Acquisition of Autonomy by Hp

HP acquired Autonomy by offering 64% premium over its market value of 7.1 Billion which is almost equal to 1.7 times the change in market capitalization value of HP at the announcement. The announcement was not taken very positively by HP shareholders and the decline in stock price resulted in a 4.2 Billion decrease in market value of HP.On the other hand, stock price of Autonomy went up by 72%.The whole deal meant that HP had to suffer a loss of almost 8.2 Billion on acquiring Autonomy.

When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. In general, the acquiring company's stock will fall while the target company's stock will rise. The reason the target company's stock usually goes up is that the acquiring company typically has to pay a premium for the acquisition: unless the acquiring company offers more per share than the current price of the target company's stock, there is little incentive for the current owners of the target to sell their shares to the takeover company.

The acquiring company's stock usually goes down for a number of reasons. First, as we mentioned above, the acquiring company must pay more than the target company currently is worth to make the deal go through. Beyond that, there are often a number of uncertainties involved with acquisitions.

iii) Was the acquisition a wise investment? What is your best estimate of the fair price that HP should have paid for Autonomy? Can you see a situation where a firm might benefit by paying a premium to acquire another firm?

Ans) No, this was a terrible decision on part of HP.Initially, HP estimated that it was just paying a 64% premium over market value of Autonomy.HP market capitalization value also went down by 4.2 billion on this announcement. However, it was later revealed that the accountants at Autonomy manipulated the financial statements to make it look much better than