The breaking HP/Autonomy story this afternoon was pretty explosive. So better stick to the facts for the moment.
HP announced a write-down of $8.8b relating to its $10b acquisition of Autonomy in 2011. HP says it is "extremely disappointed to find that some former members of Autonomy's management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy's acquisition by HP" accusing it of "serious accounting improprieties" which lead to it being"substantially overvalued". "These efforts appear to have been a wilful effort to mislead investors and potential buyers, and severely impacted HP management's ability to fairly value Autonomy at the time of the deal”.
HP has referred the case to the UK Serious Fraud Office and the US Securities and Exchange Commission.
All this arose after a whistleblower came forward after Mike Lynch’s departure from HP earlier this year. (See – Autonomy – the day after)
Mike Lynch then issued a statement"The former management team of Autonomy was shocked to see this statement today and flatly rejects these allegations, which are false.”
"HP's due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays Perella Weinberg. HP's senior management has also been closely involved with running Autonomy for the past year. It took 10 years to build Autonomy’s industry-leading technology and it is sad to see how it has been mismanaged since its acquisition by HP.”
Comment
Clearly buying Autonomy has not been a good experience for HP. We questioned the synergies at the time – See – HP and Autonomy Where are the synergies? . In my Aug 11 post HP and Autonomy, I questioned whether Lynch and his team could ever fit in to HP. The article pretty accurately forecast what would happen – although not even I forecast today’s dramatic announcement. The price paid and the considerable ‘management issues’ post acquisition are another story. But if every tech M&A that didn’t work out as expected for the purchaser was referred to the SFO, they would be having a very busy time!
We have no knowledge of the detailed nature of HP’s accusations. Software companies have been plagued by accounting issues almost since the start of the industry. The list of companies involved is too long to detail here. In the 1990s we ran a campaign to stop the practice of capitalising software development costs – an argument which we largely lost. It was a wonderful way of making companies appear to be profitable whilst building up huge intangible ‘assets’ of dubious value. We even remember a debate about whether ‘product brochures’ could be capitalised as development costs! Then there were all the debates about revenue reorganisation with companies taking the full revenue to the P&L the moment the order was signed; leaving the costs of implementation – or possible cancellation - to later accounting periods. This was an issue which has landed a number of software company directors in jail. The scope for such ‘accounting issues’ has probably got even worse with the advent of SaaS.
We will have to wait and see how the story develops. Mike Lynch was about to officially launch Invoke Capital - a $1b fund to invest in pure play UK software and technology. Lynch is held in high esteem and is a regular, and much sought after, speaker at industry events as well as being a fierce proponent for UK technology. Even the threat of an SFO investigation would send shudders down my spine and must be detrimental to Lynch’s other activities. Of course, if any of this was proven, the consequences could be extremely serious.