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Lynch Slaps Down HP Fraud Allegations, Accuses HP Of Corporate Faction Fighting

Anyone that thought Mike Lynch, former CEO and founder of Autonomy was going to sit back and let Meg Whitman, CEO of HP, make all the running on a story that has left the rarefied atmosphere of information management and entered the mainstream, prime-time news, would be underestimating Mike Lynch.

HP and Autonomy

The story, of course, is the allegations made in a press statement yesterday by HP that something very unpleasant had happened to the accounts at Autonomy before it was bought for US$ 11 billion by HP.

Even yesterday, as the story broke, and HP published the worst quarterly results in its 70 year history, something just didn’t look quite right.

Here was a company — Autonomy — with a more or less unique information management product (IDOL) that, instead of adding value for its buyer — in this case HP — has added massive negative sentiment in the shape of rather poor quarterly figures, and this for the second quarter in a row.

IDOL, for those not familiar with it, is capable of giving relative meaning to information in an information industry that is desperate to find a product that can turn information into business value. However, all IDOL did for HP, the company says, was to add to its troubles.

HP’s Autonomy Acquisition

So back to the story. HP bought Autonomy 16 months ago, and while the price tag of over US$ 10 billion caused a lot of consternation at the time, it could possibly be justified by looking to its future potential in a world where businesses are desperate to make a few bucks from their business content.

Then yesterday, it all turned pretty nasty; Meg Whitman suggested Autonomy had been fixing the books, and that HP had been sold a pig-in-a-poke.Thumbnail image for shutterstock_46427431.jpg

However, according to former CEO Mike Lynch, not only had he heard nothing about this until yesterday, but that HP had never contacted him either directly, or through its lawyers, and that the first he, or any of the senior managers, had heard about it was the press release containing the allegations.

Since then, Lynch has been shooting down the accusations as they appear, in a number of interviews carried out over the past 12 hours.

Before looking at what he has said, it should be pointed out here that according to Lynch, there are no legal people involved, and he is unaware of any contact by HP with the Securities and Exchange Commission, or the UK police, although that doesn’t necessarily mean that they are not involved.

HP’s Autonomy Figures

Even before this, though, financial news service Bloomberg, was quick to point out that the figures being put forward by HP don’t make sense.

Jonathan Weil, Bloomberg, business writer, in an article yesterday pointed out that HP still needs to explain in considerably more detail than it has, exactly how it figures the books were cooked.

He says HP initially recorded US$ 6.6 billion of goodwill and US$ 4.6 billion of other intangible assets, when it bought the company. HP later revised the goodwill to $6.9 billion and reduced other intangibles by about $300 million.

Goodwill is the bookkeeping entry that a company records when it pays a premium to buy another company. More precisely, it’s the difference between the purchase price and the fair market value of the acquired company’s net assets. Goodwill can’t be sold by itself. The goodwill in this instance tells you that HP paid $6.9bn more than it believed Autonomy’s net assets were worth," Weil wrote.

Is this likely? For most companies you would think not, but think back to Palm and the EDS acquisition, both of which have been written off by HP and you think you start seeing patterns.

HP Business Culture

Unfortunately for investors, the pattern that appears to be emerging is a company that is busily tearing itself apart as internal factions fight for supremacy while the business goes down the tubes.

At least this is what Lynch suggests in an interview with Arik Hesseldahl in All Things Digital. Hesseldahl tracked Lynch down yesterday and asked some of the obvious questions like: did you do it? In reply to the accusations of accounting irregularities he said:


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