The Dog that failed to bark (Advisers who failed to advise) – HP write-down of USD 8.8 Billion after an acquisition

(Based on media reports)

 IN AUGUST 2011, when HP said it would buy Autonomy, a British software company that specialises in analysing “unstructured” data, for $10.3 billion, many people thought the Californian maker of computers and printers had paid over the odds. On November 20th HP agreed that it had—and claimed that it had been duped. It said that it was taking a charge of $8.8 billion related to Autonomy in its fourth-quarter results, of which more than $5 billion was “linked to serious accounting improprieties, misrepresentation and disclosure failures”. Some of Autonomy’s former managers, it said (naming no individuals), had inflated the company’s figures before the acquisition.

When Hewlett Packard acquired Autonomy, some 15 different financial, legal and accounting firms were involved in the transaction — and none raised a flag about what HP said  was a major accounting fraud.

HP Chief Executive Meg Whitman, who was a director at the company at the time of the deal, said the board had relied on accounting firm Deloitte for vetting Autonomy’s financials and that KPMG was subsequently hired to audit Deloitte.

HP had many other advisers as well: boutique investment bank Perella Weinberg Partners to serve as its lead adviser, along with Barclays. The company’s legal advisers included Gibson, Dunn & Crutcher; Freshfields Bruckhaus Deringer; Drinker Biddle & Reath; and Skadden, Arps, Slate, Meagher & Flom, which advised the board.

On Autonomy’s side of the table were Frank Quattrone’s Qatalyst Partners, which specializes in tech deals, as well as UBS, Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America. Slaughter & May and Morgan Lewis served as Autonomy’s legal advisers on the deal.

While regulators in the United States and the United Kingdom, as well as the Federal Bureau of Investigation, are likely to spend many months if not years investigating what happened, legal experts said on Tuesday that it wasn’t clear if any of the advisers would ultimately be held liable.

“The most logical deep pocket would be the acquired firm’s auditors, who should have allegedly caught these defalcations,” said James Cox, a professor at Duke University law school who specializes in corporate and securities law. Since both auditors missed the problems and it appeared to have taken HP a while to catch it after it took over Autonomy, the auditors may have a strong defense.

“You can have a perfectly sound audit and still have fraud exist,” he said. A Deloitte UK spokesman said the company could not comment and would cooperate with any investigations.

The law firms and the bankers will likely argue that they were not hired to review the bookkeeping and had relied on the opinion of the auditors, securities law experts said.

Multiple sources with knowledge of the HP-Autonomy transaction added that the big-name banks on Autonomy’s side were brought in days before the final agreement was struck. These sources said the banks were brought on as favors for their long relationships with the companies, in a little-scrutinized Wall Street practice of crediting — and paying — investment banks that actually have little do with the deal.

Plaintiffs lawyers said they were taking calls from investors about HP. Darren Robbins, a San Diego-based plaintiff lawyer who represents shareholders, said the tech icon appears to have spent billions on a shoddy company without undertaking the proper due diligence, and thus misrepresented its finances to investors. “I think they have serious troubles,” he said.

But plaintiff lawyers may have difficulty bringing so-called derivative lawsuits against professional services firms, said Brian Quinn, an M&A professor at Boston College Law School. In those cases, plaintiff lawyers can sue third parties, such as auditors, on behalf of HP — but they must convince a judge that HP’s board is unfit to pursue those claims itself. In this situation, though, HP’s board disclosed the alleged fraud itself, Quinn said. Even if the bankers and lawyers escape any legal problems, they could suffer a reputational hit.

 

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