PwC finds $5bn black hole in HP's Autonomy deal

by Kevin Reed

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20 Nov 2012

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Driver in Formula One Autonomy team car

A PwC REVIEW has led to the discovery of "accounting improprieties and disclosure failures" in former FTSE100 UK technology business Autonomy, which has forced its acquirer, HP, to write off more than $5bn (£3.1bn) from the deal.

The firm was called in by HP to undertake a forensic review of Autonomy's accounting practices prior to its acquisition. The review was part of an investigation that HP said was sparked by a whistleblower from within Autonomy, described as a "senior member of Autonomy's leadership team", who said there were "questionable accounting practices" at the UK business prior to its acquisition.

HP now believes that Autonomy was substantially overvalued at the time of the deal.

"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," it said in a statement to investors.

"These efforts appear to have been a wilful 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% committed to Autonomy and its industry-leading technology."

A non-cash impairment charge of $8.8bn related to Autonomy was announced in HP's Q4 2012 statement. More than $5bn is linked to the accounting misrepresentations discovered during the investigation. The balance related to the trading of HP stock and a revaluation of autonomy's future performance – and the synergies from the deal.

An example given by HP of the misrepresentations include negative-margin hardware sales mis-described as ‘license revenue', which affected future growth calculations. These negative-margin sales are estimated to represent 10%-15% of Autonomy's revenues.

The Securities and Exchange Commission, and the Serious Fraud Office, have been notified of the issue by HP.

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