Monday, April 6, 2015

Forgive Them (Not)-They Do Not Know What They Do: Hewlett Packard Again

Hewlett Packard’s (HP) Autonomy acquisition is back in the news again. I previously covered this tale of woe back in 2012. HP was the target of lawsuits following the botched acquisition. The terms of a recently settled suit are pretty interesting. How HP missed “accounting irregularities” so large that they were forced to write-down $8B of the $11B acquisition soon after the close has always puzzled me.

As part of the settlement HP agreed to establish an M&A related risk committee to incorporate the views of the investment, finance and technology committees - now there is a novel thought (get other points of view). Also, they will require their due diligence teams to be better trained - you mean they have to know what they are doing? My God, now they decide to better handle M&A risk and due diligence more than three years after the disastrous Autonomy deal! What were they doing before that deal and since it closed? To be fair this is probably legalese - form over substance.

What I find especially appalling is that the current CEO, Meg Whitman, was one the board members who approved the deal over the objections of HP’s CFO - so much for accountability! You don’t need enhanced risk committees and better due diligence to know that it is a BIG-BIG-BIG red flag if the CFO objects to a deal. Some other less obvious indicators include:

1)     Pressure to grow: looking to cover up weak core operations with a large acquisition is always troublesome as was the case here.
2)     Transformation: big acquisitions away from your core rarely end up well.
3)     Over Priced: the CFO objected, inter alia, that the deal was massively over priced at 11X sales v comparables at 3X.
4)     Dissenting views ignored: like the CFO’s.
5)     Weak Due Diligence: everyone knew the answer the then CEO wanted and no one was going to stand in the way-at least not if they liked their job.

The incident is another example of a board rubber stamping the CEO’s wishes. Of course boards cannot run the firm. This does not excuse boards from exercising some minimum of oversight and basic judgment. This is critical when the board’s CEO selection track record is weak - as it was with HP prior to Autonomy with substantial CEO turnover. CEOs are frequently selected based on luck not skill. A CEO candidate who has a “successful” track record is deemed skillful, when in fact he could have been simply lucky. Such CEO candidates are frequently over confident AKA decisive. Thus, absent a strong board they are prone to behavioral errors in an acquisition setting.


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