Time to let the dust settle on HP’s writeoff of Autonomy goodwill

The view of HP’s claimed fraud against its acquired sub is getting murkier.  Looks like we need to let the dust settle before we decide who gets the vigilante mob’s lynching.

News filtering out now is about a lot of revenue that can be recognized under IFRS but not under U.S. GAAP. Apparently, some things we would consider to be “channel stuffing” are allowed under IFRS.

Also, there are multiple reports that Autonomy’s aggressive accounting has been known in the analyst community for years.

Finally, there is growing criticism of a very aggressive sales culture in the company.

Wow. Imagine that. 

Calling out sales people at the bottom of the production list and embarrassing people and generally being mean to sales people who don’t produce. Who’d a thunk that’d happen? Especially in a huge, rapidly growing, publicly traded software company.

I’m starting to scratch my head about whether or not HP knew exactly what it was getting into.

Looks like a number of people have been critical of the accounting for a while. I doubt those discussions were in secret.

Look at some numbers, from the other news articles backed up with HP’s 12-31-11 financials and Autonomy’s 6-30-11 financials:

• purchase info:
• 11.1B – purchase price
•   6.9B – goodwill from the purchase
•   4.2B – other amortizable intangible assets
• Income statement info:
• 931M – Autonomy’s 12 months revenue through 6-30-11
• 476M – 6 month revenue through 6-30-11
• 952M – my straight line project of annual income
• 109.1M – bottom line profit for 6 months ending 6-30-11
• 218.2M – my projection of annual profits from 6 months data

So HP paid 11.9 times annual revenue (11.1B / 931M) for the purchase.  All of the purchase price went to intangibles, other than what I assume is net zero amount to tangible assets and liabilities.

The purchase price is 50.8 times earnings (11.1B / 218.2M). 50? And that is all future earnings with only intangible assets acquired.

Some of the emerging counter claims are:

• The size of the due diligence team was in the range of hundreds of people. (The fraud was good enough for that many people to miss it?) 
• Copies of all invoices for sales over $100K were automatically sent to the auditor.
• Revenue recognized differently under IFRS than GAAP.
• A large portion of the senior staff left Autonomy after HP took over.

Some interesting reading, new today:

• Wall Street Journal– Long Before H-P Deal, Autonomy’s Red Flags

From last week:

• Jonathan Weil – Bloomberg – HP’s Explanation Still Makes No Sense
• Jesse Drucker – Bloomberg – HP’s Accounting Claims Are Seen as Cover for Bad Deals

All in all, I think it is far too early to figure out who to blame for the mess.