HP Autonomy: Happy (-$8.8 Billion) Thanksgiving!

As the gift that keeps on giving, apparently to everybody but shareholders, HP is once again making headlines for all the wrong reasons, although analysts believe the world’s largest IT vendor will once again weather the storm. Following news of a massive layoff and restructuring, and disappointing but not-unexpected financial results, HP has announced that it is taking a $8.8 billion charge.

‘The majority of this impairment charge, more than $5 billion, is linked to serious accounting improprieties, misrepresentation and disclosure failures discovered by an internal investigation by HP and forensic review into Autonomy’s accounting practices prior to its acquisition by HP’, according to a statement from the company. ‘These efforts appear to have been a willful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal. We remain 100 percent committed to Autonomy and its industry-leading technology.’

Earlier this year HP announced plans to lay off 27,000 employees, and in August said it would take an $8 billion write-off on goodwill for its Enterprise Services (AKA EDS) business. This week the company announced a net loss of $6.85 billion for the fiscal fourth quarter, which ended Oct. 31; revenue sank 6.5%, or 4% adjusting for currency impacts; the operating margin nosedived from last year’s 2.5% to negative 21.7%; total costs and expenses surged 16%; personal systems unit revenue was down 14% (commercial decreased 13%, consumer declined 16%); services segment fell 6%; enterprise, servers, storage and networking segment dropped 9%; and the printing business fell 5%. The sole bright spot was software, where revenue grew 14%.

HP’s latest woes, which contributed to the firing of Leo Apotheker and his replacement by Chief Executive Meg Whitman, center around last year’s acquisition of Autonomy for $11.5 billion

After taking an $8 billion write down on its services business, HP is flushing away another $8.8 billion, mainly due to its Autonomy acquisition.

, almost double the valuation of $6 billion that another suitor, Oracle, thought “was way too high”. Best known for its search capabilities, Autonomy was part of an attempt by H-P to strengthen its portfolio of high-value products and services.

Charles King, Principal Analyst, Pund-IT, Inc., thinks this new development will have little impact on HP’s enterprise customers. “The increase in software revenues suggest that that company’s strategy there is getting traction, and I expect the drop in sales of business critical servers (the Integrity line) is largely related to the tussle with Oracle earlier in 2012. The court order forcing Oracle to resume support for HP Integrity, along with last week’s release of the new generation Itanium 9500 chips should bolster those numbers in the coming quarters,” he said.

“However, the drop in x86 servers and storage revenues is troubling. The decline in services revenues is also problematic but that has been a difficult area for HP, reflected in the write down on the EDS deal earlier this year. While things look bad – especially when you include the embarrassment of the Autonomy write down -— I don’t think it’s time to head for the lifeboats.”

News like this can create concerns about the viability of a company and were HP a smaller firm it would certainly have an impact, said analyst Rob Enderle, Enderle Group. “AT HP’s scale, coupled with the belief that much of this loss will be recoverable from the Autonomy sellers, they should be able to weather this far better than a typical smaller firm. However, competitors will market against this performance and it will make it far harder to convince customers of future acquisitions to stay with the acquired company. HP needs to fix their acquisition process and model it closer to Dell’s so this kind of problem doesn’t continue to recur.”

Mark Peters, Senior Analyst, Enterprise Strategy Group, Inc., agrees that realistically for enterprise customers things don’t/won’t change instantly – “there’s simply too much inertia on all sides of the coin.” Now, that said, much as all the competitors will be ‘FUD-ing’ enthusiastically, HP is bound to have considered and planned for this….meaning it will have retention programs in place, he said.

As to what HP needs to do first? “Simply (!!) to establish AND communicate a solid, credible, overall strategic plan and vision. That would change things a lot.”

King said it’s imperative for HP to contact core customers and apprise them of the situation. “The goal is for HP to be transparent about what’s going on and to address any issues or insecurities those clients might have. Just as important — HP must do everything it can to manage the narrative around these events since, if they don’t, competitors will be happy to step in and manage it for them. Finally, HP needs to be clear about where it’s going from here and what enterprise customers can expect from that journey. Meg Whitman’s task is unenviable but if she’s smart and tough enough to bring HP back from this particular brink, her tenure will be remembered fondly for years to come.”


Author: Steve Wexler

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