You are a forensic accountant who has been engaged by your client, Magical Technology, Inc., to report on certain aspects of the disastrous acquisition of the UK based software company Autonomy by Hewlett-Packard. Your client wants to understand what went wrong and who was responsible for this terrible financial mess so they would like to know what “red flags” should have been identified. Your client wants to avoid making a similar mistake so has asked for your help. You have a summary of the acquisition and have agreed with your client that you will perform the following procedures in order to be in a position to report to your client by Thursday June 10:
- You will listen to an interview by the BBC of current H-P CEO Meg Whitman where she discusses the acquisition. You will not have time to interview anyone from H-P or Autonomy so you have agreed to use this interview to help you focus on the key questions. Interview of Meg Whitman by Rory Cellan-Jones of the BBC in 2013. web link: on separate page.
- You will then conduct your research using information from the internet and company regulatory filings in order to better understand the issues. Keep in mind that there is a great deal of information available and you have a limited amount of time to come to any conclusions.
- You will summarize your findings in a report addressed to your client. Your client has asked you to address the two questions included at the end of this summary. Be careful in determining the format of your report as you want it to be logical and orderly so your client can understand. This is a complex event and keeping your report to two pages may be difficult.
Summary of transaction and related events
Hewlett-Packard, an iconic American technology company, acquired Autonomy , a young emerging UK software company, for $11.1 billion during August 2011. This was considered to be a transformative acquisition for H-P as this would make them a player in the emerging “big data” field of data and analytics software. The following are key events related to the acquisition:
- August 2011- Acquisition completed and Wall Street reacts negatively- stock tanks
- September 2011- H-P CEO fired
- May 2012- Autonomy founder and CEO fired
- October 2012- H-P records an expense of $8.8 bill to write off 80% of assets related to Autonomy and accuses Autonomy founder of fraud ($5 bill)
- November 2012- SEC, Dept of Justice, UK Serious Fraud Office investigate the acquisition
- January 2015- UK Serious Fraud Office closes investigation, cedes jurisdiction to US
- November 2016 Former CFO of Autonomy convicted of fraud (inflating revenue)
- January 2020 HP fraud trial in UK ends and judge’s decision pending
Questions to address in your report
- Can you identify red flags that should have caused HP to be very careful in their due diligence? Perhaps you should group these into categories such as cultural, accounting department attitudes, accounting issues, and due diligence concerns.
- How did H-P come to the conclusion a little over a year later that their valuation of the business was grossly overstated? given that they had skilled advisors helping with projections and valuation that supported the valuation at the time of the acquisition? Big Hint; Look into the market capitalization reconciliation proceed
- https://www.bbc.com/news/av/technology-22094466 (interview link)
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