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.
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, orthrough 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 ofany contact by HP with the Securities and Exchange Commission, or the UK police, although that doesn’t necessarily meanthat 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 thisis 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:
I don’t know what she’s referring to or why. Obviously, there are differences between IFRS [International Financial Reporting Standards] accounting and the U.S. GAAP system, but the fact is that all our financial information was given to Deloitte, which, unlike most European accounting firms, audited us every quarter. And consequently we’re confident in the numbers being right."
But the real story appears to be a corporate rather than financial story.What’s more, what Lynch says tallies with what is known publicly about the history of HP over the past two years, and which we have covered in detail elsewhere.
The first thing Lynch says is that he rejects any suggestion of financial impropriety. He says that when HP took over Autonomy there were hundreds of people involved in due diligence with financial accounting powerhouses like KPMG, Barclays and Perello, all involved.
On top of that HP has run the company for more than a year now, so “…to somehow admit a $9bn elephant in the room just beggars belief, frankly.”
So what did happen then -- according to Lynch that is. In the interview, he said that as soon as HP took over Autonomy the problems began. First off, he says, HP managers slapped a 30% mark-up on Autonomy software and drove away a number of long-term, high paying customers.
Incredibly, he also says that HP sales people were paid commissions to sell third-party products that competed with Autonomy, but no commissions to sell Autonomy products.
Autonomy had been very much part of the Apotheker era and just entered the HP fold as he and CTO Shane Robinson left the company. It also entered just as HP had decided to throw out Apotheker’s vision of a company pursuing software and application development rather than hardware sales.
The picture Lynch paints is of a company of factions, of power-plays, where business decisions were made on the basis of who-was-in-and-who-was-out.
The result, he says, is the well-documented resignation of the majority of Autonomy’s employees and senior managers who were unable to cope with a corporate culture that just didn’t work for a company as small as Autonomy.
At this point in time there is not a lot more to be said. As it is,it remains a he-said-she-said story with provable facts thin on the ground.
What we do know is that HP is in trouble and that the troubles were there before Autonomy. What we don’t know is where this is all going to go. But we might, just might, by the time this is over have a better idea of the machinations of the information management industry and how decisions are made.