If you own or have followed HP stock (HPQ), you are no doubt shocked by the headlines of accounting fraud at Autonomy and the $8.8 B writedown HP took in Q4. It is in fact a testament to the lack of credibility of the current HP management that most market watchers are still debating if there is truth in these disclosures.
- Autonomy’s then CEO Michael Lynch flatly denies any fraud – but of course, he would
- Oracle, last year accused Michael Lynch of lying and put up evidence on its PleaseBuyAutonomy site which is still available to view
- Meg Whitman blames Autonomy acquisition on past HP CEO Leo Apothekar, who she succeeded in 2011
- Leo Apothekar claims the due diligence was meticulous
- HP used Deloitte to audit Autonomy’s accounts and later brought in KPMG and neither of these audits found any issues
Perhaps Autonomy did mis-represent their accounts and HP overpaid for the acquisition. Whether they did or did not, it doesn’t matter. The problem with HP is not this one time charge, although in the short term it does nothing to improve investor confidence. The problem lies in the utter and complete mismanagement of the company.
- Wrong Strategy: Apothekar wanted to get rid of the low margin and commodity PC business. Whitman decided to keep it
- Declining Metrics: Revenues, Margins and Earnings have been declining in ALL the core segments HP competes in. HP can’t seem to be able to grow its business in a fast growing segment like Cloud computing. The only segment that still shows reasonable growth is Software at 14% year over year. Twisted irony then, this includes the Autonomy business
- And I have already spoken about how HP lost its way.
At some price though, every stock becomes a buy. Right?
Arguably so. The question is, what is this price for HP?
As of today, HP’s book value (shareholder equity) is $22.8 Billion. This equity includes $35.6 Billion in Goodwill and Purchased Intangibles, related to HP’s past (failed) acquisitions such as Compaq, EDS, 3Com, Palm, etc. A large portion of this will eventually be written down, quite possibly making the shareholder equity negative. The tangible book value is already negative, so it is just a matter of timing and recording these writeoffs to make it official.
In other words, HP’s mindless acquisition spree in the last decade or so has wiped out the shareholder value in the company.
The balance sheet is worth zilch. Earnings are declining with no visibility into how they can be revived.
Right now I do not recommend paying anything for HP shares. It is NOT a value stock.
Meg Whitman says this is year 1 of a 5 year turnaround. At the current rate of progress, I doubt that the business will start improving in the next 4 years, unless there is a CEO and top management change that brings in new and better ideas and a defined strategy.
If there is any material change in the next few years, I will take another look.