This HP and Autonomy: Who's Accountable? case study discusses the case when Hewlett-Packard when it acquired Autonomy Corporation (Autonomy) and ended up writing down the $11.2 billion acquisition within a span of one financial year.
Justin J. Hopkins and Gerry Yemen
Harvard Business Review (UV7498-PDF-ENG)
February 27, 2018
Case questions answered:
- Why did HP purchase Autonomy and how do you feel about the transaction?
- How much did HP pay for Autonomy? And how was the purchase price allocated among tangible assets, intangible assets of definite life, and intangible assets of indefinite life?
- How does HP account for goodwill? What result did this process have in 2012 as it relates to Autonomy?
- How do you feel about the 8-K press release announcing and impairment in case Exhibit 6?
- Do you think the level of CEO turnover played a role in the acquisition? How about the accounting for the acquisition?
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Case answers for HP and Autonomy: Who's Accountable?
This case solution includes an Excel file with calculations.
I. Introduction – HP and Autonomy: Who’s Accountable?
Many companies view mergers and acquisitions as a way to grow their businesses, and this is possible because there is always one company that is bigger than the other (Renaud, 2020). While acquiring another company opens up numerous growth opportunities for the acquirer, it can turn out to be a tragedy as well. This report discusses one such case when Hewlett-Packard (HP) acquired Autonomy Corporation (Autonomy) and ended up writing down the $11.2 billion acquisition within a span of one financial year.
II. HP acquires Autonomy
Tight competition in product, cost, and profit margin in hardware business forced HP to seek another opportunity in another segment. A shift in the trend among the consumer market from PC’s to tablets and smartphones threatened to shrink HP’s market share. Legal process discrepancy round the world also causes a problem with HP operation.
HP considered Autonomy as a part of its plan to enter a high-profit margin software industry. Autonomy’s tech on cloud computing and unstructured big data process are also a main attraction for HP to gain control and capitalize in the future.
HP’s decision to acquire Autonomy fits with its strategy to diversify and expand. However, the premium paid over the fair value of Autonomy can be viewed as excessive. The high premium involved in the deal can be attributed to the adjustments HP made to the discount rate used to discount the future cash flows.
III. Purchase price and its allocations
The allocation of the purchase price is expressed in Exhibit 1. The purchase price of $11.2 billion consists of Market Value of Equity and Goodwill of Autonomy. The market value of equity was recorded as amortizable intangible assets of about $4.6 billion, and goodwill was about $6.6 billion (HP 2011).
Exhibit I: Purchase price allocation.
A normal acquisition transaction would involve the acquirer debiting Other Investments and Goodwill while crediting cash in their balance sheet. However, HP recorded the transaction as amortizable intangible assets to receive the tax shield because these assets could be amortized over its useful life.
Market Value of assets and liabilities together add up to the Market Value of Equity. The market value of liabilities is estimated to be $1.2 billion as it is less likely to be different than its book value. Thus it is estimated at $1.2 billion. Hence, the estimated market value of assets is $5.8 billion.
The market value of assets contains the market value of intangible and tangible assets. As Autonomy is a technology firm specialized in processing unstructured data and or means-based computing, the integral part of total assets would be intangible assets. Particularly, from Autonomy 2010 balance sheet, except for cash and cash equivalent, the tangible assets only account for 26.1% of total assets, whereas intangible assets account for 41.5% (Autonomy 2010). Hence, assuming that the market value of tangible assets is equal to its book value of about $1.9 billion, it leaves a market value of intangible assets of $3.9 billion.
IV. HP’s Goodwill Calculation on Acquisition of Autonomy
HP acquired Autonomy on 31 October 2011 with a purchase price of $11.2 billion, yet the latest financial statement of Autonomy was FYE2010. Thus, the projected revenue and balance sheet has to be acquired first to estimate the goodwill of the transaction at the acquisition date. Assumptions used are sales growth of 18% from FYE2009 to FYE2010 and the percentage of each balance sheet accounts in FYE2010 over its sales to estimate balance sheet accounts on…