Much has been said and written about HP’s (NYSE:HPQ) acquisition of Autonomy since the global technology giant announced the rather unsettling $8.8 billion write-off in its Q3 2012 results, blaming accounting irregularities in what was Britain’s largest software company. Investors are obviously not very happy about this huge one-time loss – especially because HP paid a higher-than-expected $11.1 billion in cash for Autonomy last year. The first investor lawsuits are starting to roll in now. The ensuing blame-game has seen fingers being pointed at every small and big firm that had a say in the deal – from Autonomy’s auditor, Deloitte, to the six legal advisers involved, to the retinue of eight investment banks that supported the deal from either side of the table. UBS (NYSE:UBS) and Goldman Sachs (NYSE:GS), which were roped in by Autonomy as second-tier advisers, have drawn more flak in particular due to their access to reports that flagged Autonomy’s accounting practices.  Even as the FBI investigates into the debacle along with the SEC, we believe the issue here is more of a systemic one rather than being one that can be pinned onto a particular party.
The Deal, The Players and The Payoffs
To begin with, let’s go through the sequence of events involved in this multi-billion deal which no doubt took months to finalize. As a going concern, Autonomy’s books were audited by Deloitte, one of the big-four auditors, which signed-off the company’s numbers for four years without reporting anything wrong in them. As an auditor, Deloitte pocketed £5.422 million ($8.7 million). It also earned an additional £4.44 million ($7.1 million) as fees for non-auditing work, which included advice on acquisitions.
Talks regarding the deal and its value were largely carried out by Perella Weinberg Partners and Barclays from HP’s side with Qatalyst Partners which represented Autonomy. Five other global investment banks were brought in as tier-two advisers – all by Autonomy. The following table summarizes the financial firms involved, their affiliation and their fees:
|Advising Firm||Appointed By||Fees Earned|
|Barclays||HP||$ 18.1 million|
|Perella Weinberg Partners||HP||$ 12.0 million|
|Qatalyst Partners||Autonomy||$ 11.6 million|
|UBS||Autonomy||$ 5.4 million|
|Goldman Sachs||Autonomy||$ 5.4 million|
|Citigroup||Autonomy||$ 5.4 million|
|JPMorgan||Autonomy||$ 5.4 million|
|Bank of America||Autonomy||$ 5.4 million|
Source: In HP-Autonomy debacle, many advisers but little good advice (Reuters)
That’s $68.8 million in advisory fees to these eight firms – of which HP contributed $30.1 million. At the end of it, the deal was finalized at the inflated value of $11.2 billion for Autonomy, with an almost unanimous approval from the shareholders and boards on both sides.
Understand the Accounts, Then The Accountability
As the Feds and the SEC dig into Autonomy’s reported numbers to verify whether it indeed was cooking its books, the big question that demands an answer is how did so many smart people missed this when it really mattered. There are a lot of ‘maybes’ involved in this entire drama: Maybe Autonomy did misrepresent its numbers intentionally. Maybe HP realized that there was an accounting issue AND that the technology business itself was not worth its initial estimate and so it decided to go in for a “big bath” write-off. Maybe Deloitte thought that the way Autonomy was reporting numbers was just a small aberration that everyone would overlook. And maybe the investment banks who advised really believed that the deal was being valued accurately.
The result – on a deal worth $11.2 billion, HP takes a $8.8 billion write-off. So what, Autonomy was/is worth $2.4 billion?
That hardly looks right, especially taking into account the fact that HP paid a 58% premium to Autonomy’s share price at the time of the acquisition. It makes you wonder what the auditor and investment banks were being paid for, doesn’t it?
Take UBS for example. The bank was allegedly made aware of possible discrepancies in the accounts. But as an adviser from Autonomy’s side - and that too a second-tier one – it was clearly in UBS’s best interests to ignore this information to ensure its share of the payouts in this billion-dollar deal. After all, it is from being a part of big deals across the globe – no matter how big or small the role – that UBS earned CHF 964 million (~$1.1 billion) in advisory fees last year.
So let’s see what comes out of the investigations. It won’t be pretty, and all the parties mentioned, have had to deal with their share of lawsuits and settlements.Notes:
- UBS and Goldman Sachs had access to negative Autonomy research, The Guardian, Nov 22 2012 [↩]