There’s a lot going on in today’s Wall Street Journal story about how Hewlett-Packard “missed a chance to back away” from its acquisition of Autonomy – which H-P now thinks did a lot of revenue recognition fraud and on which it has taken zillions of dollars of writedowns – but this description of the board’s approval process for the deal is the only thing you really need to know:1
H-P directors and bankers calculated how much revenue Autonomy would have to add over 10 years to justify such a price. Autonomy’s trajectory alone wouldn’t get there. The deal required assuming more revenue growth as a result of the tie-up than H-P usually assumed in acquisitions, said people familiar with the matter. But the directors believed they could make the numbers.
Those calculations were done without knowledge of the alleged fraud but who cares? Here is, roughly, H-P’s thought process:
- The price that Autonomy demands is X2
- Autonomy’s DCF value is Y1 based on expected revenue growth but no synergies
- Y1 < X
- Well but the DCF value is Y2 with regular-to-aggressive synergies
- Y2 < X
- Well but … well we could make up another number Y3
- Y3 >= X
- LOOKS GOOD.
If you notice that current revenue numbers are made up, then that changes Y1, but Y1 isn’t an input into Y3 – the actual value that H-P put on Autonomy – because that number was also just made up. Read more »
What do you think of this?
Meanwhile, the most controversial banker involved in the HP-Autonomy deal, Frank Quattrone of Qatalyst, represented Autonomy and played a key role in getting HP to pay a high price. … Analysts almost uniformly deemed the $11.1 billion he got HP to pay for Autonomy as overly rich – a compliment to him at the time, but possibly a hollow success if HP’s allegations prove true.
True or false, re: “hollow success”? The article is about how the eight zillion bankers and lawyers and auditors and, I dunno, PR firms swarming around the HP-Autonomy deal failed to notice that Autonomy was a giant fraud due to (1) it not being a giant fraud, (2) it not being their job to notice that it was a giant fraud, and/or (3) their not being good at their jobs.1 Was it Quattrone’s job?2 The capital-markets gatekeeping function, whether in sell-side M&A or in IPOs, exists in irresolvable tension between “getting the best possible price for your client” and “maintaining some credibility with the buy side.” If I were selling my company – fraud or otherwise! – I’d be pretty psyched to hire someone talented enough to get $11 billion for a giant fraud; on the other hand, once you get a reputation for getting top dollar for giant frauds, it becomes hard for you to get any dollar for anything.3
A while back we talked about a sort of amusing article saying that M&A lawyers provide no value because (1) their job is to negotiate the conditions in which a merger will and will not close, (2) mergers always close, so (3) their job is purely decorative. You could take issue with that for a number of reasons; at the time I suggested that one of those reasons would be “well they also add value by doing due diligence” and, heh, so much for that. Read more »