Hewlett-Packard has accused Autonomy, the British software company it bought last year, of accounting improprieties and is taking an $8.8 billion charge in the latest of a string of setbacks.
HP has discovered "serious accounting improprieties" and "a wilful effort by Autonomy to mislead shareholders" after a whistleblower came forward, the company said.
It has alerted regulators on both sides of the Atlantic.
Irish-born mathematics whiz Mike Lynch, who led the firm he had co-founded when it was sold to HP last year for a hefty $11.1 billion, denied the allegations. He blamed mismanagement by its new owners for shredding its value.
"We are shocked, this is a big surprise, it's completely and utterly wrong and we reject it completely," he told Reuters by telephone. "We have not heard anything from HP, they have not been in touch and we don't know what they are on about."
Mr Lynch left HP's employment in May.
HP's announcement yesterday sent the company's shares plunging 12 per cent to a 10-year low of $11.71. HP, which for decades was synonymous with technical excellence and innovation as one of the bedrock companies of Silicon Valley, has seen its market value sink to roughly $20 billion from $155 billion in April of 2000.
CEO Meg Whitman took the helm at HP a little over a year ago when her predecessor, Leo Apotheker, was fired after less than a year on the job.
Apotheker's big strategic move during his brief tenure was the acquisition of Autonomy, intended to hasten HP's transformation into a software and services company - but which was criticised by many analysts at the time as over-priced.
Analyst Paul Morland at Peel Hunt said at the time that HP shareholders should be worried about the high price agreed, contracting margins and single-digit profit growth.
Ms Whitman told an analyst call: "Most of the board was here and voted for this deal, and we feel terribly about that."
The announcement came just three months after the company took a write-down of almost $11 billion on its EDS services division. HP has for years relied on deal-making, acquiring businesses ranging from EDS to Compaq to Palm, but has largely failed to articulate a clear strategy or establish a strong position in growth businesses like computer services or mobile computing.
"To put it bluntly ... this story has been an unmitigated train wreck, and it seems every time management speaks to the Street, there is new negative incremental information forthcoming," said ISI Group analyst Brian Marshall.
HP said it has referred the alleged accounting wrongdoing at Autonomy to the US Securities and Exchange Commission's enforcement division and the UK's Serious Fraud Office for civil and criminal investigation. HP also said it would take legal action to recoup "what we can for our shareholders".
Both agencies declined to comment.
Ms Whitman said the investigation of Autonomy's finances - both external and internal - will take multiple years as it wends it way through the courts in both countries.
She defended the board's handling of the acquisition and blamed HP's auditors for failing to detect the problems.
"The board relied on audited financials, audited by Deloitte. Not Brand X accounting firm, but Deloitte," she said, speaking to Reuters, adding that KPMG was hired to audit Deloitte.
"Neither of them saw what we now see after someone came forward to point us in the right direction," Ms Whitman said.
A person familiar with the situation told Reuters that the Federal Bureau of Investigation was probing the HP-Autonomy allegations in concert with the Securities and Exchange Commission, although the inquiry was at an early stage.
HP and Autonomy were not available to comment on the FBI probe, and the FBI declined to comment.
The alleged accounting issues also put a spotlight on the investment banks and law firms involved in the acquisition.
Reuters
