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CEO Leo's defeat now complete with loss

NewsWire Editorial

HP's stock dove 10 percent this morning on the news that its last big-ticket acquisition lied about its net worth during the 2011 buyup of Autonomy. Aside from the spectacular flame-out of the HP TouchPad and its subsequent fire sale -- and the loss of WebOS futures -- Autonomy was about the only other thing Leo Apotheker could manage while CEO. Manage, it appears, being a term used hopefully.

Now comes the news that HP believes the UK British company it bought for $9.7 billion lied about its finances. Current CEO Meg Whitman didn't call it fraud, but the undervaluation triggered an $8.8 billion write-down of the value of the UK maker of big data software.

Whitman said in a statement there were "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation PLC." The former CEO denied the charges, but the Associated Press ran a story this morning that tallied the tricks that Automony used to fool HP.

StrikeoutHow bad is the strikeout? This time HP is asking the SEC and Britain's Serious Fraud office to look into criminal charges. The inevitable HP lawsuit, this time against its own operating unit, is in the wings. The AP story said Whitman revealed "a senior Autonomy executive volunteered information about the accounting shenanigans, prompting an internal investigation." The internal investigator? None other than PricewaterhouseCoopers. HP tried to buy PWC during the Carly Fiorina spree, but the boardroom held that one in check. HP got EDS instead, along with another $9 billion writedown.

The result is the second straight quarter of losses for HP, a first in the company's history. The maker of replacement systems for migrated HP 3000s is having a dark chapter in its turnaround story. Now it heads into a winter season where tablets -- a product HP failed to launch under Apotheker -- will be bleeding sales off the PC business which HP has been using to generate cash, if not many profits.

The turnaround story will have to start in earnest come mid-February. No one knows what it would mean to see HP fail to turn a profit for nine consecutive months. While its cancelled HP 3000 business didn't deliver enough cash to survive the company's new wave, at least HP knew the valuation of the 3000 for certain. After it cleared Y2K, that year was the start of HP's era of buying companies like Autonomy which triggered moves like easing the 3000 out of HP's future.

HP's board of directors has been swinging and missing at the business plate for many years. But many of the whiffs were covered by profitable HP Services business and the thrum of PC's meager profits off massive sales. There was a deep count -- lots of foul balls to prolong the outcome, in baseball terms. But eventually that thin-profit cavalcade of PC consumer business is heading back to the bench. HP's PCs are already so desperate for acceptance they're rolling out as knockoffs of Apple's Macs.

Now HP has spent each of the last two quarters writing down massive companies which it purchased. In a flurry of ill-advised and shortsighted moves, the years from 2000 to 2011 were spent shucking off product lines where HP owned everything, including legacy sales, in order to step into areas where billions were peeled off to buy competitors (Compaq), businesses built on a model totally different from HP (EDS, which never tried to sell its own systems at the same time it did outsource work, but needed almost 150,000 people to do it) or software companies whose hopeful rise or valuation turned out to be fever dreams or worse (Mercury Interactive, Autonomy, and other).

There have been some things HP has done from its heart -- R&D -- and done well. Enterprise servers starting with the HP 3000, and then because the 3000 was a winner, enterprise Unix. Its Labs cooked up innovations in printing which remain a revenue firewall against HP's torched-up trials like Autonomy. When you go back to what made HP into a $130 billion computing powerhouse, the most potent return on starter money came from anything which Hewlett-Packard built itself. (Unless you count NewWave software or the HP Touchscreen, efforts that surely didn't cost even 1 billion dollars to fail in the 1980s.)

With the latest news, it's doubtful HP's got any other course going forward but to build. To run the baseball analogy into the ground, it's become a company that can only go out to its minor league farm system: brilliant wizards who cost less than $10 billion pseudo-stars. Purchasing free-agent players like Autonomy is beyond HP's budget, and nobody knows who's smart enough on the board to approve a winning deal anyway. Unless the markets recant, the forthcoming Q1 of 2013 could determine how hard HP's got to run to avoid being chased down in an acquisition.

All of this might not end up affecting the future of those migration platforms. Analysts are saying HP's headed for a split of the company, a spinoff that might right the listing ship to give the vendor time to focus on its own technology and its enterprise legacy. A migrated customer is usually watching cost of ownership or a tech roadmap while making a futures plan.

But the company's Project Odyssey, announced just one year ago this week, is a costly venture designed to preserve that migrated business -- at least the part that went to HP's Unix. There's a limit to how much HP will have on hand to pay for R&D in the coming year. Something like Odyssey might stanch the flow of enterprise business away to commodity Linux computing. Odyssey represents the most likely future for the migrator who wants to stick with HP's technology and heritage.

The former is the most tangible asset HP seems to muster, along with the hundreds of thousands of IT customers who will be hearing the alleged shenanigans and red-ink news. That latter heritage looks worn down this morning. The companies who left HP behind -- even to homestead on its shunned 3000 -- could be forgiven for feeling a bit vindicated on the woeful news. The migrators will supply hope of better management, plus a cheery outlook from Wall Street in the months to come