The Question We’d Like to Have Heard Today

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 When your company reports a loss per share of$6.41, or roughly half your own stock price, thanks in good measure to thewrite-off of most of the book value of a $10 billion acquisition [actually $11.1 billion by the time it closed thanks to currency moves] you made barely one year ago, you should probably let more than nine analysts ask questions on the earnings call…especially when you’re going to blame almost everybodybut your own employees for the horrible, terrible, no-good, very badacquisition. But HP management, keeping up a pattern ofplaying the Wall Street fiddle about as well as a public company management canplay it, did just that, mainly by yammering for a very long period of time fromthe “script” before opening the call to questions. Here’s how CEO Meg Whitman (not the architectof the Autonomy acquisition, but now serving as the undertaker) spun the dealbefore the Q&A: “Autonomyremains a work in progress as we move this business from start up to grown up.There is a big market opportunity for this business but operationalimprovements are needed to take full advantage of these opportunities. While weexpect these efforts will improve the future of our Autonomy business, weannounced today an $8.8 billion non-cash impairment charge related to Autonomy.Let me spend a moment giving you some detail about the situation. “The majority ofthis impairment charge is linked to serious accounting improprieties,disclosure failures, and out right misrepresentations that occurred prior toHP's acquisition of Autonomy [emphasis added] and the associated impact on the expectedfinancial performance of the business over the long term. The balance of theimpairment charge is linked to the recent trading value of HP stock. Theseimproprieties were discovered through an internal investigation after a seniormember of Autonomy's leadership team came forward following the departure ofMike Lynch on May 23. “Basedon this information, HP initiated an intense internal investigation into theallegations, including a third party forensic review of Autonomy's historicalfinancial results. HP has contacted the SEC's Enforcement Division and the UK'sSerious Fraud Office. We have requested that both agencies open criminal andcivil investigations into this matter. In addition, HP intends to seek regressagainst various parties in the appropriate civil courts to recoup what we canfor our shareholders. “Iwant to stress that we remain 100% committed to Autonomy and its industryleading technology. We will continue to fully support our new and existingcustomers and we believe Autonomy's technology will play a significant role inour growth strategy over the long term. To that end, we recently announcedRobert Youngjohns as Senior Vice President and General Manager our Autonomy IMbusiness unit. Robert is a seasoned software executive who was most recentlyPresident of Microsoft North America.” The second way HP assured itself of a Q&Asession lacking fireworks was that those nine analysts who were allowed to askquestions are all polite sell-siders, as opposed to actual, angry HPshareholders.  And polite sell-siders arenot going to ask the really juicy questions you’d want to hear asked.  Still, the first analyst, Ben Reitzes, ofBarclays, gave it a reasonable shot out of the gate:Ben Reitzes“Yes, thanks a lot. Meg, with regard tothe Autonomy situation, we understand what you're doing in terms of going afterthe folks that you feel misled you but what about internally? Whose responsibleinternally for the acquisition, how are you analyzing yourself internally, theBoard, I think everybody at the Board was there when the Autonomy decision wasmade except for Mr. Whitworth, so what's the, what are you doing internally tomake sure that you have the right processes and who are you holding accountableinternally if anyone to make sure this doesn't happen again and that maybe eventhere's some folks internally that need to be held responsible and we could seerepercussions of this in the near future. How are you looking at it internally?”Meg Whitman “Yes,well first of all, the CEO at the time and the Head of Strategy who lead thisdeal are both gone...[emphasis added] With regard to the Board you're right. Most of the Boardwas here and voted for this deal and we feel terribly about that. What I willsay is the Board relied on audited financials, audited by Deloitte, not Brand Xaccounting firm but Deloitte and by the way, during our very extensive duediligence process, we hired KPMG to audit Deloitte, and neither of them sawwhat we now see after someone came forward to point us in the right direction.That said, obviously, we have not done any big acquisitions and we will reviewthe acquisition process.  “WhatI will say is due diligence and M&A now reports to our Chief FinancialOfficer. At the time when I came to the Company I was surprised to find thatdue diligence and M&A reported to strategy as opposed to the ChiefFinancial Officer. I've never seen that before in my career and that's adecision I made right away before I knew any of this, so I understand yourpoint of view and we have made a few changes in that regard but in the end, you have torely on audited financials [emphasis added] and we did and we will now carry on andas you know we've reported this to the SEC as well as the serious fraud officeand we will take it from here.”Ben Reitzes “Andin terms of internal personnel though, based on what you see right now theorganization can remain stable based on this occurrence?”Meg Whitman “Yes,it can. I mean really the two people that should have been held responsible aregone and that's the way I see it right now so I feel good about sort of thestability it of leadership.”  Longtime readers can see where we’re goingwith this. According to HP’s CEO, there were only “twopeople” in all of HP who “should have been held responsible” for the Autonomyacquisition, which saw the evaporation in about a year of nearly all the value ascribed to what $11 billion worth of HP’s cash had been used to buy, and boththose “two people” are happily gone. Butif my friend, fellow blogger and ace hedge fund manager John Hempton could havetold me the Autonomy books were well and truly “dodgy” waybefore today’s news, based strictly on a reading of the same “auditedfinancials” that HP’s CEO said today “you have to rely on”...then where onearth was HP’s entire senior management team, which presumably contains a fewpeople who know as much about how the audited financials of a software companyshould look as a guy in Australia reading 10Ks and 10Qs, when this dealwas getting done? Out of the office making a Peets coffee run?

Jeff MatthewsAuthor “Secrets in PlainSight: Business and Investing Secrets of Warren Buffett”(eBooks on Investing,2012)    Available now at Amazon.com
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