HP/Autonomy and Public Company Governance Perplexities

I’ve been listening to my good friend Todd Zenger for the last few years explaining that the strategic management field is predicated on the idea that corporate managers know more than the uninformed stock market and its lazy analysts. Dick Rumelt’s Good Strategy/Bad Strategy makes a similar point. The idea is that finding unique resource synergies is a good way to get competitive advantage but a bad way to please narrow-minded investors who hate unique strategies that are hard for them to evaluate. Raghurum Rajan’s recent presidential address to the American Finance Association makes a similar point, although with a much more positive spin on the role of equity markets in supporting the creation of entrepreneurial enterprises. With such an eminent set of eloquent and insightful advocates, it’s hard not to tentatively consider the perplexing idea that stock markets systematically undervalue powerful synergistic corporate strategies.

Then I wake up.

You probably followed the news about HP’s massive writeoff on its perplexing Autonomy acquisition of a year ago. The headline to that story was HP CEO Meg Whitman’s claim that Autonomy had cooked its books and fooled its auditors prior to HP’s purchase of the firm under previous, perplexingly hired, CEO Leo Apotheker. It isn’t clear that the extent of the alleged fraud can explain the gigantic size of the writedown by HP, but in any case outsiders like short-seller Jim Chanos, much of the British tech analyst community, and the very useful John Hempton, proprietor of the Bronte Capital blog, had long smelled a rat. They thought, even prior to the acquisition, and using only the company’s official accounting statements, that there was something fishy about Autonomy’s books. How could HP’s finance team and the outside auditors have failed to notice this at the due diligence stage? It’s perplexing.

One of Hempton’s commenters says, “Having been through multiple mergers/acquisitions at various technology companies, even as a low-level grunt I could see that generally the due diligence was a farce. It’s irrelevant to the deal. The CEO and the board have already made up their minds by the time DD is undertaken, and nothing is going to stop them.” That sounds about right to me. We know that the CFO at the time tried to warn the board of directors not to go forward with the deal, although apparently on the grounds that the proposed price multiple to revenue was too high rather than any fraud concerns. Yet she got rolled over and the fatal acquisition occurred.

Whitman, who was a member of the board that voted for the Autonomy purchase, insists that even though the firm is writing off $5 billion of its $10 billion price, the Autonomy products will be very helpful for HP’s growth strategy going forward. Less encouraging is her written-with-a-fat-crayon strategic vision for HP:

“IT is the engine that powers the enterprise and often redefines the enterprise when all these changes are taking place,” she said. “What’s emerging out there in my view is an entirely new style of IT. This new style is driven by cloud and by big data. This new style of IT promises lower cost, and increased agility.”

HP’s strategy is “quite simple,” Whitman added. “To provide the solutions for the new style of IT. We’d like to engage with you to provide the business outcomes you need and frankly require in the coming years.”

Yikes! A bunch of generalities about “cloud computing” and “big data” and “lowered cost with increased agility.” Not a word about how HP would be better at doing this than anyone else. Not a word about how Autonomy’s supposed analytics capability would make HP more economically valuable, much less why a purchase of the company was the sensible way to exploit any such synergies. How can people say or listen to such statements and keep a straight face? It’s perplexing.

Two CEOs ago, HP perplexingly bought EDS, as part of its move to provide “solutions” to large enterprise customers (read: mimic IBM). How did that work out? Another giant write-off–yet HP still carries more goodwill than Santa Claus even after these enormous write-offs. In what sense are foolish stock analysts hindering HP’s seemingly random quest for synergies and new growth platforms? In fact, is there any force other than Carl Icahn and his cohorts that can stop a cash-flow-positive public company from repeatedly dissipating shareholder wealth on harebrained acquisitions?

If HP were alone in these shenanigans, it would be one thing. But as I observe the vast majority of corporate strategy announcements and results, especially where large acquisitions and divestitures are involved, I see perplexingly paper-thin rationales, poor results, and fundamental distractions from solving basic business-unit-level strategic problems. At this point, the Zenger-Rumelt-Rajan thesis is looking a lot weaker than the Michael Jensen thesis about the eclipse of the public corporation.

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