Last year, Hewlett-Packard bought Autonomy, a software company focused on data analysis and intelligent searching, for $11.1BN, or 12.6 times their 2010 revenue. Last week, HP announced an $8.8BN write-off related to the acquisition, effectively admitting that they overpaid for Autonomy by 79% (HP had a lost of $6.9BN this quarter, in large part due to this write-down). HP is now claiming that fraud was potentially committed by Autonomy during the acquisition process. However, HP was not the first company to look at Autonomy, and potential fraud aside, the deal was overpriced according to the earlier “courters” of Autonomy (like Oracle).
The AOL-Time Warner deal in 2000 is largely considered the worst acquistion in history, but there is now speculation that this deal is worse. For example, the AOL-Time Warner deal resulted in a 50% decrease in value, while HP-Autonomy is approaching 60%, and the fallout is still unfolding.
So, how did it happen? There is quite a bit of “he said, she said” going on in the public eye, and likely more of it privately.
In both of these acquisitions, the acquiring company was a “has been” in the industry looking for a way to transform. HP bought Autonomy to transform their software division for the 21st century. If we speculate a bit, it is not hard to draw the conclusion that instead of trying to transform what HP currently had, they chose to buy a transformation, and thus overpaid for it – either out of optimisim for the deal, desparation for a solution, or both.
If we read a bit into the “he said, she said” that is public, it appears as though a couple of things are going on:
(1) HP overpaid for Autonomy, regardless of potential fraud (based on earlier companies that passed on Autonomy, and former Autonomy executives admitting publicly that HP “paid a full price”);
(2) No one besides HP’s board or CEO thought the acquisition was a good idea for HP;
(3) There were power struggles within HP that caused speculation and indecision on whether they would be a hardware company, software company, or both; and
(4) The cultures of the two companies were not taken into consideration.
This last point is potentially the most important from a longer-term strategy perspective. HP, a larger, mature company that has not kept up with industry changes, was likely “stuck in its ways” in terms of how the company operated – from R&D all of the way through sales and support. Autonomy, a smaller, “trendier” company was likely more nimble and able to respond to market demands, which was one of the reasons they were more relevant in the market. Based on some of the public comments, it seems as though Autonomy was bought, and then forced to change it’s ways to the “HP way”, instead of integrating the two sets of cultures and processes to get the best of both worlds. If you take a successful company and force it into the processes for a struggling company, it will not reach the revenue potential that was the basis for the price paid – hence the current situation.
It will be interesting in the coming months to watch the fallout of this situation. There will most certainly be litigation that comes out of this as a result of the write-down and potentially the accusations of fraud. There is already speculation that HP could become a takeover target. And, most importantly, this is likely a “make or break” situation for HP – they could either become yesterday’s news, or if the embrace the need for change, transform the company.
Sources: http://www.nytimes.com/2012/12/01/business/hps-autonomy-blunder-might-be-one-for-the-record-books.html?; http://www.businessinsider.com/shane-robison-hp-autonomy-2012-11; http://www.law.com/jsp/ca/PubArticleCA.jsp?id=1202579983940; http://www.businessinsider.com/mike-lynch-hp-autonomy-mismanagement-2012-11
One thought on ““Worst Corporate Deal Ever” – How Did It Happen Again?”
I was reading your post about HP purchasing Autonomy and it got me thinking how many firms become their own worst enemies even after completing a terrible purchase. I would completely agree that HP made a desperate bid to try and increase their relevancy within the marketplace through their acquisition of Autonomy but in many ways, they are also throwing nails in front of their own tires so to speak. After looking at news stories from Bloomberg on the deal, I find it amazing how it seems that story after story keep appearing about how the deal was a terrible decision. In essence, the pot of investor discontent continues to be stirred to the point that the public will lose confidence in the firm and its leadership. These actions will only hurt their efforts to attempt to utilize their new assets through rejection in the marketplace. A perfect example of this would be a recent story on how HP is attempting to launch a new solution from Autonomy while also destroying the firm’s credibility.
I completely agree that these firms are taking the terrible step of attempting to force these innovative firms into their own mindset of doing business but I feel firms also need to change their reactionary methodology to these issues by taking the attitude that the firm simply made a mistake in their assessment of the value presented by the potential takeover and that they will move forward in an effort to maximize the potential value for shareholders. Quite frankly, the less media attention a firm can put on a poor choice, the better they will be in the long run.
HP Remains Committed to Autonomy Amid Accounting Claims