Jim Chanos saw through Enron, Tyco, and the subprime mortgage mess. And made money on them.
On a muggy Thursday in the dog days of August 2011, the news broke that the American technology giant Hewlett-Packard was about to acquire British software maker Autonomy Corp. The offer price represented a 64 percent premium on the previous day’s close. At his office in mid-Manhattan, hedge fund manager Jim Chanos ’80 did not rejoice.
Only a few weeks earlier, his firm, Kynikos Associates, had put together a report on Autonomy, calling its chief operating officer unqualified, its customers unenthusiastic, its market share and growth numbers questionable, its financial disclosures “very poor,” and its margin profile “suspiciously high.”
“We thought this was one of the great shorts of all time,” says Chanos, who specializes in ferreting out corporate bad behavior and then short-selling the companies that indulge in it. (That is, he borrows shares in a company and sells them at the current price, in the expectation that he will be able to pay back the loan, or “cover the short,” with shares purchased at a much lower price when the truth comes out. See boxes, pages 41 and 43.) Autonomy was the firm’s largest short position in Europe. So Hewlett-Packard’s decision to more than double the value of the company was—and here Chanos laughs—“very painful.”
Chanos passed along a copy of his Autonomy analysis to a friend who had friends on the board at HP, saying, “You should look at this. This is going to be a disaster.” The deal closed anyway, and Chanos was soon shorting HP as enthusiastically as he had shorted Autonomy. Thirteen months later, in November last year, HP management woke up, said there were “serious accounting improprieties” at Autonomy—and handed shareholders an $8.8 billion loss on the deal. (Autonomy’s ex-CEO denied the charge.) By then, Chanos had already covered most of his short, pocketed the profits, and moved on.
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