For HP, deal advice proves costly

How much would you pay for advice that turned out to be questionable? Would about $81 million sound unreasonable? That’s how much Hewlett-Packard is estimated to have paid out in fees to its investment bankers in the last two years for advising it on a series of acquisitions that have all been vocally scrutinised by investors. During the same period, Hewlett-Packard’s market value has fallen by more than $40 billion.

While HP’s famously dysfunctional board - along with the company’s short-tenured former chief executive, Leo Apotheker - has taken the brunt of the criticism, a notable group of behind-the-scenes influencers have so far escaped scrutiny: Wall Street banks.

Take HP’s $11.7 billion acquisition of Autonomy this year, for example. HP paid an astonishing 80 per cent premium for Autonomy, a business software maker based in Britain. HP lost $12 billion in market value within 24 hours of the deal’s being announced.

Inexplicably, HP disclosed the transaction on the same day that it lowered its earnings guidance, creating a huge loss of confidence in the company among analysts and investors.

“If at first you don’t succeed, overpay for yet another acquisition,” Auriga analyst Kevin Hunt, mockingly said of the deal at the time. HP’s board relied on an army of bankers to help it decide whether to pursue Autonomy. It had many on standby as it tried to remake itself, moving away from hardware and towards software and services. Its whisper-in-my-ear consiglieri included folks from Barclays, which also provided an $8.3 billion one-year loan to HP, and from Perella Weinberg Partners, the boutique investment firm.

In total, the two firms were paid about $30 million in fees, according to estimates by Thomson Reuters and Freeman & Company, a mergers and acquisitions consultancy that tracks and provides deal fee estimates. HP did not disclose its fees.

People involved in the deal said that the bankers had cautioned HP’s board that its stock might fall initially after the deal’s announcement, but the bankers had not been told that HP planned to also lower its earnings guidance at the same time, which clearly complicated the announcement.

In addition to the $30 million it paid its own advisers, HP, like all acquirers, ultimately assumed the cost of the raft of Autonomy’s advisers that, truth be told, may have outsmarted HP’s board. That total? An estimated $38.69 million. The beneficiaries, which in this case clearly did well by Autonomy’s shareholders, were Qatalyst Partners, Goldman Sachs, Citigroup, UBS, Bank of America Merrill Lynch and JPMorgan Chase.

As it happens, Qatalyst Partners, which was founded by the famed technology banker Frank Quattrone, and Goldman Sachs have made a habit of selling to HP other businesses at inflated prices.

For instance, in the spring of 2010, Qatalyst and Goldman sold Palm, the handheld device company, to HP for $1.2 billion. HP had hoped to use Palm’s webOS operating system to create a new platform of tablet and mobile devices. Yet a year later, after introducing the TouchPad to lackluster sales, HP announced that it would “discontinue operations for webOS devices, specifically the TouchPad and webOS phones devices.” Its $1.2 billion investment just went poof.

For that deal, HP’s board sent an estimated $20 million thank-you fee to Bank of America Merrill Lynch, which served as its own adviser. Qatalyst and Goldman pocketed an estimated $30 million driving up the price of Palm, according to Freeman & Company. And then there was HP’s $2.35 billion acquisition of 3Par, an online maker of storage systems. HP out-maneuvered its rival, Dell, in a testosterone-fueled bidding war that may have resulted in the highest premium ever paid: 242 per cent. 

HP “way, way, way overpaid,” Kaushik Roy, an analyst at Wedbush Securities, told Bloomberg News when the deal was announced. Who helped HP overpay? This time it was JPMorgan. And HP paid the firm an estimated $13 million fee for its advice. And yes, Quattrone’s Qatalyst was again the one advising the company that was selling itself. His firm was paid about $15 million, according to Freeman & Company. The price tag of HP’s $1.4 billion acquisition in 2010 of ArcSight, a cybersecurity firm, has also been questioned. Goldman Sachs, its adviser on that deal, made an estimated $18 million.

In fairness, some of these deals could very well work out over time for HP. And of course, it is difficult to hold bankers accountable for a client’s success or failure in integrating another company. And in every instance, the company’s management and board signed off on these transactions.