HP's Acquisition of Autonomy
Goodwill Impairment and Fair Value Measurement: Hewlett-Packard’s Acquisition of Autonomy
Abstract
In today’s business environment, mergers and acquisitions are becoming increasingly common. Mergers and acquisitions create many accounting challenges including issues of fair value measurement and the associated topic of goodwill impairment. The fair value measurement of an acquired company usually entails using a Level 2 fair value estimate, or using a market or income approach, both level three fair value estimates. Valuing an entity using the income approach can be a very challenging due to the significant unobservable inputs that must be used to arrive at fair value. Such unobservable inputs include items such as growth rates and discount rates can have potential to drastically affect the value of the related entity. These fair values are then used in conjunction with the carrying value in order to determine potential goodwill impairment. The likelihood for errors in these measurements can lead to material complications for the financial statements, as in the case for Hewlett-Packard’s (HP) acquisition of Autonomy. HP used the income approach to measure the value of Autonomy, which is the focus of this study in accounting measurement challenges. This analysis of accounting measurement challenges discusses these issues in detail, in addition to making sense of the accounting of HP’s acquisition of Autonomy. Additionally, there is insight into how HP overpaid for Autonomy and how HP may have justified paying such a high price for Autonomy. Further, the various parties associated with the acquisition will be analyzed to reach an understanding of the overvaluation by HP and any cause and repercussions.
Introduction and Background
Mergers and acquisitions provide many challenges from an accounting standpoint including the measurement of goodwill and its subsequent impairment. Goodwill is often a large portion of the purchase price of the
Abstract
In today’s business environment, mergers and acquisitions are becoming increasingly common. Mergers and acquisitions create many accounting challenges including issues of fair value measurement and the associated topic of goodwill impairment. The fair value measurement of an acquired company usually entails using a Level 2 fair value estimate, or using a market or income approach, both level three fair value estimates. Valuing an entity using the income approach can be a very challenging due to the significant unobservable inputs that must be used to arrive at fair value. Such unobservable inputs include items such as growth rates and discount rates can have potential to drastically affect the value of the related entity. These fair values are then used in conjunction with the carrying value in order to determine potential goodwill impairment. The likelihood for errors in these measurements can lead to material complications for the financial statements, as in the case for Hewlett-Packard’s (HP) acquisition of Autonomy. HP used the income approach to measure the value of Autonomy, which is the focus of this study in accounting measurement challenges. This analysis of accounting measurement challenges discusses these issues in detail, in addition to making sense of the accounting of HP’s acquisition of Autonomy. Additionally, there is insight into how HP overpaid for Autonomy and how HP may have justified paying such a high price for Autonomy. Further, the various parties associated with the acquisition will be analyzed to reach an understanding of the overvaluation by HP and any cause and repercussions.
Introduction and Background
Mergers and acquisitions provide many challenges from an accounting standpoint including the measurement of goodwill and its subsequent impairment. Goodwill is often a large portion of the purchase price of the