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[November 27, 2012]
Let the buyer beware, especially when it is a PC firm searching for a software saviour
(Observer (UK) Via Acquire Media NewsEdge) Blame Mike Lynch. Blame Deloitte, Autonomy's auditors. Blame the investment banking advisers. Blame Hewlett-Packard itself. All those conclusions have been advanced this week after HP wrote off the colossal sum of $8.8bn (pounds 5.5bn) against its $11bn purchase a year ago of software firm Autonomy.
So who is to blame Well, Lynch and Deloitte are innocent until proven guilty, and we (as well as the US Securities and Exchange Commission and the Serious Fraud Office) will have to wait to see what HP offers as hard evidence to support its claim that there was a deliberate attempt to inflate Autonomy's financial performance. Lynch denies all the allegations and, at the moment, this electric tale is stuck in the territory of claim and counterclaim.
For what it's worth, Lynch does himself no favours when he complains that HP managed the firm he founded in 1996 in a cack-handed manner. The US acquirer may well have been incompetent, but that's a separate issue. This is an argument about the accuracy of Autonomy's accounts. That's a dispute about facts - and if HP has sound evidence, Deloitte is in deep trouble.
Yet one can still say that HP was monumentally silly to pay $11bn for Autonomy on the basis of what appears to have been a bog-standard inspection of the goods and a couple of "fair value" opinions from banking advisers Barclays Capital and Perella Weinberg. HP's chief executive Meg Whitman, as she attempted to explain why the alleged improprieties had not been discovered during pre-acquisition scrutiny, replied: "In the end, you have to rely on audited financials and we did." Rubbish. HP did not have to rely solely on the audited financials. It could have crawled over contracts, interrogated Autonomy's customers and suppliers and dug as deep as it wished. There was every reason to do so, since respected analysts had been prodding Autonomy's accounts for years and making unflattering comments, as Juliette Garside explains on page 37. In the world of software, what constitutes a sale is always a contentious issue. Anybody paying $11bn for a company with an annual turnover of $870m had a duty to their shareholders to satisfy themselves that they knew precisely what the composition of Autonomy's sales were and when revenues were recognised.
Indeed, HP had a double duty given its appalling acquisition record. The US company has had a reverse Midas touch for years, incurring heavy write-offs against its purchases of Electronic Data Systems and Palm.
The acquisition of Autonomy was part of a last-gasp attempt by then chief executive Leo Apotheker to reinvent HP as a broadly based technology company with a bigger software presence, instead of a boring old computer maker. It looks as if Apotheker and the HP board were bewitched by the idea of Autonomy as a sexy software outfit that could rebrand their company as a "growth" stock, as opposed to a business stuck in its PC past.
Whether or not Autonomy's management was engaged in a "wilful attempt" to mislead, HP's top folk appear to have been wilfully deaf to the sceptical views about Autonomy. That's unforgivable. Larry Ellison at Oracle - nobody's fool - was screaming that the purchase price was "absurdly high" so, in effect, HP's directors were staking their reputations that they knew better. Apotheker has departed (with a hefty payoff) but several of the survivors on the HP board will surely have to follow.
Autonomy was always a baffling company for non-tech outsiders to understand. Bayes's theorem didn't succeed in proving the existence of God in the 18th century but apparently the mathematics behind it was perfect in the 21st for making sense of so-called "unstructured" data. Don't worry about the details of how the software works: just remember that God helps those who help themselves - and HP didn't.
(c) 2012 Guardian Newspapers Limited.
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