Hewlett-Packard's Inevitable Impairment

That was quick. Just one quarter ago, when Hewlett-Packard (NYSE: HPQ  ) reported its third-quarter earnings results along with the $8 billion impairment charge related to the purchase of EDS, I sarcastically wrote, "[L]uckily, it hasn't made any other questionable multi-billion-dollar deals recently, just waiting to get written down... Oh, wait. Never mind."

That was a reference to the company's highly controversial acquisition of British software maker Autonomy that was made almost exactly a year prior. I didn't expect to be able to say, "I told you so" so soon, but HP's just making this too easy.

The plot thickens
HP has now reported fourth-quarter figures and the company is eating an $8.8 billion non-cash goodwill and intangible asset impairment charge related to the Autonomy acquisition from last August. That's the majority of the total $11 billion purchase price! It's also more than the $3 billion impairment that Jefferies analyst Peter Misek thought was en route. Ouch. Just ouch.

It gets better, though. As if HP didn't already have enough soap opera excitement from the Mark Hurd scandal, this plot continues to thicken. HP says that Autonomy was fudging its numbers, inflating its value and leading HP to overpay. The company attributes the charge to "serious accounting improprieties, disclosure failures and outright misrepresentations" at Autonomy.

In a separate statement, HP said it was "extremely disappointed" that Autonomy pulled a fast one on it, although it remains committed to the technology it acquired -- it's just not fond of how much it paid. After Autonomy founder Mike Lynch left the company, a senior member of Autonomy's management team came forward and fessed up, sparking and internal investigation. HP said it "now believes that Autonomy was substantially overvalued at the time of its acquisition."

Sadly, this predicament was entirely avoidable without the need for an internal investigation. Any Fool can tell you that paying 15% of your market cap for a company that has 0.8% of your revenue is a raw deal. Sounds dumb, don't it?

On top of that, CEO Meg Whitman is pointing fingers at two former HP execs that have since left. Of course, the first would be her predecessor Leo Apotheker, while the second was Shane Robison, previous head of strategy. While deflecting some blame is somewhat appropriate, Whitman was on the board at the time so she did have a vote in all this. Besides, the board just feels awful for wasting all that shareholder money. Just awful.

Please buy Autonomy
Investors might also remember when Oracle (NYSE: ORCL  ) CEO Larry Ellison promptly bashed the deal, saying that Autonomy had tried "shopping" the company to Oracle. The enterprise software giant said no to a $6 billion proposal, yet HP paid far more. Never one to shy from the public spotlight, Ellison even had Oracle issue official corporate press releases just to poke fun at the hopeful couple.

Lynch had denied "shopping" Autonomy to Oracle, so Oracle responded: "Either Mr. Lynch has a very poor memory or he's lying. ... The Lynch shopping visit to Oracle is easy to verify. We still have his PowerPoint slides." Lynch then recalled meeting with Mark Hurd, who Oracle snapped up after HP ousted him. Oracle even has a whole collection from the dramatic episode, neatly filed under its "Please Buy Autonomy" page of its website.

Impairment: The new normal
If this all sounds like deja vu, it's because impairment charges are becoming the new normal for HP. Within the past five quarters, the company has eaten over $20 billion in impairments related to botched acquisitions in recent times. That's a ton of shareholder dollars that have promptly evaporated in a poof of non-cash charges as HP desperately and unsuccessfully tries to diversify away from the struggling PC market.

Company

Acquisition Price

Date Purchased

Impairments

Quarter Recognized

Palm

$1.2 billion

4/28/10

$3.3 billion

Q4 2011

EDS

$13.9 billion

5/13/08

$8 billion

Q3 2012

Autonomy

$11 billion

8/18/11

$8.8 billion

Q4 2012

Total

$26.1 billion

 

$20.1 billion

 

Source: HP.

Also, don't forget the $1.2 billion impairment from the second quarter as the company focused its PC branding strategy, adding even more dollars to our tally. That reduced the value of the Compaq trade name that HP acquired in 2002.

For fiscal 2012 (which doesn't include the Palm writedown), we're talking about a total of $20.3 billion in goodwill and intangible asset impairments, along with restructuring and acquisition-related charges. Poof.

Can't take no more
Over the past year, HP has cut its shareholders' equity by nearly half. This time last year, the book value of equity was $39 billion and today that figure is just $22.8 billion. Heck, if HP has another year like this, it could approach negative book value next time around. Don't forget that the company still has another $35.6 billion in goodwill and intangibles sitting on the balance sheet, down from $55.4 billion a year ago.

HP investors can't take much more of this.

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