In 2011, HP was churning on many fronts simultaneously.
It had decided to abandon its tablet computer and was struggling with a decision about whether to exit its $40-billion-a-year personal computer (PC)
business altogether. It also had a new CEO, Leo Apotheker (formerly the head of German software company SAP AG), who was intent on making a high-impact acquisition that would transform the firm from being primarily a hardware manufacturer into a fast-growing software firm. The firm also had a new chairman of the board, Ray Lane, who was a software specialist as well as former president of Oracle.
Apotheker had proposed buying two midsized software companies, but both deals fell through. The first was nixed by the board’s finance committee, and the second fell apart during negotiations over price. In frustration, Apotheker told Lane, “I’m running out of software companies.”
Then, in Summer 2011, Apotheker proposed looking at Autonomy, a British company that makes software firms use to search for information in text files, video files, and other corporate documents. Lane was enthusiastic about the idea. When Apotheker brought the proposal to the board members in July 2011, half of them were already busy analyzing the decision to jettison the PC business, so only half of the board evaluated the acquisition proposal. The board approved a price for Autonomy that was about a 50% premium over its market value, which was already high at about 15 times its operating profit. HP announced the acquisition on August 18, 2011—the same day that it announced it would abandon its tablet computer and was considering exiting the PC industry. The price of the acquisition was $11.1 billion—12.6 times Autonomy’s 2010 revenue. Notably, Oracle had already considered acquiring Autonomy and decided that, even if the numbers Autonomy was presenting were taken at face value, it was not worth buying even at a $6-billion price tag. HP’s stock fell by 20% the next day.
In the days following the announcement, HP’s stock continued to tumble, and backlash from shareholders and others in the investment community was scathing. Lane asked HP’s advisers if the company could back out of the deal and was told that, according to U.K. takeover rules, backing out was only possible if HP could show that Autonomy engaged in financial impropriety. HP began frantically examining the financials of Autonomy, hoping for a way to get out of the deal. In the midst of harsh disapproval from HP’s largest stockholders and other senior executives within the firm, HP fired Leo Apotheker on September 22, 2012, less than a month after the acquisition’s announcement, and only 11 months into his tenure as CEO.
By May 2012, it was clear that Autonomy was not going to hit its revenue targets, and Michael Lynch, Autonomy’s founder (who had been asked to stay on and run the company) was fired. In late November 2012, HP wrote down $8.8 billion of the acquisition, essentially admitting that the company was worth 79% less than it had paid for it. Then the finger pointing began in earnest. HP attributed more than $5 billion of the writedown to a “willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers. . . . These misrepresentations and lack of disclosure severely impacted management’s ability to fairly value Autonomy at the time of the deal.”
Lynch denied the charges, insisting he knew of no wrongdoing at Autonomy, arguing that auditors from Deloitte had approved its financial statements, and pointing out that the firm followed British accounting guidelines, which differ in some ways from American rules. Lynch also accused HP of mismanaging the acquisition, saying “Can HP really state that no part of the $5-billion writedown was, or should be, attributed to HP’s operational and financial mismanagement of Autonomy since acquisition? . . . Why did HP senior management apparently wait six months to inform its shareholders of the possibility of a material event related to Autonomy?”
Many shareholders and analysts also pointed their fingers at HP, claiming that the deal was shockingly overpriced. Sanford

C. Bernstein & Company analyst Toni Sacconaghi wrote, “We see the decision to purchase Autonomy as value-destroying,” and Richard Kugele, an analyst at Needham & Company, wrote, “HP may have eroded what remained of Wall Street’s confidence in the company” with the “seemingly overly expensive acquisition of Autonomy for over $10B.” Apotheker responded by saying, “We have a pretty rigorous process inside HP that we follow for all our acquisitions, which is a D.C.F.-based model . . . . Just take it from us. We did that analysis at great length, in great detail, and we feel that we paid a very fair price for Autonomy.” However, when Lane was questioned, he seemed unfamiliar with any cash flow analysis done for the acquisition. He noted instead that he believed the price was fair because Autonomy was unique and critical to HP’s strategic vision.
According to an article in Fortune, Catherine

A. Lesjak, the chief financial officer at HP, had spoken out against the deal before it transpired, arguing that it was not in the best interests of the shareholders and that HP could not afford it. Furthermore, outside auditors for Autonomy apparently informed HP (during a call in the days leading up to the announcement)
that an executive at Autonomy had raised allegations of improper accounting at the firm, but a review had deemed the allegations baseless, and they were never passed on to HP’s board or CEO.
In the third quarter of 2012, HP lost $6.9 billion, largely because of the Autonomy mess. Its stock was trading at $13—almost 60% less than it had been worth when the Autonomy deal was announced. In April 2013, Ray Lane stepped down as chairman of the board (although he continued on as a board member).
Did Autonomy intentionally inflate its financial metrics? Did Apotheker and Lane’s eagerness for a “transformative acquisition” cause them to be sloppy in their valuation of Autonomy? Or was the value of Autonomy lost due to the more mundane cause of integration failure? Financial forensic investigators are trying to answer these questions, but irrespective of the underlying causes, Sacconaghi notes that Autonomy “will arguably go down as the worst, most valuedestroying deal in the history of corporate America.”

Questions
1. Why do you think Apotheker was so eager to make an acquisition?
2. Why do most acquisitions result in paying a premium over the market price? Was the 50% premium for Autonomy reasonable?
3. Was it unethical for Apotheker to propose the acquisition at the 50% premium? Was it unethical for Autonomy to go along with the price at a 50% premium? Who suffers the consequences of an overpriced acquisition?
4. Is there anything HP and Autonomy could have done differently to avoid the public backlash and share price drop the company suffered?