Long before Hewlett-Packard (HPQ) paid $11 billion for what turned out to be its disastrous purchase of Autonomy, a handful of industry experts were raising red flags about the British software company's accounting practices and claims of continuous growth.
HP said this month that it only recently discovered what it characterized as fraud and other problems that made it realize it spent billions of dollars too much on the deal. But a vocal group of critics -- albeit a minority at the time -- were sounding alarms about the company as far back as 2007.
In a 2009 report, for instance, one analyst termed some of its financial statements "wrong and misleading." The following year, another said its "earnings momentum appears to be negative." And after HP announced its plan to buy the company in August 2011, a third analyst predicted the acquisition would "destroy" HP's stock value.
With sales of their computer gear faltering, HP's leaders had desperately hoped to transform the company with Autonomy's products. But the transaction has turned into one of the most embarrassing debacles in the storied Palo Alto corporation's history. And many critics contend HP never should have done the deal given what some experts had long been saying about the software company.
"Our concern was the organic growth that Autonomy was reporting was overstated," said Dan Mahoney, research director at CFRA, summarizing the skepticism of other analysts. While not alleging fraud, Mahoney said his forensic accounting firm began sounding alarms in reports to its investor clients in 2007, adding "it seemed like they were constantly moving things around in their financial statements to make things appear better than they are."
HP now admits it erred in paying what it did, claiming it was duped about the British company's sales. But while acknowledging in a statement to this newspaper that it had been aware of apprehensions expressed about Autonomy, it said it had "relied on the audited financial statements and the representations of Autonomy's management and its auditors."
In an interview with CNBC two weeks ago, Meg Whitman, who had been on HP's board when the deal was announced in August 2011 and became CEO in September, a month before the Autonomy purchase was finalized, said "I regret that I voted for this deal but we are where we are."
Whitman added that "after we announced the acquisition there were a number of blogs that came to the fore about potential issues at Autonomy." But she said "the former management team ran that to ground and came up with the conclusion that there was nothing there ... Obviously we know different now."
HP has asked U.S. and British regulators to conduct a "civil and criminal investigation" of the transaction, but Autonomy's former CEO Mike Lynch has denied his company misrepresented its finances.
Founded in 1996, the software company was little known in the United States, but favored by many European investors because of its record of rapid growth and its reputation for cutting-edge technology. With its sophisticated search engine for analyzing commercial data, Autonomy made an attractive purchase for Leo Apotheker, who was hired to be HP's CEO in November 2010 at a crucial time for the computer giant -- after a previous CEO had been forced out and as new technology trends were threatening to undercut HP's business.
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