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Thursday, 30 October 2014

Overdue diligence

HP-Autonomy row suggests bankers did not compute

The M&A advice on Hewlett-Packard’s Autonomy deal does not compute. If the U.S. tech giant’s extraordinary claims of accounting skulduggery are true, there will be plenty of blame to go around. But in addition to the many executives, directors and accountants on the hook, the situation raises tough questions for the financial advisers who shepherded the $12 billion deal, chiefly Frank Quattrone’s Qatalyst Partners, Barclays and Perella Weinberg.

The banks can try to fall back on an easy riposte: they’re not detectives, and Autonomy was a FTSE 100 blue chip company audited by a Big Four accounting firm. The buyer had its own bean-counters, too. If the numbers were deemed kosher, who were the banks to disagree?

Such a perfunctory defence, however, would contrast poorly with the image bankers otherwise like to portray. What are the all-nighters, red-eye flights and midnight calls for, if not to make sure all the i’s and t’s have been dotted and crossed? The lucrative fees - estimated by Freeman & Co. at $70 million in the case of HP-Autonomy - are for seasoned advisers to think creatively about risks. They’re supposed to ensure a deal is credible.

The speed with which HP moved on Autonomy raises questions about how thoroughly Barclays and Perella Weinberg could have scrutinised the target’s books. They also put their stamp of approval on a full price that left little room for error on a company long dogged by sceptical sell-side analysts. Meanwhile, Quattrone, Autonomy’s primary adviser, finds himself linked again to scandal after working so hard to clear his name from dotcom-era allegations. The master salesmanship exhibited in his second act will be seen in a whole new light.

With HP trying to pique the interest of regulators and fraud-busters on both sides of the Atlantic, banks could be sucked into yet another long and distracting investigation. If there is a case to answer, the harshest evidence, as it so often does, probably would emerge from notes and presentations emailed around to the various constituents. That leaves bankers susceptible to more thorough due diligence than they themselves seem to have mustered. Ironically enough, one company specializes in just the sort of software designed for such a probe: Autonomy.

Context News

Qatalyst Partners was lead financial adviser to Autonomy on its sale to Hewlett-Packard. The target also received financial advice from Citigroup, Goldman Sachs, JPMorgan, Merrill Lynch and UBS. Barclays Capital and Perella Weinberg were joint financial advisers to HP.

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