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HP shareholders bay for blood in $19 BEELLION writedown aftermath

Calls to boot two board veterans and auditor next month

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Updated Hewlett-Packard investors are rearing up against Meg Whitman’s board, demanding senior heads roll over several multi-billion-dollar failed acquisitions, including HP's 2011 $11bn buy of Brit software company Autonomy - which it wrote down to the tune of $8.8bn late last year.

The Autonomy writedown at the tail-end of 2012 was HP's third writedown in 12 months. It had written down $8bn in August 2012 from its EDS acquisition and registered an impairment expense of $885m on Palm in November of the previous year. Altogether it spent a total of $26bn on the three firms and wrote off $19bn in all.

CtW investment Group is calling on shareholders to dump two of the longest-serving members of HP’s board at the company’s forthcoming annual meeting.

The group also wants Ernst & Young booted as independent auditor because of a “conflict of interest”, intimating that E&Y had been overpaid in its letter to shareholders.

It also alleged that the accounting firm bears "significant responsibility" for providing tax advice that has landed the company in hot water with Washington over aggressive tax avoidance.

You can read the letter to shareholders here (PDF).

However, CtW seems to have relented on calling for the head of Silicon Valley veteran Ray Lane, according to The Wall St Journal. In a meeting with CtW, Lane – HP's chairman since September 2011 – and other HP directors tempered the group’s fire, saying HP is investigating the failed $11bn Autonomy purchase while also revealing that an “informal committee” has been created to “provide strategic advice” to HP’s current chief executive Meg Whitman.

CtW is reported to hold about 7.8 million shares, less than one half of 1 percent of HP shares.

In a statement attributed to HP's head of corporate communications Howard Clabo, the PC and server maker said a special board committee had been set formed to review the specific claims raised by shareholders and it would make a recommendation to the full board "as to its response to these claims."

He also called shareholders meeting with Lane and others "productive" and said HP feels it has "the right board in place to turn HP around.”

CtW wants investors to vote against the re-election of John Hammergren and G Kennedy Thompson, in situ since 2005 and 2006 respectively, at HP’s March 20 AGM.

CtW singled out Hammergren for supporting the purchases of EDS, Palm and Autonomy during his tenure, deals that have resulted in $19bn write-downs.

The group claimed Hammergren, a CEO of US healthcare services giant McKesson Corporation: “has been unduly deferential to the HP CEOs with whom he has dealt.” CtW claims: “Mr Hammergren supported the Autonomy acquisition despite his misgivings about the deal, the repeated increases in cost, and the compressed due diligence timeline.”

According to CtW, Thompson “bears primary responsibility for the board’s willingness to tolerate unusually high non-audit fees paid to Ernst & Young.”

CtW claims in its letter:

HP pays Ernst & Young non-audit fees equal to 40% of total fees, twice the average for public companies... We are concerned that by allowing such high non-audit payments to Ernst & Young, the HP board may have compromised the effectiveness of the outside audit function.

Along with Microsoft, HP and E&Y were hauled before the US Senate Permanent Investigations Subcommittee last year and grilled over the aggressive exploitation of loopholes in US tax law.

E&Y was hired by HP during the Autonomy deal to audit the company's books. KPMG was brought in to conduct due diligence, while PricewaterhouseCoopers monitored the takeover. HP went on to accuse Autonomy's old management of "serious accounting improprieties, disclosure failures and outright misrepresentations" late last year after it wrote down $8.8bn on the cost of buying Autonomy. However, the audit of Autonomy’s books that was provided by E&Y and KPMG forms a central plank of Autonomy’s founder and former CEO Mike Lynch’s defence against HP’s board; he claims outside auditors could not have missed the accounting practices claimed by HP’s board. In his open letter to HP, Lynch wrote:

Please explain how such issues could possibly have gone undetected during the extensive acquisition due diligence process and HP’s financial oversight of Autonomy for a year from acquisition until October 2012.

In its letter to shareholders, CtW said of E&Y: “We have grave concerns over HP’s unusually extensive use of its outside auditor to provide non-audit consulting services, which in our view threatens both the appearance and actuality of auditor independence.”®

This article has been updated with comment from HP.

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