I wrote my post HP, Autonomy and the Serious Fraud Office early on Tuesday afternoon as soon as I could after the stunning announcement.
Since then, HP has detailed the accusations they have for the serious charges they have made against Autonomy. They say that IDOL licence revenues were booked for sales to VARs rather than to end users which accelerates revenue recognition. That the profile of revenue recognition in a long term SaaS contract had been incorrectly tilted towards the front end. That revenues from hardware resales had been incorrectly billed as software thus boosting IDOL revenues (which is valued somewhat higher than hardware pass through). That some project costs had been incorrectly booked as marketing which had the effect of boosting operating margins.
At 9.00pm (after the football..) I switched to CNBC and there was a live ‘exclusive’ interview between the Money Honey and Mike Lynch. I then switched to BBC TV news for another ‘exclusive’ interview with Lynch. We all know from past experiences that when Lynch is accused of anything he comes back fighting tooth and claw. Lynch blamed HP’s accusations on a year of mismanagement at Autonomy and as a distraction to Whitman announcing the worst results in HP’s 70 year history. (To that point, it worked. The media has given scant coverage to HP’s further set of awful results. See our review here) He absolutely rejected all the accusations made against Autonomy. He repeated his long list of bankers, auditors, advisers involved on both sides of the deal. He repeated his amazement that if the accounting irregularities were that serious (ie requiring an $8.8b writedown) that these could have gone unnoticed for so long. He said "Look at the size of the writedown. If you have done meticulous due diligence with 300 people you can't get it that wrong." "HP ran the business for a year with these accounts and now they are writiing down the value of Autonomy by $5b as a result? Well, that's a hell of an elephant in the room for them to miss".
Our own postbag is interesting. It largely consists of people who do not want to be quoted supporting the claims that HP are making. Indeed most seem to infer that this was going on at Autonomy for many years. The media this morning is full of analysts saying that they had long questioned Autonomy’s accounting methods. ‘I told you so’ was writ large. I assume that HP and its many advisers had read these public reports/blogs prior to its acquisition or at least during due diligence? But, remember, Autonomy had been a FTSE100 company for many years. If the allegations are true, it casts an even bigger shadow over nearly every aspect of governance at our largest companies.
There is little doubt that Lynch’s reputation and Autonomy’s place as an icon for the UK tech sector has been damaged. But HP’s reputation is in tatters. HP’s board has limped from one disaster to another over years. Its board comes over as disfunctional. Its M&A record is about the worst you can have. It has destroyed considerable shareholder value. Its #1 position in almost every sector of the tech sector has been conceded to others. Some say that the worst is now over for HP. I’m not so sure.
As a person who has had affection for both Autonomy and HP (I’ve been both a supplier to and shareholder in both), who would class Mike Lynch as a friend and really cares about the future of UK tech, I cry for all of them.