HP Faces Pressure on $9 Billion Writedown
Hewlett-Packard Co. (HPQ) may reveal as early as today how it will fight shareholder claims it botched the Autonomy acquisition and will soon face demands that executives provide testimony, e-mails and documents as investor lawsuits over an $8.8 billion writedown of the deal reignite.
The personal-computer and printer maker faces a judge’s order to complete an internal review of the claims and decide by tomorrow whether to seek dismissal of the investor case or file its own lawsuit. Shareholders claim current and former top executives knew, or should have known, about shoddy accounting practices at Autonomy before buying the company for $10.3 billion in 2011.
Hewlett-Packard Chief Executive Officer Meg Whitman, the lone executive ordered by a federal judge to face allegations of misleading investors in the shareholder case, contends the company was defrauded by Autonomy.
The shareholder cases “call into question HP’s responsibility for its own misfortune,” Deborah DeMott, a Duke University law professor, said in a phone interview. “The victim’s negligence is not a defense.”
Fallout from the Autonomy deal included a shareholder rebuke that prompted Chairman Ray Lane to resign his position last year and two other directors to leave the board. Securities regulators in the U.S. and the U.K. began civil and criminal investigations into Hewlett-Packard’s allegations and shareholders filed a derivative suit on behalf of the company against its officers and directors, as well as securities-fraud class actions that also named the company’s auditors and financial advisers.
Hewlett-Packard bought Autonomy in a deal engineered by Whitman’s predecessor, Leo Apotheker. A year later, Hewlett-Packard under Whitman said it would take the $8.8 billion writedown, largely because of what it said was falsified accounting at the software maker.
Whitman and the company’s board are in the midst of a turnaround of the struggling computer maker, which is poised for a third straight year of sales declines. Hewlett-Packard, which makes personal computers, servers and printers, is trying to move past a period of upheaval including declining performance and the departure of Apotheker and Mark Hurd as CEO before him.
Shares of the Palo Alto, California-based company gained 96 percent last year, making it the 17th best performer in the Standard & Poor’s 500 Index (SPX), which rose 30 percent. The stock had declined 45 percent in 2012 and 39 percent in 2011.
Whitman is getting credit for almost doubling Hewlett-Packard’s stock price last year and “most investors think she’s heading in the right direction,” said Jayson Noland, an analyst at Robert W. Baird who has the equivalent of a hold rating on the shares. The autonomy dispute is “pretty much in the rear-view mirror now” for investors, he said.
“HP has just misused capital over the years, from Autonomy to Palm,” Noland said. “But it’s not a big deal for the stock right now.”
Whitman and other Hewlett-Packard executives have said Autonomy under founder Michael Lynch misstated more than $200 million in revenue -- including booking sales of PCs and computer mice as software. Whitman has said Hewlett-Packard relied on financial results at Autonomy audited by Deloitte LLP and KPMG LLP.
Claims in the derivative case against Apotheker, Lynch, former Hewlett-Packard Chief Strategy and Technology Officer Shane Robison and other of the company’s managers were dismissed in November by U.S. District Judge Charles Breyer in San Francisco.
Breyer, who put the derivative case on hold in September, said in his Nov. 26 ruling that Whitman must face claims that statements she made in May and June of 2012 about Autonomy’s weak performance omitted that she knew accounting fraud was under investigation.
Hewlett-Packard hasn’t disclosed more details about misstated revenue, while Lynch has denied there were accounting improprieties.
Hewlett-Packard appointed three board members -- Ralph Whitworth, Gary Reiner and Robert Bennett -- to a special committee to review the shareholder lawsuit claims. The committee’s lawyer persuaded Breyer to put the derivative case on hold until the panel completed its work and made a recommendation to the board on how to proceed.
Breyer, who is presiding over both lawsuits, gave the company until tomorrow. Hewlett-Packard’s board was expected to meet this week, said a person familiar with the matter who asked not to be identified because the matter wasn’t public. Michael Thacker, a company spokesman, declined to comment on the litigation.
By law, companies whose managers or former managers are sued derivatively by stockholders can join the lawsuit, seek to take it over, have it dismissed or file their own lawsuit targeting former executives or outsiders, said DeMott.
The board committee’s lawyer is Ralph Ferrara, who represented a special litigation committee at Brocade Communications Systems Inc. (BRCD) that sued former company executives and board members over stock option backdating practices. Ferrara, based in Washington, didn’t return phone and e-mail messages seeking comment on the court-imposed deadline.
Hewlett-Packard is unlikely to file its own lawsuit against those it believes are responsible for defrauding the company before the federal investigations are completed, DeMott said.
With the case back on, shareholders’ attorneys will seek depositions of executives involved in the deal and documents about audits and due diligence, said Brian Robbins, partner at Robbins Arroyo LLP, a lawyer for Hewlett-Packard investors. They will also seek to obtain any reports by the board committee, he said.
Hewlett-Packard and Whitman said in a Jan. 10 response to the derivative lawsuit that they didn’t make false or misleading statements or cause investors to lose money.
A lawyer for shareholders said he expects the company to ask that the case be thrown out.
“I guarantee you that on Jan. 20, you will receive a motion to dismiss,” Joseph Cotchett, a lawyer for shareholders, told Breyer in September.
The shareholder case is Nicolow v. Hewlett Packard Co., 12-05980, and the derivative case is In re Hewlett Packard Shareholder Derivative Litigation, 12-06003, U.S. District Court, Northern District of California (San Francisco).