Financial Mismanagement In Silicon Valley Is Not A New Phenomenon

One of Warren Buffet’s favorite aphorisms is that when the tide goes out we find out who’s not wearing a bathing suit. With the Federal Reserve’s steady increase in interest rates over the last 18 months, we are discovering that many entities in Silicon Valley have been swimming in the nude.

Many companies found it impossible to resist the lure of rock-bottom interest rates and vast pools of capital sloshing around financial markets, and they spent wildly. With capital costs sharply higher in 2023, many firms have found it necessary to pare back or abandon their high-flying projects they took on a few years ago.

For instance, Meta—the company that owns Facebook—fully doubled its employee size between 2018 and 2021 as it tried to build out its virtual reality universe, but has already laid off 21,000 so far in 2023. Amazon
AMZN
has laid off 27,000 workers, Google
GOOG
has let go of 12,000, and Microsoft
MSFT
has laid off 10,000. And Twitter, while shedding fewer total employees, reduced its workforce by half. Each of these represents bets that have failed to come to fruition.

But while taking risks is a central part of Silicon Valley culture, some investments by Silicon Valley entities failed not because they were inherently risky but merely because the company was complacent and failed to bother to do its due diligence. For instance, the Silicon Valley Bank went bankrupt not because it made bad bets on startups but merely because it failed to hedge its interest rate risk after it invested most of its deposits in U.S. Treasury bills.

The history of a tech firm making an ill-considered investment is a long and storied one, and the missteps of one iconic tech firm of a decade ago is still playing out today.

In 2011 Hewlett-Packard
HPQ
, the company that famously calls the garage where it was started “the birthplace of Silicon Valley,” purchased Autonomy, an enterprise software company, for $11.7 million. To say that the investment was a mistake would be a gross understatement: Just one year after the purchase, HP wrote down $8.8 billion of its investment.

Autonomy’s founder, Mike Lynch, recently lost his bid to appeal his extradition to the U.S. to face criminal charges over the sale of the company.

HP’s missteps in this acquisition are difficult to comprehend. For starters, HP paid a 79 percent premium to acquire the company–a price that many HP shareholders deemed excessive at the time. More startling is the fact that HP’s then-CEO Léo Apotheker admitted in court that he hadn’t bothered to read KPMG’s due-diligence reports on Autonomy, or even the company’s most recent quarterly financials, before purchasing it. Nor did HP’s chief financial officer, which is harder to fathom. HP’s CFO
CFO
seemed to have been spot on when she complained at the time that “[w]e are reactive and act without good planning. There isn’t financial discipline.”

The Justice Department has charged Lynch with wire fraud, alleging that he misled HP and shareholders about Autonomy’s financial condition ahead of the sale. HP has also sued Lynch in Britain for fraud, seeking $5 billion in damages –although a judge has said the total amount due would be “considerably less.” Lynch denies all claims against him.

HP’s fumble of Autonomy was merely the last in a series of terrible decisions by the company’s management that included a sex scandal that forced a previous CEO to resign, a difficult-to-comprehend spying scandal that beggars belief (the management hired private detectives to spy on board members and journalists) and a series of failed acquisitions (Compaq, Electronic Data Systems, and Palm). As a result, its stock price remained in the tank for years, and at its nadir in 2013 it was below what it traded for in 1996.

The latest development in HP’s legal saga is a reminder that not all of Silicon Valley’s failed businesses are the result of courageous bets that didn’t pay off: Financial incompetence is just as likely to happen there as in New York, London, or anywhere else.

It remains to be seen whether any of the tech giants that are shedding workers have made any missteps along the lines of HP’s, but it’s a safe bet that Silicon Valley’s habit of playing fast and loose when there’s cheap capital available makes it all but certain that there are still a few companies afoot that have made a few reckless bets with investors’ money.

Investors in search of stability, beware.