Ouch! Just when it seemed things could not get any worse for Hewlett Packard (HPQ) shareholders, news came out that the company would be taking a $8.8 billion charge for the "Autonomy" acquisition it made for about $11.5 billion last year. HP CEO Meg Whitman went on CNBC to discuss the issue in an interview, stating:
"We believed there is a willful effort on the part of certain members of Autonomy management to mislead shareholders when Autonomy was a publicly traded company, and to mislead potential buyers including HP, Whitman said. "We stand by the forensic review that we've seen," she added.
That leads one to wonder who might be sought after or involved in a potential attempt to recover monies, if the HP claims are proven as true. A CNBC article gives details on the position Autonomy's auditor is taking in the wake of this news, and it states:
Deloitte, the accounting firm that audited Autonomy prior to its acquisition by HP, said that it "categorically denies that it had any knowledge of any accounting improprieties or misrepresentations in Autonomy's financial statements."
Autonomy founder and former CEO, Mike Lynch who was reportedly fired by Hewlett Packard shortly after the acquisition stated:
"We've been pretty ambushed by this today," Lynch said in an interview from London. "I think there's been significant mismanagement of the company."
Whether or not they are at fault, it's not surprising to see the auditor and the former CEO and founder of Autonomy positioning themselves as they have. In this situation, both could find themselves in the "hot seat" for Hewlett Packard's claims. HP's management is likely to look at ways to recover part of what was paid for the deal and that means some of Autonomy's management team and the auditor could be at the top of the list.
Mike Lynch is reported to be a billionaire thanks to the HP acquisition of Autonomy and if investigators and the legal system (in the future) conclude that management misrepresented financials, that could lead to recovery attempts against certain individuals and companies. To some extent, an auditing firm might also be a source to recover damages from, but only if it took part in some type of misrepresentation or major negligence. There were also a number of advisors on this deal who could become embroiled if they were negligent when due diligence was conducted
It's too early to say what, if anything, HP could recover if it proves these claims. However, with the SEC, the FBI and the United Kingdom's Serious Fraud Office now investigating this matter the truth is probably going to come out. It's hard to imagine that HP would make claims of this type if there was no there "there", and it is likely to do what it can to recoup shareholder value on this deal. In time, we will learn if this was possibly a case of aggressive accounting or something much worse. With HP's market capitalization down to just about $23 billion, even a recovery of a billion or two could warrant a meaningful rally for the battered shares.
Expectations appear to be quite low for Hewlett Packard, and that could be a good thing. Any stock that has declined this significantly is often subject to tax-loss selling at this time of year and HP shares fit that profile. With the stock trading for just about 4 times earnings and below book value, it seems to be a very poor time to consider selling.
Investors might want to consider accumulating HP shares while the stock is under extra selling pressure from tax-loss selling. These types of stocks often see a sharp rebound in January when tax-loss selling is over and some shorts cover to take profits. HP has to be one of the most beaten-down tech stocks, and it might be time to take a contrarian view and buy for a January rebound.
Key Data Points For Hewlett Packard From Yahoo Finance:
Current Share Price: $11.94
52-Week Range: $11.35 to $30
Dividend: 53 cents per share which yields 4%
2012 Earnings Estimate: $3.46 per share
2013 Earnings Estimate: $3.72 per share
P/E Ratio: about 4 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Additional disclosure: I have a very small position in HPQ and might add to it at the end of the year when tax-loss selling winds down.