HP's First Quarter 2015 Surprises Some

HP reported revenue of $26.8 billion for the first quarter of fiscal 2015, a year-over-year decline of 2% on a constant currency basis.  Diluted EPS on a GAAP reporting basis was $0.73 per share, and $0.92 on an non-GAAP basis, which was at the high end of the guidance range for the quarter.

All of the operating businesses has yr/yr improvements in their non-GAAP operating margin rates, the CEO noted.  65% of corporate revenue was recorded OUS.  Despite hitting the top end of the non-GAAP EPS guidance range, the impact of currency in the quarter was stronger than expected, and will be substantially stronger than prior expectations for the balance of FY15.

As happens in corporate reporting, especially in a behemoth like HP with distinct businesses with some many moving parts, a number might have been reached, but it was reached in a completely different way than the forecast assumed.

Currency headwinds seem more appropriately characterized as currency typhoons.  Current expectations for EPS impacts of currency were characterized as $0.60 per share gross, and $0.30 per share net, on an annual basis.

The forecast of flat revenue for FY15 yr/yr seems particularly challenging in light of the heightened currency impact, but management cited continuing progress in printing revenue, enterprise businesses, as well as a meaningful improvement in Enterprise services revenue.

All of the analysts completely missed on cash flow from operations for the quarter, as the costs of separating the company in to HP, Inc. and HP Enterprise were omitted from their models, even as guesstimates.  $80 million of expense was recorded in the quarter, $250 million is now expected in the second quarter, and $1.3 billion in corporate cost and additional taxes are expected for the full fiscal year 2015.


Printing, 20% of the consolidated revenue for the quarter, generated a non-GAAP operating profit of $1,067 billion, 39% of the segment total, with an operating margin rate of 19.2%.  The margin rate was consistent with the prior period and described as "unsustainable" and "bad for business" by the new business leader.  Supplies were down 5% and total units down 4%, as competition from Japanese vendors in corporate accounts was strong due to a weakening yen.

Personal System sales were 31% of revenue, producing non-GAAP operating margin of $313 million, a margin rate of 3.7%; PS contributed 11% of segment income, and HP reestablished itself as the leader in the notebook segment.

So, the core of what will become HP, Inc. accounted for 51%  of quarterly consolidated revenue and 50% of segment operating income.

The Enterprise Group accounted for 25% of quarterly revenue, earning $1,090 in operating profit, a margin rate of 15.6%, which was a healthy 40% of the segment operating profit total.

Enterprise Services accounted for 18% of quarterly consolidated revenue and only 5% of segment operating profit, but  the stage was being set, management said, for a better performance in the back half of FY15.  The latter two groups, plus Software, will comprise HP Enterprise.

The CEO pointed out that two Fortune 50 global companies were being created out of the separation of HP.  As complicated as the separation sounds, it is ultimately lots of nitty gritty work, expensive but very doable.  Changing the culture of one behemoth serving two distinct markets with so many different offerings would be well nigh impossible.  In this sense, the split is better for the businesses, their employees, for customers and shareholders.

Referring to our recent post the go-to-market problems facing companies like HP, the CEO noted that some "realigning of sales incentives" had occurred in the Enterprise businesses in the quarter, and it's clear to us that a different kind of sales team with different incentives will be an indispensable part of a successful tech company in the future.

A big corporate client win at Deutsche Bank was highlighted during the call, and it illustrated the nature of such wins for the future HP Enterprise.  It involved lots of different strategic business units, was led by Enterprise Services, and the Helion offering was a pivotal differentiator.

CEO Whitman noted that despite the fact that 44,000 employees have left the company since the beginning of the restructuring and more is to follow, employees with new, client-facing skill sets will have to be hired, and there are even more opportunities for HP and HP Enterprise to become internally much more efficient in their own systems and processes.

Currency aside, the softer items in the call seemed the most encouraging.

Apple Pay on Your Apple Watch?

I forgot about the biggest head scratcher in thinking about Apple and what it really wants to be: Apple Pay.  There's nothing more profitable than a large payment network: just have a look at Visa, MasterCard, Discover and American Express.

Private label cards using the MasterCard or Visa networks are a wonderful business for their retail issuers, as research shows that they actually engender loyalty to the co-brander and, provided card users don't abuse their main card, the retail private label cards often get paid more consistently in times of financial difficulty for the card holder.

So, back to Apply Pay. Why?  Check out this link to the Apple Pay site. Look in particular at the picture that goes with this text:
"Apple Watch
 Double-click to pay and go. You can pay with Apple Watch — just double‑click the button next to  the Digital Crown and hold the face of your Apple Watch near the contactless reader. A gentle pulse  and beep confirm that your payment information was sent."

So, in order to save yourself the trouble of scanning the magnetic stripe or reading a security chip on a Bank of America card (pictured on the site), you are going to press a button on a screen which most people can barely read in order to save yourself a second or two, so your funds are debited faster? This physical action is exactly what I have to do on my old digital watches in order to change the modes: it's an awful movement, and in the case of the old watches, sometimes you have to press twice to engage the electronics properly.  The Apple consumer with a $500 watch gets her kicks out of this?

So, again, Apple wants a piece of the action from the big payment networks?  A company with a $700 billion capitalization is wasting its time doing this?

Meanwhile, MasterCard and Silicon Valley Bank have launched their own VC type effort to help entrepreneurial companies interested in setting up their own payment networks to profit from MasterCard's expertise on security and scale up strategies. The beauty of this effort is that MasterCard keeps tabs on what's out there, Silicon Valley Bank eventually gets a lending relationship with lots of warrants, and if successful, MasterCard buys new business.  Meanwhile, what will Apple Pay be doing?  Probably floundering around.

Much as I dislike the monopolistic payment networks whose interchange fees are still monstrously expensive given their economies of scale, it is good to deal with them when there are illegal or problem transactions on the card.  Because of bank and credit card industry regulations, it is easy to get problems on the record, with documentation, and eventually resolved, almost always to the consumer's satisfaction.

If Apple Pay were ever to become a significant enterprise, can you imagine contacting their customer support?  Who would they be?  Where would they be?  That organization would probably be as consumer friendly as Comcast.  What business is Apple in?  I think everyone knows.  Going forward, it may not be so clear, probably to the detriment of returns relative to the past decade.

Will Apple Inevitably Lose Its Way?

This parody of Rene Magritte's painting struck me as being very appropriate for this post. My former colleague Michael Moe's firm, GSV Capital, listed the Top 25 Best Performing Stocks for the period 2004-2014, and Apple was number 9, growing its EPS at a CAGR of 54% over the period and its stock price at a rate of 37% per annum.  In absolute terms, Apple's performance was stunning looking at the growth of its market capitalization: it went from $26 billion at 12/31/2004 to $647 billion at 12/31/2014.  If the Apple of Steve Jobs' reign is painted in the middle, Mr. Jobs left current CEO Tim Cook with his portrait at the left. (not exactly proportionate, but you can see the idea.)  It is almost inconceivable performance, which is why it's unlikely to be repeated.

"Trees don't grow to the sky," as students learn in their introductory microeconomics classes. Also, as GSV notes, ",,if Apple were to notch the same stock performance in the next ten years as it has in the past ten years, it would have roughly a $40 trillion market cap--nearly 2x the entire U.S. Equity Capital Markets."  GSV also notes that no company has remained in the list for two consecutive ten year periods.  

We have always taken the position that Apple is a cult stock, namely most investors buy it for philosophical reasons, e.g. they love Steve Jobs, they work in creative industries that use Macs and want to support the company that makes their great machines, they work in public education and admire Apple's commitment to that market, they believe that Apple's mission is about much more than making money, or they believe that the stock is "cheap," selling at 11x estimated earnings, net of cash. Each one of these reasons has 5 or more variations for cult members. I have considered owning it many times, but couldn't pull the trigger--my loss for the past ten years.

What are some signals flashing yellow, besides those presented above?  Apple is flush with cash.  Most companies in this position have their investors clamoring for a return of the cash through dividends or share buybacks.  The company has arguably responded on both counts by planning to return $130 billion to shareholders through the end of 2015. No yellow here.

The company announces something called Project Titan, a skunkworks to design an electric car. Hello?  This is an industry far away from Apple's core competencies, and one which is cyclical, rife with competitors, and subject to all kinds of regulation, something that Apple strenuously avoids.  This project should sound about as exciting to Apple shareholders as Google's driverless car is to its shareholders.  I don't think either of the two Steves would be excited about this project.

More recently comes the famous Apple Watch.  Initial rumors had this device being the centerpiece of the company's projected foray into consumer healthcare monitoring, patient management and anything called e-health.  However, as the Wall Street Journal reported, none of these features made it into the product to be launched this April.  Besides some features not working or being to complex, the Journal writes, "And still others could have prompted unwanted regulatory insight.."  Okay, maybe, but electric cars?

The watch being launched needs to be near an owner's iPhone in order to have wireless connectivity, and so the Journal notes that it appears to be an add-on accessory to an existing owner's iPhone. Cultish iPhone owners may go for this, but surely new customers wouldn't want to jump straight into a new Apple Watch and iPhone at one go?  That's a big ticket.  

There is a range of price points.  At the the lower end, Apple Watch competes with FitBits and other established products in a crowded segment. At the upper end, the ultra models feature 18 karat gold casing and will retail above $4,000.  Even billionaire oligarchs and young tech company CEOs who have sold their companies to Google may think twice about this.  Isn't there more cachet in a Tag Heuer or some of the newer, ultra-luxury watch brands?  

CEO Tim Cook says to the Journal, "One of the biggest surprises people are going to have when they start using it is the breadth of what it will do."  And what is that?  Even the reviewers can't come up with the wonderful things.  

Probably, the first generation product buyers will be orphaned as the company eventually figures out what the product should really be. In this respect, the company would then appear to be more like Microsoft, which first launched Surface RT before realizing that it was rubbish and launching Surface Pro 3, leaving a lot of unhappy consumers.  

When Apple launched the iPod for music, it wasn't the first player in the market.  Creative Labs made a relatively inexpensive, functional, intuitive series of players called Zen that really served music lovers well.  But, Apple miniaturized the iPod, which was very important to consumers, and it launched iTunes that turned the music business upside down.  A key innovation and a market disruption, and it led to success.  So far, the watch looks like late entry with a placeholder product.  A definite yellow signal, but shareholders have to stay tuned.

What about emerging markets?  Is Apple ceding all but the uber-middle class to Chinese and other competitors?  Will Apple become the Louis Vuitton of electronic gear?  

If Apple wants to get into other businesses like making cars, wouldn't shareholders rather diversify their holdings themselves by buying an emerging car company?  Or, wouldn't they prefer to buy an emerging healthcare informatics company?  What is Apple all about?  Could the story end for shareholders like the third panel on the Magritte parody?  Who knows. 

Greece Is One Problem of Many for the European Union

Here's something we wrote in 2013, writing about Greece and its possible exit from the euro:

• The European monetary system still has fundamental design and execution flaws that make it unstable in most environments;
• It offers peripheral members few real benefits except access to easy credit; 
• Unless the peripheral countries undertake real economic reforms, the austerity medicine may make the patient better, if it hasn't killed him first;
• French, European and Italian banks need to take their medicine and acknowledge the diminished economic values of sovereign debt on their balance sheets;
• The continuing struggle for EU power between France and Germany is very analogous to the struggle between our two sides in Congress.  Despite all the nice rhetoric and the ECB posturing, their divergent interests still limit the effectiveness of the monetary union. 

What has changed, after all the posturing by the Greek governments,ECB, the Eurocrats, Chancellor Merkel, President Hollande, the IMF and all the other zombie actors on the European stage? In terms of events, lots; fundamentally nothing has changed.  

Greece has sung out of the austerity hymn book, and it has received substantial transfers, all with different names.  Although its ratio of debt to GDP has come down from its peak, it is still unsustainable and no amount of austerity can save the situation without a currency devaluation lever to help the demand side; the euro has taken this instrument away.  So, point number one is still true, as is point number two.  Greece got its bailout money, much of which comes due in 2015-2016 and which cannot be repaid, only re-restructured. 

The austerity medicine is killing the patient, as no real reforms have been undertaken.

Economic storm clouds lie over several economies, some peripheral and one core.  Dumpster diving was prevalent in nice Barcelona neighborhoods several years ago.  The latest Eurostat numbers for 2013 show youth unemployment rates of 42% for Spain, 29% for Portugal and 49% for Greece.  What's worse, the rate is 30% for Italy, a much larger economy.  

There can never, and should never, be any fiscal harmonization as the Eurocrats advocate, solely for their own perpetual employment.  Right now, the individual social compacts between Spanish voters and their government is at risk.  If their leaders really have no real economic levers to make their economies more globally competitive, and Spanish leaders look to Bonn and Brussels for a handout, then why not just take to the streets and kick them all out?  The last time I looked, the ECB does not have an army, so they would be no help. 

Chancellor Merkel has beaten on the fiscal responsibility drums for several years, and Germany voters couldn't accept mutualization of EU peripheral country debt.  Fine, but if the euro is to be something beneficial for all its members, the current system and its architecture have to be razed.  Germany has to show leadership, but it can't.

It's self-appointed co-star, France, will always be on the stage beside Germany, and its economy continues to need fundamental reforms on the domestic front. France will never let Germany take the lead in defining a new European monetary system. The Brussels bureaucracy won't let itself be unwound. 

I have listened to several webcasts from really smart economic and financial economists from Chicago Booth and various European think tanks. They are out of ideas. A Grexit would be "catastrophic," but all of the various costumes put on maintaining the status quo can lead to a Greek tragedy eventually. 

President Putin's Adventurism in Ukraine Won't Solve His Problems

As the Wall Street Journal notes, President Putin's objectives in Ukraine included sending a message to dissident political and ethnic groups in Russia about the consequences of looking West or for independence. As we've written about for some time, strengthening Ukraine's economy with Russian help, or at least with non-interference, would have been the best hand for him to play.

Now, the collapse in energy and materials prices have taken away the biggest levers Mr. Putin planned to use on major oil companies and on Western Europe.

In the background, the long-run demographics in Russia don't favor prolonged dominance by a native Russian majority.  Russia's Muslim population is projected to grow from some 18 million in 2010 to approximately 19 million in 2030, according to estimates reported by the Pew Foundation.

Rampant alcoholism among the native Russian population, along with public health problems and higher death rates continues to be an issue, and the WSJ suggests that the Putin government is getting desperate enough dealing with population unrest as to use vodka as a 'pacifier.'

Predictably,oligarchs and successful business owners have long been buying up London and U.S. real estate, and the capital flight continues.

This unstable situation bears watching, but our foreign-policy challenged administration seems to be focused on domestic election-oriented issues at present.

What's Wrong With Technology's Four Horsemen?

It's the season for IBM, Cisco, H-P, and Microsoft to be in the financial news, with earnings results at the front of investor and customer psyches.

IBM

On the face of it, IBM appears to be remaking the portfolio with the sale of the commodity server business, semiconductor manufacturing, and exiting the low margin BPO business.  Acquisitions have continued, and the acquisition of SoftLayer looks like a good one, both timely and strategic. 

Along the way of this portfolio make-over, however, execution has really been poor, no matter what the geography and what the business, in constant currency terms. As a corollary to this, the Road Map finally lost any credibility and had to be abandoned.  For all the talk about seamless succession of executives, since this was a cornerstone of CEO Rometty's predecessor, it shows how quickly market changes can overtake even the industry leaders.  

Finally, we have noted before an undercurrent of frustration in the CEO's otherwise aggressively sunny presentation when she talks of "execution" issues.  Whenever this happens, an executive change within the CEO's senior leadership is announced, as it has for IBM and H-P.  More on this later.

Microsoft

Microsoft is trying to be two companies, one consumer-focused and the other aimed at the enterprise customer.  The new CEO was the right choice at the right time and seems to be doing and saying the right things.  This organization, however, isn't doing a great job on the consumer side, as we've said many times before.  

Look at Windows Phone.  Despite having a pretty neat OS that works on good Nokia phones, CEO Nadella's commitment to app developers to work on the Windows marketplace hasn't yielded any increase in the the share of Windows Phone.  Even Windows 10, which looks promising, is all about an operating system; consumers care about their experience on a device, whether a laptop, phone or a tablet. Somehow, in the Microsoft world, it's never as idiot proof to do things as it is in Apple's world. Surface Pro has had a tremendous ad campaign and exposure with the NFL, but it doesn't seem to be gaining meaningful share.

With recent product introductions by Dell and H-P in the laptop/hybrid form factors, maybe MSFT's intention was to force the OEM's to innovate more in response to Surface and Macbooks.  Maybe.

Microsoft's organization can use some serious rationalizing--the ill-chosen Ballmer reorg notwithstanding--- both in numbers and in the way the dual market-facing company works.

The stock has done exceptionally well, and the Enterprises businesses seem to be gaining a lot of traction.  After the recent quarterly results, brokerage houses have meaningfully trimmed EPS estimates for fiscal years ended 6/15-6/17.

Cisco

Besides managing the fortress balance sheet, their questions about margin compression in their core business product lines while managing their transformation into cloud, data center, and security products are largely unanswered.  The stock looks somewhat less expensive than their peers, but with the financial and operational murkiness, one wonders where this company is going over the next one-two years.

H-P

Breaking into two companies, which of course they now admit to discussing over the past year or two, shines a light away from the core concerns about the future, including the board, the M&A process, and how much more heavy lifting has to be done to truly transform the company, as opposed to the impressive and difficult financial realignment that has taken place so far.  

HP, Inc. based on 2014 results would have had $57.3 billion in revenue and $5.45 billion in earnings from operations, with a return on average assets of 24%, driven by a 40% return in Printing.  Future cash flows should be attractive and stable, and thiscompany won't grow too fast but can support debt and perhaps consolidate the printing business over time.  

HP Enterprise would have had $57.6 billion in revenue, $6.1 billion in earnings from operations, and an ROAA of 8.9%.  It is carrying a small, under performing Software segment with a 7.4% ROAA and only $3.9 billion in revenues, with too many small products.  The Services segment carries a 5.4% ROAA, the lowest in the portfolio, lower even than the rebounding Personal Systems group in HP, Inc. 

This business can do much better, but there are still many open questions.  Although the stock has rebounded since 2012, over the past five years it has dramatically under performed the S+P500 and the S+P IT Technology index, according to the 10-K.  

What's wrong with all these companies?  What's the common thread, the elephant in the room?

Going to market---it's the sales forces! Let's think about everything we've been fed by the company CEOs in conference calls, the CIOs, the industry gurus, the software gurus, and corporate governance gurus and put it together.

A New Selling Paradigm

1. Tech sales people have generally always made a great living, whether they sold hardware of software.  Marginal product improvements and enhancements, new models, and industry gurus crying wolf about security or energy efficiency were all enough to generally carry the day over a cycle.
2. IT executives were generally left alone by senior management, unless a VP were brought into the CEO's office to fix a printer or reboot a system.  Despite the governance gurus and folks Accenture and McKinsey protesting,  CIOs weren't real players in the C-suite.  I would bet most investors couldn't name the CIO of their portfolio companies. 
3. Business segment leaders cried directly to the CIOs about what they needed, and because they were the profit centers, they got it.  As long as the big budget came in where it needed to, nobody cared.
4. Sales were organized by geography, by product line, by type of account (national, global, key strategic etc) with lots of cross-over "sales teams" which never worked for the insiders or for the customers.
5. Going forward, things have to change.

• Issues like data security, especially in the case of global financial firms, e.g. JP Morgan Chase , now land right in the board room and the CEO's office.  It has to be a new kind of CIO, probably supported by other key executives like a Chief Data Security Officer, who is in the CEO's office answering questions and having accountability for lots more than a budget.  
• This new CIO will have to have a new relationship with the heads of business units, actually trying to understand their businesses, as opposed to just IT.  This CIO will have to respond quickly, without time for multi year major system makeovers or delayed data center openings. 
• IT, whether hardware, software, or services, probably won't be bought blindly from one vendor, just because of a history with a key sales person. The CIO and her staff won't have time for sexy sales presentations.
• The corporate sales staff too will have to understand their business unit customers and how they actually work, much better than in the past.
• In a sense, a new sales force will have to be more like Accenture-style consultants, but with specific product, software and application knowledge across a variety of offerings.
• This means a new kind of sales team, but a real team with accountability for more than hitting a quota or making the President's Club by individuals.  

IBM and H-P for sure have these issues to address, and the repeated references to "execution" during conference calls over the past two years have made this clear.  The Enterprise businesses within Microsoft have probably operated under the radar because all analysts used to care about was PC sales and Windows licensing.  VARs and other channels should be rationalized and used where appropriate, not just to move volume for reporting periods.  

Taking care of the new CIO and their more complex demands in a unique way with a best-of-breed offering and hands on service, perhaps at lower margins, will carry the day in the "new IT."  

The Serious Fraud Office Finally Passes on Autonomy: HP Should Move On

As recently as Q2:FY14, we had Autonomy on a list of big questions, not just from the legal and financial implications, but because the overhang was distracting for the marketplace. This acquisition again points to failures of the company's outside directors, the naive vision and defective business acumen of former CEO Apotheker, and an acquisition process which had run amok. 

Now, after three years of spinning its wheels, Britain's Serious Fraud Office concluded, "In respect of some aspects of the allegations, the SFO has concluded that, on the information available to it, there is insufficient evidence for a realistic prospect of conviction."  Presumably, potential civil issues will be picked up by the SEC. However, this shouldn't be a fertile ground for large cash fines given HP's having already consolidated and settled many shareholder derivative claims.  HP's impending break-up and its ability to thrive going forward should be where investor and management energies should be spent.

The most illuminating document summarizing the Autonomy acquisition debacle is the January 10, 2014 report of the" Hewlett-Packard Company Independent Committee's Resolution of Derivative Claims and Demands."

HP had a business relationship with Autonomy since Q4 2009, and so the IDOL product and Autonomy's management, especially founder Dr. Mike Lynch, should have been well known to HP's technology, business, and marketing executives.  In fact, thoughts of acquisitions had been circulating with HP for some time, but the disconnect between Autonomy's stand-alone valuation and its revenues precluded any pre-acquisition work. 

During HP board meetings from July 19-21, 2011 CEO Apotheker made a case for a "transformational acquisition" of Autonomy, which was to be the centerpiece of a complete makeover of HP from a hardware company into an enterprise software giant. 

The standalone value of Autonomy was set at $9.5 billion, and HP's internal business development group and others concluded that there were $7.4 billion of "revenue synergies" between HP and Autonomy, presumably with IDOL and Vertica's offerings primarily. This is an extraordinary number, even laughable.  $0.157 billion in integration expense and fees offset these numbers, and there were said to be $0.322 billion of tax synergies available to a combined company. All of this made for a value of $17.1 billion!

Apotheker argued to the board that HP had in place extensive, proven and reliable processes for screening, valuing, and integrating acquired companies, and the board should feel comfortable relying on the output of this machinery, along with the extensive roster of supporting advisers, like KPMG for accounting due diligence, and a bevy of American and British law firms and investment banks.

However, this assertion was belied by facts, including the most recent failure of the EDS acquisition and integration, which itself resulted in an $8 billion write-down.

Apotheker's putting forward that the acquisition of Autonomy would be "financially accretive" in addition to have strategic transformational value had to be a critical element in the board's giving him Authority to Negotiate with Autonomy.  Any board member, even those without financial background, should have disregarded a "revenue synergy" number equal to almost 80% of the target's standalone value.

During an August 8, 2011 conference call with Deloitte, Autonomy's auditor, questions were put forward about "revenue recognition, instances of fraud, control mechanisms" and the like.  Deloitte just answered questions, and no work papers were provided to demonstrate the revenue recognition processes.  Deloitte also noted that an individual whistle blower had filed a complaint about financial irregularities which Deloitte (and presumably Autonomy's audit committee) had investigated and found to have had no merit.  Apparently, this kind of lack of sharing of audit material or detailed financial records is the norm for British acquisitions, according to the report.

CFO Cathy Lesjak objected to the acquisition of Autonomy, but not for the specific valuation process or numbers.  She felt, (1) shareholders would object to the size of the premium paid; (2) HP's bankers underestimated the impact of the announcement on HP's share price, and (3) HP's "history of not executing on major acquisitions" should give the board and management pause about going forward.

Post-acquisition, Ernst and Young were hired as forensic accountants.  They received Deloitte's work papers on Autonomy and identified red flag areas, including audit issues such as differences between the principles-based IFRS and rules-based GAAP that could be problematical.  These were all ignored or swept under the rug during the out-of-control due diligence process.

Vertica and IDOL's product lines could not be integrated, which caused problems during conference call presentations by CEO Meg Whitman when she had to be very careful with her language about the future of HP offerings in the software area.  Revenue synergies clearly had been illusory; the synergy modelling had been prepared by the company's own Corporate Development Group, or internal bankers.  This is not the best way to go about this exercise.

HP's CEO Whitman's characterization that some $5 billion of the $8.8 billion write down of Autonomy post-acquisition was due to "accounting improprieties," "misrepresentation," and "disclosure failures" seems misleading, after reading the text of the report.

According to the report's description of the HP impairment model, the $9.5 billion standalone value of Autonomy had to be reduced by some $6 billion!  If this write down were due to differences interpreting the appropriate treatment of Autonomy's fiscal 2011 results under IFRS and the subsequent translation to US GAAP, this isn't improper or misrepresentation on its face; over a long-time horizon, the cash flows should be the same, unless the fundamentals of the companies technology products were misrepresented; this hasn't been suggested, and so HP's claim is, at best, unproven.

$5.3 billion of the assumed $7.4 billion of revenue synergies were deemed impaired. $3.9 billion of the impairment came from the decline in HP stock and the subsequent effect on the market capitalization reconciliation. This calculation accounts for former Autonomy CEO Lynch's assertion that $5 billion of the impairment came from HP's own reckless assumptions about revenue synergies and not from any proven accounting fraud.

$11 billion in carrying value of Autonomy less the net $2.2 billion revised value yields the $8,8 billion impairment charge.

If the SFO couldn't find the evidence to pursue and win a criminal conviction for accounting fraud, then CEO Whitman's claims don't seem to be above reproach.  Just for the other side, the report details Dr. Lynch's behavior and assertions when the integration work and post-acquisition forensic accounting work were going on.  His behavior seems inexplicable, petulant and unprofessional.  After all, he had just enjoyed a huge payday, and was likely still a contract employee of HP. Professionally and personally, his conduct wasn't exemplary.

For all the 'smart' people in Silicon Valley, this episode should underline for equity investors the need to really investigate, understand and monitor the qualifications, personal character and conduct of the the board members and managements whom they entrust with their clients' funds.