HP: Accounting Fraud Isn't the Worst of It


Stocks are giving back some of yesterday's rich gains this morning, with the Dow Jones Industrial Average (INDEX: ^DJI) and the broader S&P 500 (INDEX: ^GSPC) down 0.37% and 0.26%, respectively, as of 10:10 a.m. EST.

The micro view
On Sunday, I wrote of Dow component Hewlett-Packard (NYS: HPQ) that while it "has beaten expectations at least four times consecutively prior to [today's] earnings report ... the company has otherwise systematically crushed investors' hopes and dreams for some time now." Today, HP keeps the investor nightmare alive by simultaneously missing expectations and announcing an $8.8 billion charge on its $10.3 billion acquisition of U.K. software company Autonomy due to accounting fraud by the latter prior to its acquisition.

If fraud took place, that is something HP should pursue vigorously. However, investors should keep their eye on the ball: The acquisition of Autonomy was probably ill-advised, regardless of any current allegations of accounting fraud -- and it was certainly overpriced. Note that while $5 billion of the Autonomy-related charge is due to accounting practices, that still leaves roughly a $3.8 billion charge that has nothing to do with the alleged fraud -- more than one-third of the acquisition price.

The Autonomy deal smacked of desperation, a situation in which a chief executive sought to paper over decline and mismanagement of core activities by buying growth or pursuing "transformational" acquisitions. Thankfully for CEO Meg Whitman, that chief executive happened to be her predecessor, who announced the deal roughly a month before he was jettisoned.

What's next for HP investors? Today, they're down another 12.6% as of 10:15 a.m. EST. At this stage, one should only consider owning or buying these shares as an outright speculation. If you want to own a tech stalwart that is turning things around, you're better off looking at Cisco Systems (NAS: CSCO) , for example. Click here to receive our premium report on the shares, which includes 12 months of ongoing coverage.

The article HP: Accounting Fraud Isn't the Worst of It originally appeared on Fool.com.

Alex Dumortier, CFA has no positions in the stocks mentioned above; you can follow him @longrunreturns. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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