Hewlett-Packard Settles Lawsuit - Analyst Blog

Computing major Hewlett-Packard & Co. (HPQ) recently settled a lawsuit related to fraudulent action by its contractors and officials. The Department of Justice (DOJ) and the Federal Communications Commission (FCC) alleged that HP violated competitive bidding rules with the Houston and Dallas school districts to win technology contracts.

Some HP contractors had bribed officials of Dallas public schools to secretly procure information that could help the company win competitive E-rate contracts. E-rate contracts are government-sponsored programs providing subsidized Internet connections in schools and libraries. The programs are funded through a surcharge on telephone bills.

The HP contractors bribed workers in the Houston and Dallas school districts by providing expensive gifts and other entertainment. Altogether, the buy-off led to a contract worth $17.0 million. However, the secrecy of the deal could not be maintained after alarms were raised about HP's fraudulent practices. Hence, the government was forced to look into the matter and appoint the DOJ and FCC for investigation.

HP extended full cooperation toward the entire legal issue and settled the suit by paying approximately $16.25 million. According to the FCC, the majority of the amount will be returned to the E-rate program.

Having learnt a lesson from these devious activities that took place more than five years ago, HP has stated that it will focus more on training employees about ethical business practices. Moreover, HP announced that the officials and contractors involved in the violation have been terminated.

We believe that the settlement amount will have very little impact on HP's earnings. We also expect that such actions will discourage employees and partners from engaging in such practices in future.

Investors, however, are likely to read the news as negative, which is apparent from the 1.79% decline in prices after the market closed yesterday.

Currently, HP has a short-term Hold recommendation, as indicated by the Zacks #3 Rank.