There Are Two Narratives on Hewlett-Packard’s $8.8 Billion Loss; Which One Should You Believe?

We’ve got our money on noted short-seller Jim Chanos

Lynch. (The Telegraph)

In the hours since Hewlett-Packard stunned investors by announcing an $8.8 billion loss on its acquisition of Autonomy, competing narratives have emerged to describe just what went wrong.

H-P spoke first, explaining that “accounting improprieties” and “outright misrepresentations” committed before it acquired the British search engine maker for $11.1 billion last year led to today’s write-down. Former Autonomy CEO Mike Lynch said that the deal was vetted by a small army of accountants and bankers, and that internal problems at the Silicon Valley giant are responsible for Autonomy’s troubles.

Which one should you believe? Betabeat breaks it down.

What H-P said

In H-P ‘s telling, it agreed to pay too much for the British search engine maker back in August 2011, back when, ahem, the Silicon Valley giant was helmed by an executive, former CEO Leo Apotheker, who is no longer with the company. In that version, the little matter of “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” caused H-P to overvalue the company.

The claim that “certain employees” of Autonomy defrauded H-P and its shareholders is no small charge (and $8.8 billion isn’t a small amount); CEO Meg Whitman promised to raise the hounds—U.S. and U.K. regulators, anyway—to make sure that the perpetrators of the apparent fraud are punished, and to pursue civil litigation against the people responsible for the fraud.

The Autonomy story

Former Autonomy CEO Mr. Lynch wasn’t named anywhere in H-P’s statement, but he’s responded like a man on public trial, stressing to The Wall Street Journal that the deal went through a “meticulous” vetting process overseen by hundreds of auditors and bankers, then taking note that the H-P’s announcement was “coincident with them releasing the worst set of results in their 70-year company history.”

That wasn’t all: Mr. Lynch stayed available, repeating his story (“it’s completely and utterly wrong”) to reporters from various outlets, and arguing that H-P abandoned Autonomy after Mr. Apotheker was forced out of the company and the software maker lost ground amid “petty infighting.”

As far as which narrative to believe, at some point the proof will be in the pudding—H-P is said to have discovered the “accounting improprieties” (such a dainty way to explain away an $8.8 billion loss!) after an Autonomy executive blew the whistle, and we expect regulators and plaintiff’s attorneys alike will be working hard to put some meat on the bones of H-P’s claims.

The third party

In the meantime, it’s worth noting that Jim Chanos, the Kynikos Associates hedge fund manager known for betting against Enron, seems to have been onto Autonomy for a while. Per Bloomberg:

Chanos, speaking at an investor conference in July, said Autonomy’s accounting was “dreadful,” and that Hewlett-Packard “did almost no due diligence” before acquiring the company. Chanos oversees $6 billion at Kynikos Associates Ltd.

And if we had to stake our life on the word of an army of faceless accountants pushing paper around under pressure from their client to complete a deal, or the conviction of a billionaire short-seller with skin in the game, we’d feel a lot safer going with the latter.

There Are Two Narratives on Hewlett-Packard’s $8.8 Billion Loss; Which One Should You Believe?