from Autonomy’s accounting; the rest  came from those pesky “headwinds against anticipated synergies and marketplace performance”.

There’s a strong case that HP should have smelled a rat. Bryce Elder points to “a decade’s worth of research questioning Autonomy’s revenue recognition, organic growth and seemingly flexible definition of a contract sale”. Then there’s the scathing statement which came about a month after the HP sale, in which Oracle revealed that it too had looked at Autonomy, but considered the company’s $6 billion market value to be “extremely over-priced”. Lynch, for his part, says that he was “ambushed” by the allegations.

Earlier this year, the FT reported that the Autonomy deal was already bordering on disastrous. Autonomy employees compared HP’s bureaucracy to “being water-boarded”, and very early on, there was a troubling lack of revenue:

[HP’s] overall software division saw second-quarter revenues rise just $173m from the same period last year, which was before the Autonomy deal. Given that Autonomy had quarterly revenues of around $250m before it was acquired, this implies a significant slowdown at either Autonomy or HP’s other software operations.

The Autonomy purchase was driven by Leo Apotheker, who reportedly delivered an impassioned plea to HP’s board to buy Autonomy, even at a pricey valuation 11 times revenue and despite the protests of HP’s CFO. His words were a classic self-fulfilling prophecy: “This company is a burning platform.” — Ryan McCarthy

On to today’s links:

Crime And/Or Punishment
Former trader at SAC unit charged in $276 million insider trading scheme – SEC
Former UBS trader responsible for $2.3 billion loss found guilty of fraud – Dealbook

Hank Greenberg will not be getting his $25 billion back this week – Matt Levine

New Normal
American manufacturing is coming back. Manufacturing jobs aren’t – Neil Irwin

Primary Sources
Bernanke: Fed policy is helping, but it’s time for fiscal policy makers to help boost the economy – Federal Reserve

US GDP growth “in excess of 3% a year… is gone forever” – Jeremy Granthan

It’s wedding season in India — buy gold! – Mine Web
Credit, forget it: Reserve Bank of India bans bank loans to purchase gold – WSJ

A Chinese company will give its employees a $180 bonus for falling in love with a coworker – World Crunch

Washington insiders think Wall Street overestimates DC’s competence – The Hill

JP Morgan
JPMorgan has a new CFO – Dealbook

How MDMA helps patients with PTSD – NYT

Confessions of a deficit denier – Anatole Kaletsky

The “blob” may not be able to keep Elizabeth Warren off the Senate Banking Committee – CNBC

Popular Myths
The US deficit is already shrinking at the fastest pace since WWII – Investors Business Daily

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