Hewlett-Packard has revealed it has taken an $8.8bn (£5.5bn) writedown after "serious accounting improprieties" were discovered at Autonomy, the British tech firm it acquired in 2011 for more than $10bn.
HP called on the US and British authorities to investigate what it called "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy" before the acquisition.
The deal was brokered under HP's previous chief executive Léo Apotheker but finalised by current boss Meg Whitman, the former eBay chief and one-time candidate for governor of California, who joined the HP board in March 2011.
The losses wiped out HP's profits for the latest quarter. The company reported a net loss of $6.9bn, compared with a $200m profit in the period a year earlier. Its shares had plunged 13% by mid-morning. HP said it would attempt to recoup shareholder money by seeking "redress against various parties" in civil courts. It is understood it intends to pursue senior staff and could take action against advisers such as Autonomy's auditor Deloitte.
Autonomy founder Mike Lynch, who has flatly denied the allegations on behalf of himself and his management team, on Tuesday accused HP of destroying a "world leader" in less than a year. Speaking to the Wall Street Journal, he said he had been "ambushed" by HP, only finding out about the allegations when the company's press release appeared at 1pm UK time.
"I think what has happened here is that they have got themselves in a mess," said Lynch. "I can't understand how you can write down $9bn of value and say somehow this was all caused by something you didn't notice when you did due diligence with 300 people. It would be kind of a big elephant to have missed."
Autonomy was one of Britain's brightest tech stars and helps firms store and search data across different networks, specialising in the search of "unstructured data" such as voicemail and email. Lynch, a Cambridge tech star with a taste for koi carp and model railways, had been feted as one of Britain's most successful entrepreneurs. He initially called the merger "a historic day for Autonomy, our employees and the customers we serve". He made £500m from the sale.
The deal soon soured as angry investors accused the company of over-paying. The row contributed to the ousting of Apotheker after 10 months in the job.
Lynch left in May as HP announced 27,000 job cuts world-wide as part of a $3bn-$3.5bn cost-cutting programme.
Lynch had been close to Apotheker. He initially appeared to have Whitman's full support but blamed a lack of independence at the company for his departure. HP in turn pointed to a "significant" decline in Autonomy's core licensing revenues and said the division needed new leadership.
The Autonomy investigation is believed to have been started by a whistleblower in Autonomy's leadership who came forward after Lynch's departure. The executive alleged there had been a "series of questionable accounting and business practices" prior to the acquisition, HP said.
The whistleblower gave "numerous details" of alleged accounting irregularities about which the company said it had no prior knowledge. HP called in PricewaterhouseCoopers to do a forensic review of Autonomy's historical financial results.
Questions have been raised about how much HP knew of problems at Autonomy before the deal was approved by shareholders. A UK-based technology consultant, Alan Pelz-Sharpe, has told the Guardian he blew the whistle on Autonomy to the Serious Fraud Office in September 2011, a week before the deal closed. The SFO declined to comment. The documents Pelz-Sharpe based his allegations on were widely circulated to analysts and journalists at the time.
"They [HP] probably realised pretty quickly what they had done but by then they had done it. It was very difficult for HP to get out of that deal."
Whitman's investigation determined that Autonomy was "substantially overvalued at the time of its acquisition" owing to misstatements of financial performance, including revenue, core growth rate and gross margins.
According to HP, Autonomy mischaracterised revenue from loss-making low-end hardware sales that represented as much as 15% of the company's revenue. HP said Autonomy also presented licensing transactions where no end-customer existed at the time of sale as revenue.
"This appears to have been 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," HP said in a statement. "These misrepresentations and lack of disclosure severely impacted HP management's ability to fairly value Autonomy at the time of the deal."
The company said it had alerted the US securities and exchange commission's enforcement division and Britain's Serious Fraud Office.
A spokesman for Lynch and Autonomy's former management team said: "HP has made a series of allegations against some unspecified former members of Autonomy Corporation plc's senior management team. The former management team of Autonomy was shocked to see this statement today, and flatly rejects these allegations, which are false. HP's due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and Perella Weinberg. HP's senior management has also been closely involved with running Autonomy for the past year.
"It took 10 years to build Autonomy's industry-leading technology and it is sad to see how it has been mismanaged since its acquisition by HP."
