Hewlett-Packard Company (HPQ) Faces FBI Investigation Over Autonomy

Hewlett-Packard Company (HPQ) Faces FBI Investigation Over Autonomy

The FBI has become involved in the Securities and Exchange Commission investigation of Hewlett-Packard Company (NYSE:HPQ) subsidiary Autonomy Corp. The news, from a source familiar with the matter, comes from Businessweek. The investigation puts a new burden on a firm already creaking under massive weight.

Hewlett-Packard Company (NYSE:HPQ) has suffered in recent years, as it failed to respond to changes in the demand structure of the personal computer market. Two major reports, filed recently by Credit Suisse Group AG (NYSE:CS) and Citigroup Inc. (NYSE:C) analysts have lowered their targets for the company’s stock price. Citigroup rated the stock as a sell.

Seth Klarman: Investing Is Art First, Craft Second And Science Third

Seth KlarmanSeth Klarman is considered to be one of the best value investors of all time. Unfortunately, he does not give many interviews or lectures. Q2 2020 hedge fund letters, conferences and more Luckily, those interviews and speeches that he does give are stuffed full of information and highly insightful comments that value investors can learn Read More

Hewlett-Packard Company (NYSE:HPQ) announced yesterday that those formerly in charge at Autonomy were to blame for unforeseen charges amounting to $5 billion. HP faced charges amounting to a total of $8.8 billion in this quarter. The firm alleged that “accounting improprieties” were to blame for the charges incurred at Autonomy.

The SEC is now involved in an investigation of the subsidiary’s finances, and according to today’s news, the FBI has been added to the list of investigating parties. The United Kingdom’s Serious Fraud Office is also conducting an investigation into the allegations.

Shares in HP were rebounding mildly today in regular trading. The firm’s stock hit a ten year low yesterday, after the official announcement of Autonomy’s culpability for the loss in the last quarter. At the time of writing, shares in the company stood at $11.94, up almost 2% in morning trading.

Hewlett Packard alleged that management at Autonomy Corp. had inflated revenue numbers and gross margins, in order to present a more positive view of the firm’s future to potential buyers. The former CEO of the company, Mike Lynch, denied the charges.

This scandal is just the latest in a series of problems that ails the Hewlett-Packard Company (NYSE:HPQ). The reports on the firm’s future, released by analysts in recent days, concentrate not on the Autonomy scandal, but on the overall trends in the firm’s business.

Citigroup Inc. (NYSE:C), who reduced their twelve month target price to $10.50, maintains that changes in the PC sector still bite deeply into Hewlett Packard’s growth options. The increase in employees bringing their own devices to work hits the company at one of its core strengths, the enterprise sector. The Credit Suisse Group AG (NYSE:CS) report hits along the same lines, but sets a higher target price, at $12.

In basic terms, Hewlett-Packard Company (NYSE:HPQ) is a PC hardware business trying to transition to an IT services company. That transition is going to take years, as demand is, as of yet, not heavy enough to justify the move. The capital costs associated with moving to the new business model are high, as new data centers are a primary concern.

The reigning narrative has been that HP is a company with many fundamental strengths that simply needs time to turn around. The announcement of a large investigation into the company’s finances may not be ideal for a company in that position. Any more downside risk could downgrade Hewlett Packard from turning around, to plummeting.

The SEC investigation is concentrated on the Autonomy part of the Hewlett Packard Corporation. If the regulators manage to find anything more improper than has already been alleged, the firm’s shareholders will pay with their wealth.

Hewlett-Packard Company (NYSE:HPQ) has a long history in American technology. This investigation will not result in the firm’s downfall, but it does weigh the company down. The added weight makes the firm less flexible. Management at Hewlett Packard will have to respond quickly to reassure shareholders.

Hewlett Packard is a firm in the midst of transition. There are tipping points, but the market still seems confident that the firm can resurrect itself. The real question centers on how long that turnaround will take.