H.P.'s Blunder for the Record Books

The dubious title of worst corporate deal ever had seemed to be held in perpetuity by AOL's acquisition of Time Warner in 2000, a deal that came to define the folly of the Internet bubble. It destroyed shareholder value, ended careers and nearly capsized the surviving AOL Time Warner.

After the Autonomy deal was announced, Ray Lane, Hewlett-Packard's chairman, heard from disgruntled shareholders.

The deal was considered so bad, and such an object lesson for a generation of deal makers and corporate executives, that it seemed likely never to be repeated, rivaled or surpassed.

Until now.

Hewlett-Packard's acquisition last year of the British software maker Autonomy for $11.1 billion “may be worse than Time Warner,” Toni Sacconaghi, the respected technology analyst at Sanford C. Bernstein, told me, a view that was echoed this week by several H.P. analysts, rivals and disgruntled investors.

Last week, H.P. stunned investors still reeling from more than a year of management upheavals, corporate blunders and disappointing earnings when it said it was writing down $8.8 billion of its acquisition of Autonomy, in effect admitting that it had overpaid by an astonishing 79 percent.

And it attributed more than $5 billion of the write-off to what it called a “willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers,” adding, “These misrepresentations and lack of disclosure severely impacted H.P. management's ability to fairly value Autonomy at the time of the deal.”

H.P. has declined to document the basis for its charges, saying it has turned the results of its internal investigation over to the Securities and Exchange Commission and Britain's Serious Fraud Office “for civil and criminal investigation.” In an unusually aggressive public relations counterattack, Autonomy's founder, Michael Lynch, a Cambridge-educated Ph.D., has denied the charges and accused Hewlett-Packard of mismanaging the acquisition. H.P. asked Mr. Lynch to step aside last May after Autonomy's results fell far short of expectations.

But others say the issue of fraud, while it may offer a face-saving excuse for at least some of H.P.'s huge write-down, shouldn't obscure the fact the deal was wildly overpriced from the outset, that at least some people at Hewlett-Packard recognized that, and that H.P.'s chairman, Ray Lane, and the board that approved the deal should be held accountable.

A Hewlett-Packard spokesman said in a statement: “H.P.'s board of directors, like H.P. management and deal team, had no reason to believe that Autonomy's audited financial statements were inaccurate and that its financial performance was materially overstated. It goes without saying that they are disappointed that much of the information they relied upon appears to have been manipulated or inaccurate.”

It's true that H.P. directors and management can't be blamed for a fraud that eluded teams of bankers and accountants, if that's what it turns out to be. But the huge write-down and the disappointing results at Autonomy, combined with other missteps, have contributed to the widespread perception that H.P., once one of the country's most admired companies, has lost its way.

Hewlett-Packard announced the acquisition of Autonomy, which focuses on so-called intelligent search and data analysis, on Aug. 18, 2011, along with its decision to abandon its tablet computer and consider getting out of the personal computer business. H.P. didn't stress the price - $11.1 billion, or an eye-popping multiple of 12.6 times Autonomy's 2010 revenue - but focused on Autonomy's potential to transform H.P. from a low-margin producer of printers, PCs and other hardware into a high-margin, cutting-edge software company. “Together with Autonomy we plan to reinvent how both structured and unstructured data is processed, analyzed, optimized, automated and protected,” Léo Apotheker, H.P.'s chief executive at the time, proclaimed.

Autonomy had already been shopped by investment bankers by the time H.P. took the bait. The pitch book was prepared by Qatalyst Partners, founded by Frank Quattrone, the Silicon Valley investment banker whose 2004 conviction on witness tampering and obstruction of justice was reversed on appeal. Qatalyst projected double-digit revenue and earnings growth in both 2011 and 2012, and suggested a visionary future of great opportunities: “The secular migration towards unstructured data has created a large and meaningful addressable opportunity in managing, regulating and monetizing the use of information.”