MCKESSON-HBOC INC.: Motivation for Ousters Comes to Light
One month after sweeping out seven executives in a "dramatic housecleaning," McKesson HBOC Inc. announced yesterday the findings of an intensive audit of software company HBO & Co., which McKesson gobbled up in January for $12 billion, the Wall Street Journal reports. The audit unearthed previously deleted "dark files" suggesting that HBO executives "had intentionally concealed efforts to accelerate revenues, lumping into sales a long list of contracts that weren't final." The results are costing McKesson: Fiscal 1999 earnings were restated to 31 cents a share, down from 84 cents a share in the original report (King Jr., 7/15). In light of the findings, the San Francisco-based company said it would fall short of analysts' predictions of earnings of 49 cents a share for the first quarter ending June 30 and would have to trim $191.5 million from its operating income for the last three years. The announcement came as a surprise to analysts and investors who "had no idea the problems would be so costly or the ills at HBO so troublesome," the New York Times reports (Morrow, 7/15).
Adding the latest chapter in "one of the more bizarre business tales of the year," the company said that in May it had discovered several small contracts that "turned out to be contingent on unmet conditions." After finding $42.1 million in sales from the HBO unit that were improperly booked, someone close to the investigation said it "was like a hole in the dike." A review team quickly uncovered clues, "including schedules, memos, codes -- and the secret list of contracts with references to contingencies that hadn't been met." After further investigation, McKesson concluded that "at least four HBO officials had participated in an organized approach to accelerate the recognition of revenue" (Journal, 7/15). "With McKesson, it just goes to prove the theory that where there's one roach, there is always more," said Michael Krensavage, an analyst with Brown Brothers Harriman, adding, "You get a handle on one problem and then another roach comes out from under the cabinet" (New York Times, 7/15). McKesson said yesterday that the U.S. attorney's office for the Northern District of California and the Securities and Exchange Commission have started their own investigations of "the improperly recorded sales" (Bloomberg/Los Angeles Times, 7/15).