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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011TimelineHewlett-Packard
Acquisitions
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Mercury Interactive$4.5 billion
3Com$2.7 billion
Vertica Systems
$0.35 billion
TimelineHewlett-Packard
Acquisitions
Compaq$25 billion
EDS Systems
$13.9 billionPalm
$1.2 billion
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011TimelineHewlett-Packard
Acquisitions
Autonomy$11 billion
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011TimelineHewlett-Packard
Acquisitions
CharteredAccountant
Solutions LLC®
Hewlett-Packard’s Acquisition of Autonomy CorporationMending a Broken Acquisition Process
Presented by Chartered Accountant Solutions LLC® –Yassine Benidir, Caroline Carrière, Jesse Dunn, Brandon Graham,
Brenda Lim, and Alexandre Sauvé
Presentation delivered on Wednesday, December 9, 2015
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Environmental Analysis
(Slides 5 to 12)
Engagement Mandate
(Slides 13 to 16)
Basis for Autonomy Valuation
(Slides 17 to 26)
Accounting Issue Analysis
(Slides 27 to 35)
Due Diligence Process
(Slides 36 to 42)
Closing Points(Slides 43 to 45)
Agendaa. What We’ll Be Discussing Today
4
Environmental Analysisa. Porter’s Five Forces Analysis: Information Technology...............................................
6b. Key Trends Analysis: Information Technology............................................................ 7c. Internal v External Environment Analysis: H-P............................................................
9d. Portfolio Analysis.........................................................................................................
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Force Weight Scope DescriptionBuyer Power High Consumers • High volume needed, low switching costs
• Historical preference for specialist producersSupplier Power Medium Intel, AMD,
etc.• Low entry barriers, vertical integration trend• Preference for long-term relationships
Threat of Substitute Low Scientific
calculators• There exists few actual substitutes to
information technologyThreat of New Entry Low Xiaomi,
etc.• Initial need for capital, particular expertise• Incumbent firms possess cost advantages
Rivalry High IBM, Dell, etc.
• Increasing trend towards specialization as a competitive advantage
Environmental Analysisa. Porter’s Five Forces Analysis: Information Technology
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Force Weight Scope DescriptionBuyer Power High Consumers • High volume needed, low switching costs
• Historical preference for specialist producersSupplier Power Medium Intel, AMD,
etc.• Low entry barriers, vertical integration trend• Preference for long-term relationships
Threat of Substitute Low Scientific
calculators• There exists few actual substitutes to
information technologyThreat of New Entry Low Xiaomi,
etc.• Initial need for capital, particular expertise• Incumbent firms possess cost advantages
Rivalry High IBM, Dell, etc.
• Increasing trend towards specialization as a competitive advantage
Environmental Analysisa. Porter’s Five Forces Analysis: Information Technology
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Force Weight Scope DescriptionBuyer Power High Consumers • High volume needed, low switching costs
• Historical preference for specialist producersSupplier Power Medium Intel, AMD,
etc.• Low entry barriers, vertical integration trend• Preference for long-term relationships
Threat of Substitute Low Scientific
calculators• There exists few actual substitutes to
information technologyThreat of New Entry Low Xiaomi,
etc.• Initial need for capital, particular expertise• Incumbent firms possess cost advantages
Rivalry High IBM, Dell, etc.
• Increasing trend towards specialization as a competitive advantage
Environmental Analysisa. Porter’s Five Forces Analysis: Information Technology
Key Takeaways• The information technology market is saturated with
competitors possessing similar capabilities• Firms must specialize to distinguish themselves
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b. Key Trends Analysis: Information Technology
1960sLarge Calculators
1970sPersonal
Computing
1980sData Networks
and Data Mining
1990sWorld Wide Web
NowSoftware and
Services
7
Environmental Analysis (cont’d)
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b. Key Trends Analysis: Information Technology
1960sLarge Calculators
1970sPersonal
Computing
1980sData Networks
and Data Mining
1990sWorld Wide Web
NowSoftware and
Services
7
Environmental Analysis (cont’d)
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ess Environmental Analysis (cont’d)
b. Key Trends Analysis: Information Technology (cont’d)
Cloud StorageOffer a new way of storing data
Mobile and ApplicationsAccess and create data in new ways
Big Data and ConsumerizationAdd value to data, and make IT simple
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ess Environmental Analysis (cont’d)
b. Key Trends Analysis: Information Technology (cont’d)
Cloud StorageOffer a new way of storing data
Mobile and ApplicationsAccess and create data in new ways
Big Data and ConsumerizationAdd value to data, and make IT simple
8
Key Takeaways• Demand in the information technology industry
today is shifting away from hardware, especially PCs• Consumers want software and service solutions
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Internal
External
What’s Working What Needs Work
Watch out For Where to Grow
Environmental Analysis (cont’d)c. Internal v External Environment Analysis: H-P
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Internal
External
What’s Working• Strong financial situation• Solid brand, market share• Strategy: end-to-end
solutions
What Needs Work
Watch out For Where to Grow
Environmental Analysis (cont’d)c. Internal v External Environment Analysis: H-P
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Internal
External
What’s Working• Strong financial situation• Solid brand, market share• Strategy: end-to-end
solutions
What Needs Work• Poor strategy execution• Late to act on key
software and service trends
Watch out For Where to Grow
Environmental Analysis (cont’d)c. Internal v External Environment Analysis: H-P
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Internal
External
What’s Working• Strong financial situation• Solid brand, market share• Strategy: end-to-end
solutions
What Needs Work• Poor strategy execution• Late to act on key
software and service trends
Watch out For• Risk losing market share
to better-branded rivals
Where to Grow
Environmental Analysis (cont’d)c. Internal v External Environment Analysis: H-P
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Internal
External
What’s Working• Strong financial situation• Solid brand, market share• Strategy: end-to-end
solutions
What Needs Work• Poor strategy execution• Late to act on key
software and service trends
Watch out For• Risk losing market share
to better-branded rivals
Where to Grow• Renew focus on high-
growth/margin segments• Improve control to better
leverage acquisitions
Environmental Analysis (cont’d)c. Internal v External Environment Analysis: H-P
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Internal
External
What’s Working• Strong financial situation• Solid brand, market share• Strategy: end-to-end
solutions
What Needs Work• Poor strategy execution• Late to act on key
software and service trends
Watch out For• Risk losing market share
to better-branded rivals
Where to Grow• Renew focus on high-
growth/margin segments• Improve control to better
leverage acquisitions
Environmental Analysis (cont’d)c. Internal v External Environment Analysis: H-P
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Internal
External
What’s Working• Strong financial situation• Solid brand, market share• Strategy: end-to-end
solutions
What Needs Work• Poor strategy execution• Late to act on key
software and service trends
Watch out For• Risk losing market share
to better-branded rivals
BCG Matrix• Renew focus on high-
growth/margin segments
Environmental Analysis (cont’d)c. Internal v External Environment Analysis: H-P
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Estimated Market ShareHigh Low
Projected Gro
wth
High
Build: the Bright Stars• IT Services (13.83%)• Storage and Networks (10.68%)
Hold: the Question Marks• Software (20.12%)• Financial Services (8.77%)
Low
Harvest: the Cash Cows• Hardware: PCs (5.21%)• Hardware: Printers (15.90%)
Divest: the Dead Dogs• None
Environmental Analysis (cont’d)d. Portfolio Analysis (H-P, Operating Margin)
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Estimated Market ShareHigh Low
Projected Gro
wth
High
Build: the Bright Stars• IT Services (11.41%)• Storage and Networks (14.43%)
Hold: the Question Marks• Software (6.26%)• Financial Services (2.38%)
Low
Harvest: the Cash Cows• Hardware: PCs (13.24%)• Hardware: Printers (33.77%)
Divest: the Dead Dogs• None
Environmental Analysis (cont’d)d. Portfolio Analysis (H-P, Return on Investment) (cont’d)
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Estimated Market ShareHigh Low
Projected Gro
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High
Build: the Bright Stars• IT Services• Storage and Networks• Software
Hold: the Question Marks• None
Low
Harvest: the Cash Cows• None
Divest: the Dead Dogs• Hardware: PCs
Environmental Analysis (cont’d)d. Portfolio Analysis (IBM) (cont’d)
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Estimated Market ShareHigh Low
Projected Gro
wth
High
Build: the Bright Stars• IT Services• Storage and Networks• Software
Hold: the Question Marks• None
Low
Harvest: the Cash Cows• None
Divest: the Dead Dogs• Hardware: PCs
Environmental Analysis (cont’d)d. Portfolio Analysis (IBM) (cont’d)
12
Key Takeaways• H-P is a related-diversified firm, and would like to
differentiate similar to IBM – however, H-P has a lot of ground to make up for
Engagement Mandatea. Summary of Key Takeaways........................................................................................
14b. Gap Analysis: Key Success Factors and Decision Criteria............................................
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ess Engagement Mandate
a. Summary of Key Takeaways
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Competitive Environment• S
pecialization-differentiation is necessary for H-P
Key Market Trends• Y
our customers want software and services
Strategic Execution at H-P• I
BM is an example to follow, but H-P is behind
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Internal
External
What’s Working• Strong financial situation• Solid brand, market share• Strategy: end-to-end solutions
What Needs Work• Poor strategy execution• Late to act on key software and
service trends
Watch out For• Risk losing market share to better-
branded rivals
Where to Grow• Renew focus on
high-growth/margin segments• Improve control to better leverage
acquisitions
Environmental Analysis (cont’d)b. Gap Analysis: Key Success Factors
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Internal
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Key Success Factors• Strong financial situation• Solid brand, market share• Strategy: end-to-end solutions
What Needs Work• Poor strategy execution• Late to act on key software and
service trends
Watch out For• Risk losing market share to better-
branded rivals
Where to Grow• Renew focus on
high-growth/margin segments• Improve control to better leverage
acquisitions
Environmental Analysis (cont’d)b. Gap Analysis: Key Success Factors
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ess Engagement Mandate (cont’d)
b. Gap Analysis: Key Success Factors (cont’d)
KSF Current State Desired StateStrong Financial Position
• Depleting resources on questionable acquisitions
• Improve acquisition process and maximize shareholder value
Solid Brand, Market Share
• Sizeable market share in low-growth/margin segments (e.g., PCs)
• Sizeable market share in high-growth/margin segments (e.g., software)
Strategy: End-to-End Solutions
• Constant executive turnover and shifts in strategy
• Strategic stability and a coherent approach to growth
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KSF Current State Desired StateStrong Financial Position
• Depleting resources on questionable acquisitions
• Improve acquisition process and maximize shareholder value
Solid Brand, Market Share
• Sizeable market share in low-growth/margin segments (e.g., PCs)
• Sizeable market share in high-growth/margin segments (e.g., software)
Strategy: End-to-End Solutions
• Constant executive turnover and shifts in strategy
• Strategic stability and a coherent approach to growth
Key Takeaways• Problem: pressures, a lack of control, and an
incoherent strategy have led to poor acquisitions• Mandate: to propose process recommendations
based on a discussion of the Autonomy acquisition
Engagement Mandate (cont’d)b. Gap Analysis: Key Success Factors (cont’d)
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Basis for Autonomy Valuationa. Assessing the Price Tag...............................................................................................
18b. Proposing a New Stock Range.....................................................................................
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Rapid Growth Autonomy was founded in the late 1990s
Innovative Enhanced offerings to become a market leader
Highly Regarded Autonomy was subject to public praise
No Red Flags Autonomy’s appeared to be a strong performer
Basis for Autonomy Valuation (cont’d)a. Assessing the Price Tag (Qualitative Considerations)
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Valuation Methods Used
• Discounted cash flow (“DCF”) method
• Multiplier method – EBITDA and revenue multipliers
Multiplier Method Formula
• EDITDA Multiplier • Equity or deal value / EBITDA• Revenue Multiplier • Equity or deal value / revenue
Basis for Autonomy Valuation (cont’d)a. Assessing the Price Tag (Quantitative Considerations) (cont’d)
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Financial Projections (in Millions of USD) (from 2011 to 2015) Year 2011 2012 2013 2014 2015
Add, Revenues 1,151.47 1,544.43 2,075.70 2,809.56 3,825.87 Less, Total Cost of Revenues 213.97 297.90 448.16 728.37 1,271.63
Gross Profit 937.50 1,246.53 1,627.54 2,081.19 2,554.23 Less, Total Operating Expenses 535.85 751.77 1,051.16 1,472.23 2,063.19 Less, Depreciation / Amortization 1.23 2.11 3.62 6.21 10.65
EBIT 400.42 492.65 572.77 602.75 480.39 Less, Tax Expense 156.16 192.13 223.38 235.07 187.35
NOPAT 244.25 300.52 349.39 367.68 293.04 Add, Depreciation / Amortization 1.23 2.11 3.62 6.21 10.65 Less, Increase in Accounts Receivable 41.21 45.41 50.04 55.15 60.77 Less, Increase in Inventory 0.12 0.14 0.16 0.19 0.22 Less, Increase in Other Current Assets 18.83 20.50 22.31 24.29 26.44 Add, Increase in Current Liabilities 42.51 68.18 109.36 175.41 281.36
Cash Flow from Operations 227.83 304.76 389.85 469.68 497.63 Less, Increase in Gross PPE 15.00 15.00 15.00 15.00 15.00
Free Cash Flow 212.83 289.76 374.85 454.68 482.63 Terminal Value (perpetuity) - - - - 8,110.04 Total Free Cash Flows 212.83 289.76 374.85 454.68 8,592.67
Basis for Autonomy Valuation (cont’d)a. Assessing the Price Tag (DCF Method) (cont’d)
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ess Basis for Autonomy Valuation (cont’d)
a. Assessing the Price Tag (DCF Method) (cont’d)
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Discounted Cash Flows (in Millions of USD)• Year 2011 2012 2013 2014 2015• Total Free Cash Flows 212.83 289.76 374.85 454.68 8,592.67 • Discount Factor 96.82% 89.59% 82.90% 76.71% 70.98%• Present Value 206.06 259.59 310.74 348.77 6,099.07
Price per Share Enterprise Value 7,224.23 Less, Value of Debt 1,213.00 Add, Net Cash 1,061.00 Value of Equity 7,072.23 Share Outstanding 269 Price per Share 26.29
Important Rates• Tax Rate 39.00%
• Terminal Growth Rate 2.00%
• WACC 8.07%
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Company Equity Value Revenue EBITDA EV/EBITDA EV/Revenue• Ansys 5,267.63 691.45 334.15 15.79 7.63• CDS 2,744.48 1,149.84 259.37 10.58 2.39• Computa. 893.15 4,408.51 114.36 7.81 0.20• DSTS 825.44 2,388.70 450.90 1.83 0.35• FleetCor 2,407.82 519.59 260.43 9.25 4.63• Igate 911.40 779.65 177.27 5.14 1.17• NI Corp. 3,165.20 1,024.17 161.03 19.66 3.09• NeuStar 2,493.52 620.46 261.57 9.53 4.02• Rackspace 5,673.45 1,025.06 317.69 17.86 5.53• Sapient 1,736.13 1,062.45 136.61 12.71 1.63• Averages 2,612.71 1,366.99 247.34 11.02 3.06
Basis for Autonomy Valuation (cont’d)a. Assessing the Price Tag (Multiplier Method) (cont’d)
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Company Deal Value Revenue EBITDA DV/EBITDA DV/Revenue• Sybase 5,958.70 1,197.00 411.90 14.47 4.98• Hewitt Ass. 4,804.30 3,092.10 613.30 7.83 1.55• DD 3,448.86 4,503.72 251.46 13.72 0.77• McAgee 7,828.20 2,002.90 430.80 18.17 3.91• Novell 2,206.80 811.90 117.50 18.78 2.72• Savvis 3,064.70 973.40 232.10 13.20 3.15• Skype 8,508.73 922.43 283.62 30.00 9.22• PAETEC 2,228.10 1,840.20 314.30 7.09 1.21• Averages 4,756.05 1,917.96 331.87 15.41 3.44
a. Assessing the Price Tag (Multiplier Method) (cont’d)Basis for Autonomy Valuation (cont’d)
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Multiples Selected Companies
Other Companies
Average
• EV/EBITDA 11.02 15.41 13.21• EV/Revenue 3.06 3.44 3.25
b. Proposing a New Stock Range (Industry Comparison)Basis for Autonomy Valuation (cont’d)
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Autonomy Value (in Millions of USD), Ent. Value Multiple
• EBITDA 758.00• Multiplier 13.21• Value of Autonomy 10,014.42
Autonomy Value (in Millions of USD), Revenue Multiple
• Revenues 870.00
• Multiplier 3.25
• Value of Autonomy 2,828.89
b. Proposing a New Stock Range (Multipler Method) (cont’d)Basis for Autonomy Valuation (cont’d)
Average of the Values (in Millions of USD)• Average 6,421.65
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Comparison of the Values (in Millions of USD)• Method DCF Method Multiplier Method
• Result 7,071.83 6,421.65
• Result/Share 26.29/share 23.87/share
b. Proposing a New Stock Range (Method Comparison) (cont’d)Basis for Autonomy Valuation (cont’d)
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Accounting Issue Analysisa. Summary-Level View of Accounting Improprieties.....................................................
28b. Accounting Issue Analysis...........................................................................................
29c. Impact of the Improprieties on the Valuation.............................................................
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Overview of Accounting ImproprietiesAllegation 1:
HardwareAllegation 2:
VARsAllegation 3: Reciprocal
Allegation 4: Hosting
Allegation 5: OEM
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Impact of Accounting Improprieties on Autonomy Valuation
Accounting Issue Analysisa. Summary-Level View of Accounting Improprieties
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Overview of Accounting ImproprietiesAllegation 1:
HardwareAllegation 2:
VARsAllegation 3: Reciprocal
Allegation 4: Hosting
Allegation 5: OEM
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Impact of Accounting Improprieties on Autonomy Valuation
Accounting Issue Analysisa. Summary-Level View of Accounting Improprieties
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Overview of Accounting ImproprietiesAllegation 1:
HardwareAllegation 2:
VARsAllegation 3: Reciprocal
Allegation 4: Hosting
Allegation 5: OEM
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Impact of Accounting Improprieties on Autonomy Valuation
Accounting Issue Analysisa. Summary-Level View of Accounting Improprieties
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Overview of Accounting ImproprietiesAllegation 1:
HardwareAllegation 2:
VARsAllegation 3:
ReciprocalAllegation 4:
HostingAllegation 5:
OEMAutonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Impact of Accounting Improprieties on Autonomy Valuation
Accounting Issue Analysisa. Summary-Level View of Accounting Improprieties
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Overview of Accounting ImproprietiesAllegation 1:
HardwareAllegation 2:
VARsAllegation 3: Reciprocal
Allegation 4: Hosting
Allegation 5: OEM
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Impact of Accounting Improprieties on Autonomy Valuation
Accounting Issue Analysisa. Summary-Level View of Accounting Improprieties
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ess Accounting Issue Analysis (cont’d)
b. Accounting Issue Analysis (Issue 1, Hardware Sales)
Accusation Description
Autonomy’s Rebuttal
Relevant Policies Proposed Treatment
• Concealed pure hardware sales
• Divided hardware costs between sales/marketing expenses and cost of goods sold
• Hardware sales not significant enough to warrant separate classification
• Cost allocation better reflects economic substance
• IAS 18, Revenue, and IFRS 8, Operating Segments
• Separate operating segment was not necessary
• Note disclosures• Appropriate cost
allocation, wrong percentage was used
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ess Accounting Issue Analysis (cont’d)
b. Accounting Issue Analysis (Issue 2, Value-Added Resellers)
Accusation Description
Autonomy’s Rebuttal
Relevant Policies Proposed Treatment
• Premature recognition of revenue and fabricated sales
• VARs bared no risk, and were not liable for paying balances outstanding
• Sales to VARs were valid transactions
• Under IFRS, VARs are an end user
• VARs did bare risk, and cash on these deals was usually collected
• IAS 18, Revenue • Recognize sales once IAS 18 criteria are met
• Improper/early recognition on some deals, as economic substance was ignored
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ess Accounting Issue Analysis (cont’d)
b. Accounting Issue Analysis (Issue 3, Reciprocal Transactions)
Accusation Description
Autonomy’s Rebuttal
Relevant Policies Proposed Treatment
• Capitalizing goods acquired
• Recognizing revenue on “reciprocal sale” to overstate income
• Deals involved dissimilar goods, had commercial substance, and the fair value could be measured reliably
• In respect of IFRS
• IAS 16, Property, Plant, and Equipment (Non-Monetary Transactions)
• Reciprocal sales should not be classified as barter transactions
• Autonomy appears to have correctly capitalized costs
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Accusation Description
Autonomy’s Rebuttal
Relevant Policies Proposed Treatment
• Intentionally changed hosting arrangements with new/existing clients
• Deceived shareholders
• Correctly accounted for the license revenues
• Each component had a separate fair value
• Residual method
• IAS 18, Revenue • Autonomy appears to have respected IFRS (generally)
• Autonomy recognized some revenue prematurely
Accounting Issue Analysis (cont’d)b. Accounting Issue Analysis (Issue 4, Hosting Sales)
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Accusation Description
Autonomy’s Rebuttal
Relevant Policies Proposed Treatment
• IDOL OEM sales inappropriately included revenue from various sources
• No royalties on some deals
• H-P must distinguish between an OEM sale and an OEM-derived revenue
• Professional judgment
• IAS 18, Revenue – note, there exists no specific standard for OEM revenue
• There needs to be more transparent note disclosures
Accounting Issue Analysis (cont’d)b. Accounting Issue Analysis (Issue 5, OEM Revenue)
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ess Accounting Issue Analysis (cont’d)
b. Accounting Issue Analysis (Summary)
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Overview of Accounting ImproprietiesAllegation 1:
HardwareAllegation 2:
VARsAllegation 3: Reciprocal
Allegation 4: Hosting
Allegation 5: OEM
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Autonomy Rebuttal
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Relevant Policies
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Proposed Treatment
Impact of Accounting Improprieties on Autonomy Valuation
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ess Accounting Issue Analysis (cont’d)
b. Accounting Issue Analysis (Summary)
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Overview of Accounting ImproprietiesAllegation 1:
HardwareAllegation 2:
VARsAllegation 3:
ReciprocalAllegation 4:
HostingAllegation 5:
OEM
Immaterial Amounts
VARs Are End Users
Dissimilar Goods Dealt
Separate Fair Values
Professional Judgment
IAS 18 and IFRS 8 IAS 18 IAS 16 IAS 18 IAS 18
Note Disclosures
Avoid Early Recognition
Capitalize Costs
Avoid Early Recognition
Note Disclosures
Impact of Accounting Improprieties on Autonomy Valuation
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Deficiencies Purchase price did not consider US GAAP and IFRS differences
Write-OffHow the write-off was calculated remains unclear
DCF ImpactAccusations mainly involve aggressive revenue recognition No cash impact
ConclusionProfessional opinion: improprieties could not justify a $5 billion write-off
Accounting Issue Analysis (cont’d)c. Impact of the Improprieties on the Valuation
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Due Diligence Processa. Board Composition: Strengths and Weaknesses.........................................................
37b. Governance Failure.....................................................................................................
39c. Due Diligence Process.................................................................................................
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ess Due Diligence Process
a. Board Composition: Strengths and Weaknesses
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Meg WhitmanInformation Technology
Marc AndreessenVenture Capital
Shumeet BanerjiConsulting
G. Kennedy Thompson
Insurance
Rajiv GuptaInformation Technology
Ann LivermoreInformation Technology
John HammergrenPharmaceuticals
Gary ReinerPrivate Equity
Patricia RussoTelecomm-unications
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Strengths• Appropriate proportion of external
governors to ensure independence• Sufficient presence of industry
expertise
Weaknesses• Lack of CPA-designates, general
accounting expertise• Need for more governance expertise
Due Diligence Process (cont’d)a. Board Composition: Strengths and Weaknesses (cont’d)
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Board Responsibilities
Information should have been communicated
Need to seek out information from external audits
Due Diligence Process (cont’d)b. Governance Failure (Communication Breakdown)
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Board Failure
CFO opposed the deal
Emergency Board meeting in attempt
to stop the deal
Board not firm in opposing the deal –
CEO decidedBoard needs to exercise their
voting power to ensure due
diligence
Due Diligence Process (cont’d)b. Governance Failure (Decision Opposition) (cont’d)
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Internal due diligence was only a 3-week process
H-P hired KPMG for a limited-scope engagement
Team was limited to Autonomy’s public records and 25 sales contracts
Requirement for the finance committee to review all M&A deals
Due diligence team reported to the CSO, not the CFO
Due Diligence Process (cont’d)c. Due Diligence Process (Internal Perspective)
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Due Diligence Responsibilities
Engagement Limitations
KPMG’s Key Findings
• Procedures were limited in nature, extent
• KPMG’s duty to report material errors was stated in the report
• Team was limited to Autonomy’s public records and 25 sales contracts
• Limited process: only reviewed Deloitte’s audits of Autonomy
• Accounting issues (i.e., hardware sales, sales to VARs, etc.) were highlighted in the report
• KPMG identified differences between IFRS and U.S. GAAP
Due Diligence Process (cont’d)c. Due Diligence Process (KMPG Perspective)
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Closing Pointsa. General Recommendations.........................................................................................
44b. Summary of the Presentation.....................................................................................
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Reducing Acquisition-Related Risks
• Shorten DCF forecasting period, perform sensitivity analysis• Create a specific M&A committee as part of the Board of Directors• Involve relevant stakeholders in aspects of the M&A process• Demand more director governance and accounting experience• Tie compensation to M&A performance, emphasize accountability• Ask due diligence teams to report directly to the CFO• Increase the scope of M&A reviews for large targets in the future• Ensure post-acquisition operational independence of targets
Closing Pointsa. General Recommendations
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H-P wants to differentiate with software/servicesExecution has been a problem for H-P (e.g., Autonomy)
Your Strategy
Accounting issues might have overstated some of Autonomy’s valueProblems with valuation and due diligence
The Problem
H-P must improve governance processes H-P must maintain independence with acquisition targetsConsider adjusting valuation/DCF assumptions
Our Solution
Closing Points (cont’d)b. Summary of the Presentation
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