Hewlett-Packard has revealed that it has taken an $8.8bn (£5.5bn) charge after "serious accounting improprieties" were discovered at Autonomy, the British tech firm it acquired in 2011 for more than $10bn.
The Silicon Valley giant called on the US and British authorities to investigate what it called "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy" that occurred prior to HP's acquisition.
The deal was brokered under HP's previous chief executive Leo Apotheker but finalised by current boss Meg Whitman, the former eBay chief and one-time California gubernatorial candidate.
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. The company's shares had plunged 13% by mid-morning. HP said it would "seek redress against various parties" in civil courts.
Autonomy was one of Britain's brightest tech stars and helps firms search data across different networks, specialising in the search of "unstructured data" such as voicemail. Founder Mike Lynch, a Cambridge tech star with a taste for koi carp and model railways, had been hailed as Britain's answer to Bill Gates. He initially called the merger "a historic day for Autonomy, our employees and the customers we serve". He had made $800m from the deal.
But the deal soon soured as angry investors accused the company of over-paying, anger that contributed to the ousting of Apotheker after just 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. The company 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.
The investigation determined that Autonomy was "substantially overvalued at the time of its acquisition" due 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 Securities and Exchange Commission's (SEC) enforcement division in the US and the UK's Serious Fraud Office.
A spokesman for Lynch and Autonomy's former management team told the Guardian: "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."
