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Behind the Woes at HP, Wall St. Banks Lurk

How much would you pay for advice that turned out to be questionable? Would about $81 million sound unreasonable?

Hewlett-Packard
Hewlett-Packard

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 acquisitions that have all been vocally scrutinized 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, Léo 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 percent 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,” Kevin Hunt, an analyst at Auriga, 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 toward 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 and may have led to more criticism of the transaction.

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. (Firms looking to sell themselves, to their credit, hire such advisers to get them the best deal possible.)

For instance, in the spring of 2010, Qatalyst and Goldman sold Palm, the handheld device company, to H.P. 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 percent. When the bidding started, Dell agreed to acquire 3Par for $18 a share; when the auction was over, HP had paid $33 a share. 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, Mr. 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.

A spokesman for HP declined to comment on the advice it received on any of the deals.

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.

A little over a week ago, HP said it was reversing itself on an earlier decision to put its own personal computer business up for auction. Instead, it now plans to keep that business within the fold.

It was the first major strategic decision by HP’s new chief executive, Meg Whitman, who recently replaced the company’s ousted executive, Mr. Apotheker, who had pressed the board to sell the PC business. “The costs and the risks of separation are simply greater than any value we could create,” Ms. Whitman said by way of explanation.

So how much did the company save in banker fees? About $18 million.

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