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On the 14th November 2011, Hewlett Packard completed its USD 9.9bn takeover of Autonomy, the UK-based listed knowledge management software company. One full year and just short of a week after the deal closed, HP yesterday issued a statement saying they have discovered “serious accounting improprieties” and a “wilful effort by Autonomy to mislead shareholders”. Strong stuff coming from a clearly dissatisfied buyer, which is effectively accusing the Autonomy board of misleading them as to the financial position of the company.

As you can imagine, the HP share price plunged on the release of this public statement, and a good many analysts are today no doubt sitting back in their chairs saying “we said the deal was overpriced, they’ve paid too much…!”

The disconnect for me in this whole sorry state of affairs is the due diligence. Perhaps somewhat naïvely, I had always believed that the whole point of paying large sums to your advisors was to ensure that rigorous due diligence actually got carried out, giving buyers the chance to spot strange things in the make-up of the company they are about to spend billions of dollars buying. Or at the very least, enabling the buyer to ask difficult questions of the seller and decide whether to go any further or not when in receipt of the answers.

But I often liken the M&A market place to that of the housing market - the difference being there are more zeros on the end of the prices paid, and I feel this metaphor is appropriate in this particular case. Market pressures force you to perhaps pay more than you wanted, you move in and discover that the survey didn’t show all the peculiarities until you start to peel back the layers.

The redress is to bring in the lawyers, clocking up more fees, reach some compensation and then sell on as fast as you can!
 

Filed under: due diligence, M&A, advisors