Autonomy, HP and the evaporation of Goodwill

News today that HP is asserting Autonomy had dodgy finances - FT articles the travails:

The struggling US technology conglomerate has alleged that “serious” accounting improprieties at the British software company were responsible for more than $5bn of the writedown.

Meg Whitman, chief executive, said that information provided by a member of Autonomy’s management team after Mike Lynch, its founder and former chief executive, was fired in May had prompted an internal investigation. This revealed improprieties, “disclosure failures and outright misrepresentations at Autonomy”, which occurred before the acquisition.

Whether there was dodgy dealing or not, all you need to know about the Autonomy/HP Brouhaha is contained in these 2 paragraphs from Jonathan Weil at Bloomberg:

HP said in its 2011 annual report that it paid $11 billion for Autonomy, a software company based in Cambridge, England. In connection with the acquisition, HP initially recorded $6.6 billion of goodwill and $4.6 billion of other intangible assets. HP later revised the goodwill to $6.9 billion and reduced other intangibles by about $300 million, according to its most recent quarterly report.

The goodwill figure is especially telling. Goodwill is the bookkeeping entry that a company records when it pays a premium to buy another company. More precisely, it’s the difference between the purchase price and the fair market value of the acquired company’s net assets. Goodwill can’t be sold by itself. The goodwill in this instance tells you that HP paid $6.9 billion more than it believed Autonomy’s net assets were worth.

When you are valuing your $11 bilion purchase at 2/3 Goodwill and your market cap is only c $28bn, you have not just overpaid, you have overpaid ludicrously on a big bet, and it will really hurt if things go wrong...I didn't write about this deal at the time, I saw it as yet another typical Bubbletime deal, and I felt I'd been writing a continual litany on large desperate corporates overpaying for less-than-meets-the-eye-but very-cool small companies (that they believe they can add value to, despite all the historical evidence) for the past year or so.

It would appear that all the HP Board bar one were in situ at the time. Be interesting to see which heads roll.....