Hewlett-Packard's Acquisition of Autonomy

On August 18, 2011, Hewlett-Packard, a computer hardware manufacturer, announced that it would

purchase Autonomy, a search and data analysis company. HP paid $11.1 billion for the acquisition,

corresponding to a 12.6 times EBITDA multiple.

This price was considered quite rich - indeed, Oracle's valuation of Autonomy determined that $6 billion

would be the highest it would be willing to pay. According to Fortune, even HP's CFO Cathie Lesjak had

spoken out against the deal.

The market's reaction to the announcement was harsh. HP's stock fell from $29.51 to $23.60 on the day

of the announcement (from a market capitalization of $26.82 billion to $21.45 billion). The New York

Times reported that Ray Lane, the Chairman of HP's board, was asked about the DCF model used to

analyze the valuation and the underlying assumptions. In his response, he claimed he was not familiar

with the DCF model and he instead emphasized HP's strategic vision. Less than a month after the

announcement, HP's chief executive (Leo Apotheker) was removed.

One year later, HP wrote-down the value of Autonomy by $8.8 billion (in other words, they reduced the

goodwill asset on their balance sheet and recorded the loss as a one-time expense), including $5 billion

in what HP claimed were "accounting irregularities" that it blamed on Autonomy's management. HP

claimed that Autonomy managers had inflated financial metrics in order to mislead potential buyers. By

August, 2012, HP' market capitalization had fallen 43% (from $26.82 billion to $15.07 billion).

What mistakes did Hewlett-Packard make with its Autonomy acquisition? What could it have done

differently to avoid these issues?

On August 18, 2011, Hewlett-Packard, a computer hardware manufacturer, announced that it would purchase Autonomy, a search and data analysis company. HP paid $11.1 billion for the acquisition, corresponding to a 12.6 times EBITDA multiple. This price was considered quite rich - indeed, Oracle's valuation of Autonomy determined that $6 billion would be the highest it would be willing to pay. According to Fortune, even HP's CFO Cathie Lesjak had spoken out against the deal. The market's reaction to the announcement was harsh. HP's stock fell from $29.51 to $23.60 on the day of the announcement (from a market capitalization of $26.82 billion to $21.45 billion). The New York Times reported that Ray Lane, the Chairman of HP's board, was asked about the DCF model used to analyze the valuation and the underlying assumptions. In his response, he claimed he was not familiar with the DCF model and he instead emphasized HP's strategic vision. Less than a month after the announcement, HP's chief executive (Leo Apotheker) was removed. One year later, HP wrote-down the value of Autonomy by $8.8 billion (in other words, they reduced the goodwill asset on their balance sheet and recorded the loss as a one-time expense), including $5 billion in what HP claimed were "accounting irregularities" that it blamed on Autonomy's management. HP claimed that Autonomy managers had inflated financial metrics in order to mislead potential buyers. By August, 2012, HP's market capitalization had fallen 43% (from \$26.82 billion to $15.07 billion). What mistakes did Hewlett-Packard make with its Autonomy acquisition? What could it have done differently to avoid these issues