Acquisitions destroy value, exhibit A – HP and Autonomy

Most of the academic and objective research suggests that mergers and acquisitions, in the main, destroy shareholder value. That doesn’t mean of course that every example is a disaster – just that the overall sum of the outcomes is nowhere near as good as the participants presumably expected.

I’ve mentioned before the brilliant book by Daniel Kahneman, Thinking Fast and Slow, which looks at how human brains work, how we make decisions and perceive the world. He actually touches on the topic when he talks about how we think, and how this leads us to overestimate the chance of success in major activities like acquisitions.

He talks about “optimism bias”, and about our failure to consider the “base case” when we’re looking at our own decisions. So even if 60% of new businesses, or acquisitions fail, and this is objective information, we are convinced that our case will be different, even if someone shows us the evidence that it probably won’t. Our acquisition will be a huge success, whatever the experience of others. Our optimism is a positive evolutionary trait in many ways, but when we look at our own prospects of success, it makes us hugely underestimate the importance of luck, and disregard the actions of others.

That’s all by way of explaining perhaps why HP paid $10 billion for UK firm Autonomy just a year ago, and have just written off $8 billion of that, claiming accounting irregularities. (Here’s a good, clear explanation of what HP are claiming).  Whatever happens in what will be a long, drawn out legal fight, it’s clear that HP didn’t listen to the many commentators at the time who suggested they were overpaying. And Mike Lynch, the founder of Autonomy, is completely denying that there was anything dodgy about the numbers.

This comes on top of a horrible few years for HP, with the dismissal of Mark Hurd in 2010 (who then went to Oracle) for an inappropriate relationship, then the short reign of Leo Apotheker, (who actually did the Autonomy deal) before Meg Whitman took over. There is even talk of HP being acquired; their market value is now only around a tenth of IBM’s and a sixth or Oracle’s for instance. If their claim against Autonomy is not proven, I suspect that could be the end of an independent HP, or at least it could mean the splitting of the business into component parts.  The outsourcing arm – based on the old EDS business HP acquired – might be interesting to IBM, Accenture or Infosys. PCs and printers could become another separate business.

Of course, HP are a major supplier to many, many organisations – they’re still one of the top 10 in terms of the UK government, for example, where they’re involved in some critical areas, from military information systems to outsourced desktop IT. So there’ll be a lot of IT and procurement executives keeping an eye on the situation, and wondering about strategies and even alternative providers. But after all the problems of the last three years, can anything else possibly go wrong for HP?

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  1. Bob Beveridge:

    Research shows that the two main reasons acquisitions fail are inadequate due diligence and cultural differences leading to failure to integrate. From what I have read it seems HP failed on both counts. They claim there are accounting irregularities but this could be as simple as different interpretations of policy. In any case it should have been unearthed in their financial due diligence. There were massive cultural differences as Autonomy was a completely different sort of business to HP. In essence HP were gambling on an acquisition of a business they knew little about and any sensible or experienced director should have realised the scale of this gamble or risk. The Board of HP are culpable for this and all the. CEO changes which have combined to create this disaster for shareholders. It will be a great case study and someone should write a book on it!

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