You just couldn’t make this up. HP, formerly one of the New York Stock Exchange’s darlings and until recent times often mentioned in the same breath as IBM, could be set to call in the cops over the acquisition of Autonomy 18 months ago. According to CEO Meg Whitman, someone had been cooking the books before the deal was inked.
With the amount of money and size of the companies we are talking about at the enterprise end of the information management space, no one is ever really surprised when some of the more unsavory business practices come to light.
Autonomy’s Financial Matters
However, even in these terms what is alleged to have happened with Autonomy is really quite startling. In order to be absolutely clear about this, we are going to cite here a statement issued by HP and attributed to CEO Meg Whitman, as it is unclear as yet whether any kind of criminal or civil proceeding will be filed.
Nevertheless, Whitman seems convinced that something is wrong so let’s take a look:
"HP 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. 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. We remain 100 percent committed to Autonomy and its industry-leading technology.”
This is bad enough; but from an IT point of view it really throws the success of Autonomy and the IDOL product up in the air. Again from the statement:
Although HP’s investigation is ongoing, examples of the accounting improprieties and misrepresentations include:
The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.
This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.
The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale.”
The result, HP says, is that the misrepresentation of Autonomy's figures means that at the time of the deal its financial performance, its revenues, its core growth rate and gross margins were all seriously out of kilter with the reality.
Of course the impact of such an announcement was really going to hurt and already the pain has started. In early morning trading, share price jumped off a cliff to land 13% lower at US$ 11.55 and appeared to be still sliding as this piece was being written.
Not a big surprise really considering the severity of the allegations that Whitman has outlined in the statement. The big question here, though, is where is corporate governance?
Where was the board of HP when this deal was being hammered together? Who examined the books? Who approved the figures? What about former HP CEO Leo Apotheker, or Autonomy’s former CEO Mike Lynch, where were they? What is their involvement in this?
And this is not the first time that these questions have been asked. Anyone that follows the information management industry, or who is familiar with the technologies both Autonomy and HP produce have been struggling for the past 18 months to understand the US$ 11 billion price tag.