How HP's Meg Whitman is passing the buckNovember 30, 2012: 11:47 AM ET
In the wake of the recent Autonomy acquisition mess, Whitman has outlined a multi-pronged defense of HP's board. But that defense has several holes.
FORTUNE – U.S. and UK taxpayers looking to spend some extra dollars on behalf of corporations during the holidays (and into next year) will be pleased to know that Hewlett-Packard's bungled acquisition of software firm Autonomy has made that possible.
Last week, HP asked both the SEC and the U.K.'s Serious Fraud Office to open investigations into possible accounting improprieties that may have occurred at Autonomy prior to HP's purchase of the firm in October 2011. Taxpayer resources at both the FBI and SEC are already at work.
On November 21, 2011, CEO Meg Whitman had touted Autonomy as HP's "priority #1, 2 and 3 for 2012." The entire current HP board, excluding new board member Ralph Whitworth, blessed the purchase. On November 20, 2012, Whitman announced an 85%, $8.8 billion write-down of the 2011 acquisition.
As last week's HP (HPQ) quarterly analyst call unfolded like a bad dream, Whitman set the beleaguered board's defense in motion. On the call and in follow up interviews on CNBC and Marketplace, Whitman fashioned her court-ready responses to questions on the board's culpability in a geek code. Not technology geek, but governance geek. The code word in this case? "Rely."
"We are disappointed by the news," Whitman told CNBC. But "that is what you do when you are on a board. You rely on the recommendations of management and the [audited] financials," she said. "I voted for this deal but we are where we are." Her carefully crafted words cast the board as the victim, wrapping it in a protective shield that directors most often use when they are sued.
Where was the board?
But reliance on management has its limits. Particularly in large transactions and M&A situations, boards need to take into account other views and carefully weigh alternatives. Before the deal closed in October 2011, HP chair Ray Lane appeared at an Information Week gathering. "Autonomy was the only answer," he said. "They are unique."
Not long after, Oracle issued press releases describing its earlier talks with Autonomy founder Mike Lynch: "Oracle refused to make an offer because Autonomy's current market value of $6 billion was way too high," one of the releases stated. (HP had offered $10.3 billion.)
Other views on the valuation were closer to Oracle's. "This bid seems to defy logic," Peel Hunt analyst Paul Morland told the Financial Times, characterizing the 79% premium HP paid as "an 'amazing' premium for a company whose earnings grew by just 6 per cent in the first half of the year." And in July 2011, before HP even announced the acquisition, short seller Jim Chanos issued a detailed report citing concerns about Autonomy's books, disclosures, and future trajectory, according to CNBC.
But even HP management was not unanimously supportive of the deal. In fact, CFO Cathy Lesjak, who Whitman later appointed to oversee M&A due diligence at HP, took a firm stand against the acquisition. According to Fortune'sJames Bandler and Doris Burke, Lesjak told the board, "I think it's too expensive," and, "This is not in the best interests of the company."
Did the board probe enough?
A little research would have highlighted other sources for concern. Good board members look for outside information at sites like Glassdoor.com. That site gives a picture of a very disgruntled Autonomy workforce (pre and post-takeover).
While reliance on management is a standard defense for a decision gone awry, the tech giant also used a less common deflection strategy: they blamed $5 billion of the $8.8 billion write-down on Autonomy's bookkeeping. The McKesson (MCK) board was able to escape blame in the courts in a similar situation a decade ago. John Hammergren, a current HP board member and CEO of McKesson, was a top exec at that company at the time.
But the first step to any good valuation is testing the plausibility of the numbers in the first place. And that's not something to skip over lightly. That means more than relying on audited financials but looking behind the numbers, as I discussed in my book. Audit firms, even those with conflicts, as was the case here, are rarely held to account.
What happens now?
Perhaps HP's board members will not have to suffer much in court. Board members I speak with are generally not concerned with being held personally responsible because the bar is set so high that it is nearly impossible to affect them.
But the HP board has suffered yet another blow to its credibility. Last quarter, Whitman wrote down $8 billion in goodwill. Even now, those who supported the board's Autonomy purchase are having doubts about the board and HP's future.
Sterne Agee and Leach analyst Shaw Wu, who went on CNBC last August to say the Autonomy deal might be beneficial to HP in the long term, told the Chicago Daily Herald last week that "he isn't even sure Whitman's job as CEO is safe because of her presence on the board when the Autonomy deal was approved."
Some are even calling for a purge of HP's board. It's surprising that board members aren't raising their hands to resign. But HP's Thacker told me the board is comfortable with how the company is proceeding.
Amid all this mess, there's one person who probably is smiling right now. Shortly after HP's board decided to buy Autonomy, Dominique Senequier decided "not stand for re-election at HP's next annual meeting of stockholders," according to an HP filing. HP had appointed Senequier to the board earlier that year.
Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.