Case Study of a Failed M&A—The Role of Accounting and Finance in HP’s Acquisition of Autonomy

Updated: Mar 26, 2021

Just 14 months after the acquisition, HP wrote down 80 percent of Autonomy’s purchase price. Four years later, HP sold Autonomy for a fraction of what it paid to acquire the company. The differences in the accounting standards used by each company allowed Autonomy to recognize revenue in a more aggressive way. Ultimately, HP accused Autonomy of fraud.

Accounting Methodology

Accounting Standards. Generally, large merging companies hire auditors to provide a due diligence report based on a target company’s financial and accounting records. These due diligence reports include differences caused by differing reporting standards. One of the major problems in the merger between HP and Autonomy came from the different accounting standards used in the U.S. and U.K. The U.S. has more rules-based accounting rules compared to the international accounting standards used in the U.K. The idea of rules- versus principles-learning is seen in the difference in reporting standards, clearly summarized by Floyd Norris in the New York Times. Norris explains, “American rules, known as generally accepted accounting principles, or GAAP, are much more specific on how to decide the relative values, while international rules tend to state principles the company should apply and offer limited examples to guide the decision.”1

Specifically, Autonomy used International Financial Reporting Standards (IFRS), which allows sellers to recognize revenue for sales on value-added resellers if specific criteria are met, but company management must use their judgement to determine when the criteria are met. Under U.S. GAAP, there are specific guidelines for revenue recognition for software sales.2 This is clearly a difference between the principles-based method in the U.K. and rules-based method in the U.S. IFRS gives standards and lets companies apply those standards using their judgement while U.S. GAAP gives standards with examples of how to apply those standards. This difference in standards led to misinterpretations of Autonomy’s revenue growth which is discussed below under the subheading ‘valuation’. Even though HP hired a team to create a due diligence report, Apotheker and the board failed to read it which lead to problems that could have been avoided.3

Valuation. On October 3, 2011 HP announced the completion of its acquisition of Autonomy for over $11.7 billion – representing a premium in excess of 79 percent of Autonomy’s closing share value4. While companies are, generally, required to pay a premium when acquiring another company (i.e., control premium), HP’s premium payment for Autonomy was derided, even then. Generally, companies don’t pay a premium as high as HP paid unless they are a part of a bidding war. In the absence of a bidding war, premiums tend to be more modest. For example, the average premium paid in deals similar to Autonomy’s (technology deal with an enterprise value of $10 billion or more) is only 32 percent.5

In the deal-making world, paying a premium is normal. In fact, the only time firms don’t pay a premium is when they structure the deal as a “merger of equals” or when the target’s share price rises when a possible deal is leaked. The rationale behind paying a premium is that companies will be able to combine their resources and function at a level higher than what the individual companies could accomplish separately. This, seemingly hidden, value is referred to as synergies and represents a significant rationale for making deals.

In this case, HP reportedly valued Autonomy “at more than $17bn, including a standalone value of $9.5bn and $7.4bn in ‘revenue synergies.'”6 Oracle’s response to a pitch meeting (a meeting where a buyer or seller will pitch the opportunity to make a deal before engaging in more serious negotiations) illustrates the subjectivity inherent in the valuation process. After HP announced it would acquire Autonomy, Larry Ellison (CEO of Oracle) said, “Oracle refused to make an offer because Autonomy’s current market value of $6 billion was way too high.”7 The fact that HP bid an amount nearly double what Oracle balked at shows the level of subjectivity inherent in valuing a firm’s standalone value and its potential synergies.

Another potential level of complication in the valuation process stems from potential differences in accounting standards. As noted in the accounting standards section, HP uses U.S. GAAP, which is rule-based, and Autonomy used IFRS, which is principle-based. HP’s valuation of Autonomy differed from reality, in part, because of differences in revenue recognition between these two standards. “Target [Autonomy] recognizes revenue for license sales upon sell-in to its VARs [resellers] rather than on a sell-through basis to end customers.”’ 8 Under this accounting method, IFRS allows Autonomy to recognize revenue earlier than U.S. GAAP. Even though HP accounted for the differences in accounting values correctly in the due diligence process, potentially, fraudulent activity caused HP to overvalue Autonomy.

HP’s failure to properly value Autonomy is evidenced in their write down of 80 percent9 of Autonomy’s value just 14 months after the acquisition, as well as the subsequent divestiture of Autonomy four years later. In the best of circumstances, valuation is an incredibly murky process. HP’s overvaluation is, likely, the result of a complicated process coupled with differing accounting standards and fraud. Still, HP’s overly myopic focus on anticipated synergies led to exaggerated expectations, and ultimately, a merger doomed to failure before the ink dried on the offer sheet.

Professional Behavior

Optimism. Sidney Gray, the father of national culture’s effect on accounting, lists the dichotomy between conservatism and optimism as one of the major cultural dimensions affecting the practice of accounting. In practice, conservatism leads accountants to defer the recognition of revenue and accelerate the recognition of expenses. Where conservatism leads to more cautious practice of accountancy, optimism has the opposite effect. Gray’s research identifies the US and the UK as two of the most optimistic countries on earth. This section will discuss how optimism effected Autonomy’s accounting practices, as well as, HP’s rationale for making the decision to acquire Autonomy despite fierce opposition from their own shareholders.


In the aftermath of the failed merger, accusations of serious accounting improprieties were levied against Autonomy. In reality, Autonomy was a publicly listed company and received audits, so the degree of financial misrepresentation HP accuses Autonomy of committing is likely overstated. The role of the auditor is to provide assurance that the information recorded in the financial statements is fairly represented and follows accepted accounting standards and practices. Autonomy’s management would have to formally state their accounting methods in the company’s financial statements, so we know that they at least received approval from their auditor. Unfortunately, we do not know to the degree to which Autonomy’s revenue was overstated.

It is possible that a portion of the, alleged, accounting discrepancies are driven by the cross-section of UK based accountants’ tendency towards optimism and the principles-based practice of IFRS. While US based accountants exhibit similar inclinations toward optimism, the rules-based GAAP provides an objective standard when recognizing revenue. While the US accounting standard setting body and the international accounting standard setting body have subsequently issued a converged revenue recognition standard, the applicable accounting standards (i.e., GAAP and IFRS) at the time of the merger did exhibit considerable variation.


While HP was levying accusations of fraud against Autonomy, others were questioning the overall rationale of acquiring autonomy. In an interview with the Financial Times, one management researcher posited, “They are using this deflection tactic, but there is much more to this – the story is really the poor due diligence and the human aspects of why they would be motivated to make what we now know was a bad bet.”10

While the researcher quoted has the benefit of hindsight, there were indicators present, which should have discouraged the Autonomy deal. First, upon announcing a deal to buy Autonomy, HP shares precipitously declined 12 percent and HP’s market capitalization tumbled $15 billion in reaction to the merger. Second, HP fired the CEO (Apotheker) who spearheaded the deal. Third, underscoring the untenability of HP’s pursuit of Autonomy is the fact that 70 to 90 percent of acquisitions fail.11 Finally, HP had a history of poor choice in acquisition targets – as evidenced in the following statement from the Financial Times:

As Meg Whitman, HP’s latest chief executive, disclosed a writedown of $8.8bn on the Autonomy deal, she made it sound like a unique scandal. But three months ago, she wrote down $8bn on its $13.9bn purchase of Electronic Data Systems in 2008. Not even that collapse matched Leo Apotheker, her predecessor, who wrote off more than the $1.2bn HP had paid for Palm in 2010…. With management and accounting like that, it is surprising HP has a balance sheet left. This cascade took $20bn of goodwill and intangibles off its assets this year – almost matching its $23bn market capitalisation.12

So, in spite of ardent disapproval from its shareholders, firing its CEO, and its well-known failure in M&A, HP persisted. HP’s, seemingly illogical, persistence is described by the social psychology term “unrealistic optimism.”13 Unrealistic optimism is a tendency for individuals to rate “their own chances to be above average for positive events and below average for negative events.” Furthermore, Neil Weinstein, a social psychologist, lists the following as affecting one’s degree of unrealistic optimism: desirability, perceived probability, personal experience, and perceived controllability.14 HP’s desire to move into software and computing, combined with their belief that they could effectively manage and control integration led its management to behave with unjustifiably high levels of optimism.

The degree to which HP’s management team acted with unreasonable optimism manifests itself in the form of negligent leadership (i.e. failing to heed the Auditor’s due diligence report15 and ignoring concerns in relation to Autonomy’s accounting16), payment of an unjustifiably high premium, and refusal to walk away from an obviously unpopular acquisition.

Fraud/Earnings Management. A statement issued by HP says, “HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP.”17 The statement accuses Autonomy of fraudulent accounting practices. An investigation by the SEC found:

The former CEO of Autonomy’s U.S.-based subsidiary in San Francisco, Calif., participated in an accounting scheme orchestrated by Autonomy’s U.K.-based senior-most executives to meet internal sales targets and analyst revenue expectations. Autonomy issued materially false and misleading financial reports that overstated revenues in 10 consecutive quarters. Autonomy’s executives also directed HP’s due diligence team to rely on these false filings in connection with HP’s acquisition.18

Part of the reason HP wrote down Autonomy is due to “inappropriate recognition of revenue on software sales to value added resellers.”19 Appropriate revenue recognition to value added resellers is allowed under IFRS but not under U.S. GAAP. However, as Jack T. Ciesielski noted, “Accounting standards can’t prevent the creation of false documents or backdated purchase orders. No set of rules, not even the new revenue recognition standard, can prevent mischief by managers expected to play by the rules.”20 The blame cannot all be placed on the difference in standards. In this case, it looks like Autonomy’s intention was to grow revenues and meet earnings expectations:

The bogus transactions were designed to look real and throw suspicious parties off the trail. Backdated documents don’t look different from ones that aren’t backdated; the cash paid from the round-trip transactions was arranged to make dummy receivables look real. That would likely satisfy auditors, if their suspicions were unaroused otherwise.21

Differences in accounting standards between corporation’s financial statements need to be scrutinized during the due diligence process, but there is always a chance of fraud going undetected on the target company’s books.

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