Geography and the Politics of Mobility (2003)

In August 2011 the US company Hewlett Packard (HP) acquired the technology company Autonomy for over US$10 billion. Barely a year later, US$8.8 billion of this amount had to be written off. The announcement of this write-off in November 2012 led to a sharp fall in the share price, causing losses for our clients. As well as recovering the financial loss, our aim with these proceedings was to improve HP’s corporate governance structure. After all, as an institutional investor with a long-term horizon, we want to continue to be able to invest in this company.

In January 2013 we joined with pension funds in the American states of Oregon and Oklahoma in filing an application with the court in San Francisco to be appointed jointly as lead plaintiff. The lead plaintiff takes a leading role in the proceedings on behalf of all misled investors who find themselves in the same position. On 6 March 2013 the court surprisingly appointed PGGM as the sole lead plaintiff. PGGM was deemed the most appropriate party to conduct this type of case due to the scale of our losses and our other qualifications as an institutional pension investor with a proven track record. From our perspective the proceedings concern not only the company but also a number of individual executive directors who were responsible for the acquisition. These include the current CEO Whitman and the former CEO Apotheker, who had already been dismissed before the Autonomy acquisition was completed.

The management situation at HP had been unsettled for some time. Over a period of three years, the strategy had been constantly adjusted or overturned by three

successive CEOs. The acquisition of Autonomy was intended to dovetail with the new strategy, but it failed completely, with serious consequences for investors. They therefore held a number of directors responsible by voting en masse against their reappointment at the shareholder meeting in 2013. Three executive directors, including the chairman, then resigned.

The reason for the enormous write-down of almost 90% of Autonomy’s purchase price largely related to accounting irregularities at Autonomy in the period before the acquisition. As a result, Autonomy was substantially overvalued at the time of the acquisition and HP therefore paid far too high a price. This was despite serious warnings both from analysts who openly raised critical questions about the software segment growth reported by Autonomy and from Autonomy’s employees. At that time CFO Lesjak already considered the acquisition to be too expensive and against the company’s interests.

The misleading results of the pre-acquisition Autonomy were then incorporated in the figures in HP’s 2011 annual report and various quarterly reports in 2012, as a result of which investors gained a false impression. Following an internal investigation, HP instructed the auditing firm PwC in May 2012 to conduct a forensic audit. After the findings of the audit became known, Mike Lynch, the previous CEO of Autonomy and member of HP’s board, was summarily dismissed, even before the acquisition was completed.

The seriousness of the case is borne out by the fact that the SEC, the FBI and the UK’s Serious Fraud Office were informed at an early stage and launched their own investigations.

HP has publicly admitted that Autonomy’s financial results and historical growth were based on numerous accounting

irregularities, but states that it itself was a victim of fraud by Autonomy. The fraud apparently only came to light as a result of reports by a whistleblower at Autonomy. In PGGM’s view, however, HP failed to conduct a proper due diligence, relying instead on the unqualified reports by Autonomy’s external auditor, conducting only a limited examination of the accounts and ignoring warnings from analysts and Autonomy employees. HP kept the

disappointing results of this acquisition to itself for many months without public disclosure. This contravenes the applicable laws and regulations.

The court issued its first important judgement in November 2013. We had to demonstrate that HP’s statements on the acquisition of Autonomy and its consequences were misleading and thereby harmed investors. The court largely agreed with our reasoning, although it specified that the ‘class period’, the relevant period in which investors acted on the basis of incorrect information, would be limited to the period from 23 May 2012. The acquisition process and the acquisition itself thus remain outside the range for the time being, but may be included in the proceedings again if relevant facts come to light during the discovery phase. Individual executive directors have also been indemnified against further proceedings. Only CEO Whitman will be required to explain in the ongoing proceedings why, after May 2012, she failed to inform investors of the fraud being investigated by HP at Autonomy as a possible cause of Autonomy’s disappointing profit contribution.

45 PGGM

The discovery phase will begin in the first half of 2014. All parties involved are required to provide documentation on events in the relevant period and PGGM also has to account for its decision to invest in HP shares and its underlying investment strategies.

6.2 Outlook

The proceedings against HP will require a great deal of attention in 2014. It is also intended to complete the September 2012 Bank of America settlement in 2014, with pay-outs expected to be released in the course of 2014. The Vivendi case in France, the Olympus case in Japan and the case against the former Fortis and a number of its executive directors in the Netherlands will also be pursued.

Outcomes and targets of quantitative indicators

(at year-end) Outcome 2012 Target*2013 Outcome 2013 Target*2014

Active proceedings 5 n/a 5 n/a

Proceeds of passive legal proceedings €825,977 n/a €1,510,164 n/a