Hewlett Packard is Still Suffering From the Autonomy Fiasco
Naomi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hewlett Packard (NYSE: HPQ) is still trying to sort out the mess they inherited when they purchased Autonomy Corp. HP claims that Autonomy managed to hide fraudulent accounting practices from them, in order to help push the buyout from HP through.
However, according to ValueWalk's Paul Shea, at least one fund manager saw this mess coming, and actually reported them several weeks prior to HP's discovery of the issue.
John Hempton, Bronte Capital Management's founder, offered a presentation aimed at teaching investors to spot companies that had "cooked" their accounting ledgers. He is somewhat of a specialist in this field, and has since admitted to knowing that something was wrong with Autonomy Corporation's books.
He admits that one major flaw in his personal assessment of Autonomy is the fact that the problems were even worse than he thought. He points out that Autonomy's 2010 accounting proves his point of how badly their books were altered. The income structure that the company claimed they were operating on simply couldn't pass a close scrutinizing look.
Why didn't Hewlett Packard catch this fraud before they completed the buyout? After all, it's fair to assume that the computer giant spent far more man hours researching Autonomy than Hempton himself exerted.
Hempton is not the only one to have noticed early warning signs. Jim Chanos, also a well known investor, spotted some of the same symptoms that Hempton did. Chanos is well known for his short investments in companies he believes have poor accounting procedures. There were also several analysts from The Financial Times Alphabook who also saw the irregularities in the books.
So, why didn't Hewlett Packard see the signs that were so obvious to outside parties? Were they ignoring the fraud in order to continue with the purchase? Is it possible that the company simply turned a blind eye to major accounting errors?
As the investigation into the matter continues, it's certainly going to have a profound effect on HP stock shares. As of Nov. 21 at market close, the company was trading at $11.94 per share, with a market cap of $23.48 billion. While this represents a 1.96% rise in price from the previous close, it will be a short lived rise if Hewlett Packard is found guilty of committing fraud.
HP has already suffered in recent years, as the shift from desktop and laptop PCs to mobile devices has seriously cut into the company's market share. With Apple (NASDAQ: AAPL), Samsung, and Google (NASDAQ: GOOG) dominating the mobile market, Hewlett Packard has struggled to make a profit. However, the same does not appear to be true for these other companies.
Apple has dominated the smartphone market, at least until the most recent quarter. Thanks to the iPhone, Apple has held its lead over Samsung. At the same time, although computer sales are down, Apple's Mac products seem to be holding their own. However, Apple's iPad tablet line is almost certain to begin cannibalizing the Mac computer line in the near future. The question will be whether it actually damages Apple's business or not. Apple is currently valued at just under $530 billion, and is trading at $563.23 per share.
Samsung is running a close race with Apple in the smartphone world. Samsung's Galaxy line has held its own against the iPhone, and finally was able to surpass the iPhone 4S in quarterly sales last quarter. Many analysts believe that this is because Apple consumers were waiting for the new iPhone 5 to be released, which finally came about in October. Samsung recently had a court ordered sales ban lifted off its Galaxy tablets, following a lawsuit in which the Korean company was ordered to pay Apple $1.05 billion in fines for patent infringement. Samsung is currently trading at $599.20.
Google is Apple's biggest competitor in the world of mobile software, and Google's Android OS is the major rival for the Apple iOS 6. Google's incredible success has allowed Android to dominate the smartphone and tablet worlds as the leading OS. Google's market cap is much smaller than Apple's, at only $219 billion; however, it's share price has also been on the rise of late. The company is currently trading at $667.31.
These companies all seem to have figured out the key to changing with the times. This is something that HP seems to still be working on. However, if they continue to wait for their market to improve, they could find themselves out of business.
While it is hopeful that the fraudulent bookkeeping at Autonomy Corporation was simply overlooked by HP, it is doubtful that the Securities and Exchange Commission will agree with that. Most likely, the person in charge of the team who examined Autonomy's books will be fired, and quite possibly others will lose their positions as well. In the meantime, we will have to wait and see what the investigation turns up.
Chizy has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!