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Mergers & Acquisition (FRE 6391) HP – Autonomy acquisition 1 HP’s acquisition of Autonomy Bhavin Desai N14144281 Adwait Dixit N18717938

HP Autonomy Acquisition_v2

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Mergers & Acquisition (FRE 6391) HP Autonomy acquisition1HPs acquisition of AutonomyBhavin Desai N14144281

Adwait Dixit N18717938Company background Hewlett Packard Company (HP)Hewlett-Packard Company (HP), incorporated on 11 February 1947, is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses (SMBs) and large enterprises, including customers in the Government, health and education sectors.Mergers & Acquisition (FRE 6391) HP Autonomy acquisition2SegmentsPersonal Systems GroupServicesImaging and Printing GroupStorage and NetworkingHP SoftwareHP Financial Services and Corporate InvestmentsEnterprise ServersHPIn 2011, HP acquired Autonomy to boost firms capabilities in Enterprise Software SpaceSales over $110b and operations in 140 countriesCompany background AutonomyAutonomy, a multinational IT company headquartered in Cambridge, UK, provides specialized software service viz. big data analytics, data protection, information governanceMergers & Acquisition (FRE 6391) HP Autonomy acquisition3AutonomyAt the time of acquisition, it was the largest and most successful software business in UKIDOL Server

(Intelligence data operating layer)Off the shelf platform forms the basis of all of Autonomy's productsAnalyze unstructured informationExtracts the key concepts or meanings in unstructured data while additional functionality modules can be purchased which provide more advanced data retrieval, presentation, monitoring and alertingHP acquired Autonomy in August 2011 Mergers & Acquisition (FRE 6391) HP Autonomy acquisition4

In August 2011, HP announced a $11.1 billion cash acquisition of British-based software firm AutonomyPossible reasons for Autonomy acquisition Mergers & Acquisition (FRE 6391) HP Autonomy acquisition5Achieve Synergy through economies of scopeIn-sync with HPs acquisition strategy Replicating rival strategiesManagerial hubrisPossible reasons for acquisitionPossible reasons for Autonomy acquisition Mergers & Acquisition (FRE 6391) HP Autonomy acquisition6Achieve Synergy through economies of scopeIn-sync with HPs acquisition strategy Replicating rival strategiesManagerial hubrisPossible reasons for acquisitionPossible reasons for Autonomy acquisition economies of scope Mergers & Acquisition (FRE 6391) HP Autonomy acquisition7

Bundling of software servicesOperational Synergy

Financial Synergy

To achieve . Many more New products and further penetration in existing marketsHP to bundle services in the Enterprise software space to its existing clients across the world especially UK and the rest of EuropeWith the acquisition of Autonomy, HP further strengthened its position in Enterprise Software category Possible reasons for Autonomy acquisition in-sync with HPs acquisition strategy Mergers & Acquisition (FRE 6391) HP Autonomy acquisition8Achieve Synergy through economies of scopeIn-sync with HPs acquisition strategy Replicating rival strategiesManagerial hubrisPossible reasons for acquisitionPossible reasons for Autonomy acquisition in-sync with HPs acquisition strategyMergers & Acquisition (FRE 6391) HP Autonomy acquisition9Prior to Autonomy, HP acquired Vertica in Feb 2011Vertica had proprietary software product in structure database managementAutonomy (through proprietary platform IDOL) performed unstructured database managementAutonomy deal complemented earlier acquisition of VerticaPossible reasons for Autonomy acquisition replicating rival strategies Mergers & Acquisition (FRE 6391) HP Autonomy acquisition10Achieve Synergy through economies of scopeIn-sync with HPs acquisition strategy Replicating rival strategiesManagerial hubrisPossible reasons for acquisitionPossible reasons for Autonomy acquisition replicating rival strategiesMergers & Acquisition (FRE 6391) HP Autonomy acquisition11HP tried to imitate its rival companies (more specifically IBM) to enter enterprise software businessIBM since 2001 had made multiple acquisitions to enter software products & services domainHP tried to sell its PC business (with lower profit margins) similar to IBMs sale of ThinkPad to Lenovo IBM acquired informics corporation, crossworld software and rational sotware11Possible reasons for Autonomy acquisition Managerial hubrisMergers & Acquisition (FRE 6391) HP Autonomy acquisition12Achieve Synergy through economies of scopeIn-sync with HPs acquisition strategy Replicating rival strategiesManagerial hubrisPossible reasons for acquisitionPossible reasons for Autonomy acquisition Managerial hubrisMergers & Acquisition (FRE 6391) HP Autonomy acquisition13Management was overly confident with regards to valuation of AutonomyNo due diligence (poor implementation of COSO internal control protocols) HP was acquiring software companies in order to release synergies without due valuationKey deal participants (HP and Autonomy) Mergers & Acquisition (FRE 6391) HP Autonomy acquisition14

CEO - Dr. Michael Lynch

CFO Susshovan Hussain

Financial Advisors included Qatalyst Partners, UBS, GS, Citigroup, JPMorgan Chase, BofA Merill Lynch

In addition, there were other PR and law firmsCEO Leo Apotheker

CFO Catherine Lesjak

Board member Present CEO Meg Whitman

Financial Advisors Barclays, Perella Weinberg LP

Financial Details of the Deal Mergers & Acquisition (FRE 6391) HP Autonomy acquisition1518 Aug 2011 HP announced purchase of Autonomy for $42.11/ share (25.50/share) in cash deal. It meant a one-day premium of approximately 64% based on 17 Aug 2011 closing price (15.58/share)Cash deal funded by a combination of HPs cash resources and debt financing of 5b provided by Barclays Capital via 364 day bridge facilityThe deal was approved by both board of directors (friendly takeover)The Transaction was completed via SPV in accordance with UK LawsFinancial details of the deal 3 Oct 2011 HP closed the deal, acquiring 213,421,299 Autonomy shares (87.34% of current issued shares) for $11.1b for a (acquiring) premium of $5.2bEffect on Stock Prices (Post-Announcement)Mergers & Acquisition (FRE 6391) HP Autonomy acquisition1618 Aug 2011 HP announced its intention to acquire UKs AutonomyAutonomy share price ()HP share price ($)72%-20%

Result post acquisition (Market Capitalization)Mergers & Acquisition (FRE 6391) HP Autonomy acquisition173 months after completion of acquisition, HP lost $26b of its market value i.e. 37% decline in stock prices. Over next 12 months, cumulative decline was about $45b i.e. 61% decline in stock pricesHP Market cap($b)-25.8b-45.1b31 Jul 2011 $72.3b (market cap)31 Oct 2011 $46.5b (market cap)31 Oct 2012 $27.2b (market cap)Autonomy Purchase Price ($11.1b) and Long Term Debt as a % of Market ValueMergers & Acquisition (FRE 6391) HP Autonomy acquisition18Autonomy Purchase Price ($11.1b) as a % of Market ValueLong Term Debt as a % of Market ValueKey dates and timelines Mergers & Acquisition (FRE 6391) HP Autonomy acquisition1931 July 2011

End of fiscal 3Q11

Net Long term debt $6b

Market Cap $72.2b18 August 2011

HP announces deal to purchase Autonomy for $11.b in cash31 October 2011

End of fiscal 4Q11

Net Long term debt $14.5b

Market Cap $46.5b31 October 2012

End of fiscal 4Q12

Net Long term debt $10.5b

Market Cap $27.2b20 November 2012

Announces $8.8b write-down and alleges fraudFinancial analysisMergers & Acquisition (FRE 6391) HP Autonomy acquisition20HP and Autonomy revenue and operating cash flow, in $ billionsHP 2011 HP 2012HP annual change (%)Autonomy 2011As % of HP 2011Revenue127.5120.4-6%10.8%Operating Cash Flow12.64.1-68%0.32.5%Accounting Fraud & LawsuitsMergers & Acquisition (FRE 6391) HP Autonomy acquisition2120 November 2012 HP announced that it would write-off $8.8b of $11.1b that it paid to acquire AutonomyHP alleged that $5b write-off was due to accounting fraud on Autonomys behalfIt accused Autonomy of dressing up low-margin hardware revenues as high-margin software revenuesAccounting FraudUp to three lawsuits were filed against former HP management with respect to Autonomy deal31 April 2014 HP announced settlement of $57m to settle the lawsuitsLawsuits30 April 2015 HP filed lawsuit against former Autonomy CEO Dr. Michael Lynch and CFO Hussain for $5.1b 31 April 2015 Former Autonomy CEO and CFO in turn filed a counter-lawsuit for $147mCOSO = committee of sponsoring organizations of the Treadway Commission 21Autonomy allegedly dressed up its accounting statements to appear more profitable than they actually wereLow margin revenues were massaged to appear as high margin revenuesThis enhanced Autonomys growth prospects potential Accounting FraudHP gained precious little in terms of revenue and operating cash flow for sacrificing 15 % of its market value on Autonomy, whose revenues were less than 1%, and whose operating cash flows were less than 3 %, of HPsLack of internal controls and managerial hubris meant Autonomy was over-valued to a large extentIll-advise was also largely responsible for the misvaluationMis-valuationPossible reasons for FailureMergers & Acquisition (FRE 6391) HP Autonomy acquisition22As per COSO 2013 internal control framework, a company should follow procedures & policies and acknowledge mistakesHP failed to conduct due diligence and detailed financial analysis of Autonomy before acquisitionFurthermore, instead of accepting poor internal controls, HP entirely blamed Autonomy for the write-offMany recent acquisitions done by HP failed to get synergies of any kind due to managerial hubrisManagement refused to accept poor diligence and internal controls and laid the blame entirely on AutonomyReasonsLack of Internal ControlsManagerial HubrisKey considerationsMergers & Acquisition (FRE 6391) HP Autonomy acquisition23Well-Implemented Internal Control

A company with well-implemented Internal Control should strictly implement policies and procedures and acknowledge mistakes (if any).

COSOs 2013 framework calls for a tone at the top of ethics and integrity

Checking Managerial Hubris

Unchecked Managerial Hubris means company management has over-confidence and over-optimism about its decisions. It frequently results in misevaluation of target companies

HPs culture at the top was so infused with hubris that it failed to conduct the elementary financial analysis and due diligence that would have uncovered the alleged accounting improprieties in time to prevent the disastrous acquisition.Proper Due Diligence

Due diligence is essential at every stage of acquisition

A well-defined approach with detailed analysis of target ensures low probability of failure Responsible Auditors

Auditors should have a broad view of their responsibilities while performing financial audits

The auditors, in reviewing HPs financial statements and internal controls, apparently considered it outside of their purview to advise management that it was embarking on an ill-advised acquisition. Yet Sarbanes-Oxley (section 404) specifically assigns auditors the responsibility not just to express an opinion on the accuracy of financial statements but also on internal controls.

Key considerationsReferencesMergers & Acquisition (FRE 6391) HP Autonomy acquisition24 HP 3Q11, 4Q11, 4Q13 Quarterly report

HP 2011, 2012, and 2013 annual report

HP's Purchase of Autonomy: Hubris at the Top and Failure of Internal Controls, Dov Fischer, 20 November 2013

HP's Autonomy acquisition cements CEO's software strategy , OVUM, 21 Aug 2011

HP takes a bold step into enterprise software, OVUM, 05 Sep 2011

HP Says it sued two former Autonomy Executives, WSJ, 31 March 2015.

HP says Autonomy erred prior to the deal, WSJ, 3 Feb 2014.

From HP, a blunder that seems to beat all, NYTimes, 30 Nov 2012.

HP's Deal from Hell: The mark-it-up and write-it-down two-step, http://aswathdamodaran.blogspot.com/2012/11/hps-deal-from-hell-mark-it-up-and-write.html, 26 November 2012.

HP to acquire leading enterprise information management software company Autonomy Corporation PLC, HP Official Press ReleaseThank You Mergers & Acquisition (FRE 6391) HP Autonomy acquisition25